VIRTUSA CORPORATION The following discussion of the financial condition and results of operations ofVirtusa Corporation should be read in conjunction with the consolidated financial statements and the related notes thereto 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, 2019 (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, 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 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 of 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 engineering and information technology ("IT") outsourcing services that accelerate business outcomes for our clients. We support Forbes Global 2000 clients across large, consumer facing industries like banking, financial services, insurance, healthcare, communications, technology, and media and entertainment, as these clients seek to 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, testing and business assurance, and maintenance and support services, including infrastructure and managed services. We help our clients solve critical business problems by leveraging a combination of our distinctive consulting approach, unique platforming methodology, and deep domain and technology expertise. Our services enable our clients to accelerate business outcomes by consolidating, rationalizing and modernizing their core customer-facing processes into one or more core systems. We deliver cost-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. 31
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Headquartered inMassachusetts , we have offices inthe United States ,Canada , theUnited Kingdom ,the Netherlands ,Germany ,Switzerland ,Sweden ,Austria , theUnited Arab Emirates ,Hong Kong ,Japan ,Qatar ,Mexico ,Australia and New Zealand , with global delivery centers inIndia ,Sri Lanka ,Hungary ,Singapore andMalaysia , as well as multiple near shore delivery centers inthe United States . AtDecember 31, 2019 , we had 22,267 employees, or team members. Financial overview
In the three months ended
In the three months ended
In the three months endedDecember 31, 2019 , net income available toVirtusa common stockholders increased by 1.3% to a net income of$11.6 million , as compared to$11.5 million in the three months endedDecember 31, 2018 . Net income increased by 395.1% to a net income$22.4 million in the nine months endedDecember 31, 2019 , compared to a net income of$4.5 million in the nine months endedDecember 31, 2018 .
The increase in revenue for the three and nine months ended
Growth, led by several of our top ten clients, primarily in our communication
? and technology ("C&T") industry group, including revenue from customer
contracts acquired from third parties through asset acquisitions
? Revenue growth in
partially offset by:
? Decline in revenue from
banking clients ? Decrease in revenue in our banking and financial services industry group
The key drivers of the increase in our net income for the three and nine months
ended
? Higher revenue particularly in several of our top ten clients, primarily in our
C&T industry group
? Decrease in operating expense as a percentage of revenue, reflecting a larger
revenue base and cost reduction initiatives
In the case of nine months ended
? foreign currency transaction losses, primarily 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: ? Increase in interest expense related to an increase in our outstanding debt under our credit facility 32 Table of Contents
In the case of three months ended
foreign currency transaction losses, primarily related to the revaluation of
? Indian rupee denominated intercompany note, primarily due to a substantial
depreciation of the Indian rupee against the
expense due to improved results of operations High repeat business and client concentration are common in our industry. During the three months endedDecember 31, 2019 and 2018, 96% and 88%, respectively, of our revenue was derived from clients who had been using our services for more than one year, including clients acquired from eTouchSystems Corp. inMarch 2018 . During the nine months endedDecember 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 eTouchSystems Corp. inMarch 2018 . 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, 2019 , our application outsourcing and consulting revenue represented 55% and 45%, respectively, of our total revenue as compared to 53% and 47%, respectively, for the three months endedDecember 31, 2018 . For the nine months endedDecember 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 endedDecember 31, 2018 . In the three months endedDecember 31, 2019 , ourNorth America revenue increased by 12.1%, or$27.1 million , to$251.2 million , or 75.0% of total revenue, from$224.1 million , or 71% of total revenue, in the three months endedDecember 31, 2018 . In the nine months endedDecember 31, 2019 , ourNorth 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 endedDecember 31, 2018 . The increase inNorth America revenue for the three and nine months endedDecember 31, 2019 was primarily due to the increase in revenue from clients in the C&T industry group, including customer contracts with certain existing customers acquired from third parties. In the three months endedDecember 31, 2019 , our European revenue decreased