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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-Q

 

x      Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2018

 

o         Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

For the transition period from                      to

 

Commission File Number 001-33625

 

VIRTUSA CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 


 

Delaware

 

7371

 

04-3512883

(State or Other Jurisdiction of

 

(Primary Standard Industrial

 

(I.R.S. Employer

Incorporation or Organization)

 

Classification Code Number)

 

Identification Number)

 


 

132 Turnpike Rd

Southborough, Massachusetts 01772

(Address of principal executive office)

 

(508) 389-7300

(Address, Including Zip Code, and Telephone Number,

Including Area Code, of Registrant’s Principal Executive Offices)

 


 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

 

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of November 5, 2018:

 

Class

 

Number of Shares

Common Stock, par value $.01 per share

 

29,911,607

 

 

 


Table of Contents

 

Virtusa Corporation and Subsidiaries

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

3

Item 1.

Consolidated Financial Statements (Unaudited)

 

3

 

Consolidated Balance Sheets at September 30, 2018 and March 31, 2018

 

3

 

Consolidated Statements of Income (Loss) for the Three and Six Months Ended September 30, 2018 and 2017

 

4

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended September 30, 2018 and 2017

 

5

 

Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2018 and 2017

 

6

 

Notes to Consolidated Financial Statements

 

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

28

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

41

Item 4.