by 15.2%, or$9.9 million , to$55.2 million , or 16.5% of total revenue, from$65.0 million , or 21% of total revenue in the three months endedDecember 31, 2018 . In the nine months endedDecember 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 endedDecember 31, 2018 . The decrease in European revenue for the three and nine months endedDecember 31, 2019 was primarily due to a decline in revenue from one of our large banking clients. Our gross profit increased by$5.5 million to$98.7 million for the three months endedDecember 31, 2019 , as compared to$93.2 million for the three months endedDecember 31, 2018 . Our gross profit increased by$7.0 million to$272.9 million for the nine months endedDecember 31, 2019 as compared to$265.9 million in the nine months endedDecember 31, 2018 . The increase in gross profit during the three and nine months endedDecember 31, 2019 , as compared to the three and nine months endedDecember 31, 2018 , was primarily due to higher revenue partially offset by higher onsite effort and subcontractor costs. As a percentage of revenue, gross margin was 29.4% and 29.6% in the three months endedDecember 31, 2019 and 2018, respectively. During the nine months endedDecember 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 endedDecember 31, 2019 was primarily due to an increase in subcontractors cost, higher onsite effort, and lower utilization. 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 endedDecember 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
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60% for the nine months ended
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. AtDecember 31, 2019 , 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%. Our attrition rate atDecember 31, 2019 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. 34 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,
2019 2018 $ Change % Change
(Dollars in thousands)
Revenue $ 335,107 $ 314,681 $ 20,426 6.5 %
Costs of revenue 236,427 221,461 14,966 6.8 %
Gross profit 98,680 93,220 5,460 5.9 %
Operating expenses 68,270 73,935 (5,665) (7.7) %
Income from operations 30,410 19,285 11,125 57.7 %
Other income (expense) (7,209) 3,912 (11,121) (284.3) %Income before income tax expense 23,201 23,197
4 0.0 %
Income tax expense 10,363 10,400 (37) (0.4) %
Net income 12,838 12,797 41 0.3 %
Less: net income attributable to
noncontrolling interests, net of tax 118 221 (103) (46.6) %
Net income available to Virtusa stockholders 12,720 12,576 144 1.1 %
Less: Series A Convertible Preferred Stock
dividends and accretion 1,087 1,087 - - %
Net income attributable to Virtusa common
stockholders $ 11,633 $ 11,489 $ 144 1.3 %
Revenue
Revenue increased by 6.5%, or$20.4 million , from$314.7 million during the three months endedDecember 31, 2018 to$335.1 million in the three months endedDecember 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$6.4 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 industry group. Revenue from North American clients in the three months endedDecember 31, 2019 increased by$27.1 million , or 12.1%, as compared to the three months endedDecember 31, 2018 , particularly due to the increase in revenue from clients in the C&T industry group. Revenue from European clients decreased by$9.9 million , or 15.2%, as compared to the three months endedDecember 31, 2018 , primarily due to decline in revenue from one of our large banking clients. We had 216 active clients atDecember 31 ,
2019 and 2018. Cost of revenue Costs of revenue increased from$221.5 million in the three months endedDecember 31, 2018 to$236.4 million in the three months endedDecember 31, 2019 , an increase of$14.9 million , or 6.8%. The increase in cost of revenue was primarily due to an increase in subcontractor costs of$12.9 million and an increase in the number of IT professionals and related compensation and benefit costs of$2.8 million , partially offset by a decrease in travel expense of$1.1 million . AtDecember 31, 2019 , we had 20,075 IT professionals as compared to 19,266 atDecember 31, 2018 . As a percentage of revenue, cost of revenue increased from 70.4% for the three months endedDecember 31, 2018 to 70.6% for three months endedDecember 31, 2019 . Gross profit Our gross profit increased by$5.5 million , or 5.9%, to$98.7 million for the three months endedDecember 31, 2019 , as compared to$93.2 million for the three months endedDecember 31, 2018 , primarily due to higher revenue, partially offset by subcontractor costs and higher onsite effort. As a percentage of revenue, gross margin is 29.6% in the three months endedDecember 31, 2018 and 29.4% in the three months endedDecember 31, 2019 . The decrease in gross 35
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margin during the three months ended
Operating expenses Operating expenses decreased from$73.9 million in the three months endedDecember 31, 2018 to$68.3 million in the three months endedDecember 31, 2019 , a decrease of$5.6 million , or 7.7%. The decrease in operating expenses was primarily due to a decrease in compensation related to non-IT professionals of$4.9 million , which reflects our cost reduction initiatives, a decrease in professional services of$1.8 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 million . As a percentage of revenue, our operating expenses decreased from 23.5% in the three months endedDecember 31, 2018 to 20.4% in the three months endedDecember 31, 2019 . Income from operations Income from operations increased by 57.7%, from$19.3 million in the three months endedDecember 31, 2018 to$30.4 million in the three months endedDecember 31, 2019 . As a percentage of revenue, income from operations increased from 6.1% in the three months endedDecember 31, 2018 to 9.1% in the three months endedDecember 31, 2019 , primarily due to a decrease in operating expenses as a percentage of revenue. Other income (expense)
Other expense increased by$11.1 million , from an income of$3.9 million in the three months endedDecember 31, 2018 to an expense of$7.2 million in the three months endedDecember 31, 2019 , primarily due to net increase in 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 theU.S. dollar, partially offset by an increase in interest expense related to our term loan. Income tax expense Income tax expense in the three months endedDecember 31, 2019 remains unchanged compared to$10.4 million in the three months endedDecember 31, 2018 . Our effective tax rate decreased from 44.8% for the three months endedDecember 31, 2018 to 44.7% for the three months endedDecember 31, 2019 . The decrease in the effective tax rate for the three months endedDecember 31, 2019 , was primarily due to a Base Erosion Alternative Tax ("BEAT") expense offset by certain discrete benefits during the three months endedDecember 31, 2019 . Noncontrolling interests In connection with the Polaris acquisition, for the three months endedDecember 31, 2019 and 2018, we recorded a noncontrolling interest of$0.1 million and$0.2 million , respectively, representing a 1.71% and 3.46%, respectively, share of profits of Polaris held by parties other thanVirtusa .
Net income available to
Net income available toVirtusa stockholders increased by$0.1 million or 1.1%, from$12.6 million in the three months endedDecember 31, 2018 to$12.7 million in the three months endedDecember 31, 2019 . The increase in net income in the three months endedDecember 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 theU.S. dollar. 36 Table of Contents
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, 2019 and 2018.
Net income available to
Net income available toVirtusa common stockholders increased by$0.1 million or 1.3%, from$11.5 million in the three months endedDecember 31, 2018 to$11.6 million in the three months endedDecember 31, 2019 . The increase in net income in the three months endedDecember 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 theU.S. dollar.
Nine months ended
The following table presents an overview of our results of operations for the
nine months ended
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 endedDecember 31, 2018 to$982.6 million in the nine months endedDecember 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 endedDecember 31, 2019 increased by$71.9 million , or 11.0%, as compared to the nine months endedDecember 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 endedDecember 31, 2018 , primarily due to a decline in revenue from one of our large banking clients. We had 216 active clients
atDecember 31, 2019 and 2018. Cost of revenue
Costs of revenue increased from
37
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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 . AtDecember 31, 2019 , we had 20,075 IT professionals as compared to 19,266 atDecember 31, 2018 . As a percentage of revenue, cost of revenue increased from 71.1% for the nine months endedDecember 31, 2018 to 72.2% for the nine months endedDecember 31, 2019 . Gross profit
Our gross profit increased by$7.0 million , or 2.6%, to$272.9 million for the nine months endedDecember 31, 2019 , as compared to$265.9 million for the nine months endedDecember 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 endedDecember 31, 2018 to 27.8% in the nine months endedDecember 31, 2019 . The decrease in the gross margin in the nine months endedDecember 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 theU.S. dollar. Operating expenses Operating expenses decreased from$218.7 million in the nine months endedDecember 31, 2018 to$209.8 million in the nine months endedDecember 31, 2019 , a decrease of$8.9 million , or 4.1%. The decrease in operating expenses was primarily due to a decrease in compensation related to non-IT professionals of$13.2 million , which reflects our cost reduction initiatives 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 endedDecember 31, 2018 to 21.4% in the nine months endedDecember 31, 2019 . Income from operations Income from operations increased by 33.6%, from$47.2 million in the nine months endedDecember 31, 2018 to$63.1 million in the nine months endedDecember 31, 2019 . As a percentage of revenue, income from operations increased from 5.1% in the nine months endedDecember 31, 2018 to 6.4% in the nine months endedDecember 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 endedDecember 31, 2018 to$17.0 million in the nine months endedDecember 31, 2019 , primarily due to a net decrease 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 theU.S. dollar, partially offset by 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 endedDecember 31, 2018 to$19.9 million in the nine months endedDecember 31, 2019 . Our effective tax rate decreased from 63.3% for the nine months endedDecember 31, 2018 to 43.3% for the nine months endedDecember 31, 2019 . The increase in tax expense for the nine months endedDecember 31, 2019 , was primarily due to improved results of operations, an increase in BEAT expense offset by a decrease in tax expense related to disregarded entities during the nine months endedDecember 31, 2019 . The decrease in the effective tax rate in the nine months endedDecember 31, 2019 is primarily due to improved results of operations offset by a decrease in tax expense related to disregarded entities. 38 Table of Contents Noncontrolling interests In connection with thePolaris Consulting & Services Limited ("Polaris") acquisition, for the nine months endedDecember 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 thanVirtusa .
Net income available to
Net income available toVirtusa stockholders increased by 229.6%, from$7.8 million in the nine months endedDecember 31, 2018 to a net income of$25.7 million in the nine months endedDecember 31, 2019 . The increase in net income in the nine months endedDecember 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 theU.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 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, 2019 and 2018.
Net income available to
Net income available toVirtusa common stockholders increased by 395.1%, from$4.5 million in the nine months endedDecember 31, 2018 to$22.4 million in the nine months endedDecember 31, 2019 . The increase in net income in the nine months endedDecember 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 theU.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 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. 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 or available-for-sale debt 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. 39 Table of Contents 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 Cash and cash equivalents $ 217,387$ 189,676 Short-term investments 20,058 33,138 Long-term investments 10 322 Total cash and cash equivalents, short-term and long-term investments $ 237,455$ 223,136
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 costs, the tax impact of dividends received from foreign
subsidiaries, the initial impact of our election to treat certain subsidiaries
as disregarded entities for
government enacted comprehensive tax legislation ("Tax Act") to provide further
insights into the comparison of our operating results among periods.
40
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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 :
Three Months Ended Nine Months Ended
December 31, December 31,
2019 2018 2019 2018
in thousands, except
per share amounts)
GAAP income from operations$ 30,410 $ 19,285 $ 63,073 $ 47,228 Add: Stock-based compensation expense 5,775 7,042 18,285 24,104 Add: Acquisition-related charges and restructuring charges (1) 4,345 6,378 12,741 17,872 Non-GAAP income from operations$ 40,530 $ 32,705 $ 94,099 $ 89,204 GAAP operating margin 9.1 % 6.1 % 6.4 % 5.1 % Effect of above adjustments to income from operations 3.0 % 4.3 % 3.2 % 4.6 % NonGAAP operating margin 12.1 % 10.4 % 9.6 % 9.7 % GAAP net income available toVirtusa common stockholders$ 11,633 $ 11,489 $ 22,394 $ 4,523 Add: Stock-based compensation expense 5,775 7,042 18,285 24,104 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) Tax adjustments (3) 161 3,370 (4,153) (6,573) Less: Noncontrolling interest, net of taxes (4) (16) (103) (44) 76 Non-GAAP net income available toVirtusa common stockholders$ 25,147 $ 19,588 $ 54,974 $ 52,460 GAAP diluted earnings per share (6)$ 0.38 $ 0.37 $ 0.73 $ 0.15 Effect of stock-based compensation expense (7) 0.17 0.21 0.54 0.72 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 change in dilutive shares for non-GAAP (6) - - (0.06) (0.01) Non-GAAP diluted earnings per share (5) (7)$ 0.78 $ 0.61 $
1.73$ 1.66 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 (1) 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
41
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termination benefits, facility exit costs 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,
2019 2018 2019 2018Amortization of intangible assets$ 3,496 $ 2,860 $ 10,157 $ 8,629 Acquisition and integration costs 849 3,518 2,584 9,243 Acquisition-related charges included in costs of revenue and operating expense 4,345 6,378 12,741 17,872 Accreted interest related to deferred acquisition payments - 474 267 1,407 Total acquisition-related charges and restructuring charges$ 4,345 $ 6,852 $ 13,008 $ 19,279
Foreign currency transaction gains and losses are inclusive of gains and (2) 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
respective periods, excluding the initial impact of our election to treat
(3) certain subsidiaries as disregarded entities for
fiscal year 2020, excluding BEAT tax impact in contemplation of a
reorganization of our Indian legal entities. Tax adjustments also assumes
application of foreign tax credit benefits in the United States .
(4) Noncontrolling interest represents the minority shareholders interest of
Polaris.
(5) Non-GAAP diluted earnings per share is subject to rounding.
During the three months ended December 31, 2019 and 2018, all of the3,000,000 shares of Series A Convertible Preferred Stock were included in the
calculations of GAAP diluted earnings per share as their effect was dilutive
(6) using the if-converted method. During the nine months ended
and 2018, all of the 3,000,000 shares of 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 toVirtusa 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 endedDecember 31, 2019 and 2018: 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 toVirtusa 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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To the extent the Series A Convertible Preferred Stock is dilutive using the (7) 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.
(8) Impact from the
Act").
(9) Other-than-temporary impairment of available-for-sale securities recognized
in earnings.
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. 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 "Credit Agreement Amendment"), which amends the Company's Amended and Restated Credit Agreement, dated as ofFebruary 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 Credit Agreement Amendment to provide additional lending capacity which we could use 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 Credit Agreement Amendment contains customary terms for amendments of this type, including representations, warranties and covenants. Interest under this new 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. For the fiscal year endingMarch 31, 2020 , the Company is required to make principal payments of$2.9 million per quarter. The term of the Credit Agreement is five years endingFebruary 6, 2023 . During the nine months endedDecember 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 ofDecember 31, 2019 , the outstanding amount under the Credit Agreement was$393.9 million . AtDecember 31, 2019 , the interest rate on the term loan and line of credit was 3.99%. 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, 2019 , the Company was 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 forth in the Credit Agreement to borrow thereunder and we are not aware of any conditions that would prevent us from borrowing part or all of the remaining available capacity under the existing revolving credit facility atDecember 31, 2019 and through the date of this filing. 43 Table of Contents OnAugust 5, 2019 , our board of directors authorized a share repurchase program of up to$30 million of our common stock over 12 months from the approval date, subject to certain price and other trading restrictions as established by the Company. During the nine months endedDecember 31, 2019 , we repurchased 505,565 shares of the Company's common stock at a weighted average price of$36.93 per share for an aggregate purchase price of$18.7 million . To strengthen our digital engineering capabilities and establish a solid base inSilicon Valley , onMarch 12, 2018 , we acquired all of the outstanding shares of eTouchSystems Corp ("eTouch US"), and its Indian subsidiary, eTouchSystems (India) Pvt. Ltd ("eTouchIndia ," together 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$15.0 million for retention bonuses to be paid to eTouch management and key employees, in equal installments on 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. During the three months endedMarch 31, 2019 , we paid the 12-month anniversary purchase price payment of$42.5 million and the retention bonus amount of$7.0 million to the eTouch management and key employees. During the three months endedSeptember 30, 2019 , we paid the 18-month anniversary purchase price payment of$17.5 million . OnMarch 3, 2016 , our Indian subsidiary,Virtusa Consulting Services Private Limited ("Virtusa India") acquired approximately 51.7% of the fully diluted shares ofPolaris Consulting & Services Limited ("Polaris") for approximately$168.3 million in cash (the "Polaris Transaction") pursuant to a share purchase agreement dated as ofNovember 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% byFebruary 12, 2018 whenVirtusa 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. OnJuly 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 onAugust 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 endedSeptember 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 . 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"). OnDecember 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, onDecember 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 fromDecember 20, 2019 , the Company is required to pay consideration of INR 480 per share for each cancelled share held by these former Polaris shareholders. AtDecember 20, 2019 , the total amount payable to the remaining Polaris public shareholders was$13.6 million . During the three months endedDecember 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 onJanuary 2, 2020 and the Merger is effective as of that date.
In connection with, and as part of the Polaris acquisition, onNovember 5, 2015 , we entered into an amendment withCitigroup Technology, Inc. ("Citi") and Polaris, which became effective upon the closing of the Polaris Transaction, pursuant to whichVirtusa 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.
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OnDecember 31, 2019 , in connection with a request for proposal ("RFP") and vendor consolidation process conducted by 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 ("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 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 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 toVirtusa's Board of Directors. Orogen is a new 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 , we 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, 2019 , 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 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 inJuly 2016 with an effective date ofJuly 2017 andNovember 2018 . TheJuly 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. TheNovember 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 agreements could demand an early termination of theJune 2016 andNovember 2018 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, 2018 , of not more than 3.50 to 1.00 for periods ending prior toDecember 31, 2019 , of not more than 3.25 to 1.00 commencingDecember 31, 2019 and for periods ending prior toSeptember 30, 2020 , and 3.00 to 1.00 thereafter and a minimum consolidated fixed charge coverage ratio of 1.25 to 1.00. As ofDecember 31, 2019 , we were in compliance with these covenants. The net unrealized loss associated with interest rate swap Agreement was$5.5 million as ofDecember 31, 2019 , which represents the estimated amount that we would pay to the counterparties in the event of an early termination. 45 Table of Contents AtDecember 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 inIndia ,Sri Lanka and theUnited Kingdom . Cash in these non-U.S. locations may not otherwise be available for potential investments or operations inthe 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 tothe United States . However, 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 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 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 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 ofDecember 31, 2019 , the total unamortized upfront payments related to these services were$34.4 million and are expected to be amortized as a reduction to revenue over a benefit period of 5 years. 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, 2019 , we sold$21.3 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, 2019 . No amounts were due under the financing agreement atDecember 31, 2019 , 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 endedMarch 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 endedMarch 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 atDecember 31, 2019 . We are actively marketing this land for sale and expect to complete a transaction over the next 12 months. 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 the Supreme Court ruling retroactively, without assessing interest and penalties, the impact would be a charge of approximately$7.5 million to our income from operations and cash flows. 46 Table of Contents Cash flows
The following table summarizes our cash flows for the periods presented:
Nine Months Ended
December 31,
2019 2018
(In thousands)Net cash provided by operating activities$ 74,454 $ 69,822 Net cash used in investing activities (24,927)
(22,047)
Net cash used in financing activities (20,275)
(18,307)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(131) (13,530)
Net increase in cash and cash equivalents and restricted cash 29,121
15,938
Cash, cash equivalents and restricted cash, beginning of year 190,113
195,236
Cash, cash equivalents and restricted cash, end of period
$ 211,174 Operating activities Net cash provided by operating activities increased in the nine months endedDecember 31, 2019 compared to the nine months endedDecember 31, 2018 , primarily due to increase in the net income adjusted for non-cash expenses and an increase in the working capital during the nine months endedDecember 31, 2019 . Investing activities Net cash used in investing activities increased in the nine months endedDecember 31, 2019 compared to nine months endedDecember 31, 2018 . The increase in net cash used in investing activities was primarily due to payments for asset acquisitions and a payment for deferred consideration related to the acquisition of eTouch made during the nine months endedDecember 31, 2019 , partially offset by the decrease in the purchase of property and equipment and a net decrease in the purchase of investments. Financing activities Net cash used in financing activities increased in the nine months endedDecember 31, 2019 compared to nine months endedDecember 31, 2018 . The increase in net cash used in financing activities during the nine months endedDecember 31, 2019 was primarily due to repurchase of common stock 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. 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, the GBP, 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 theU.S. dollar and GBP 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 47 Table of Contents fluctuation in foreign currencies, such as the GBP, euro, the Canadian dollar, the Australian dollar and Swedish Krona against theU.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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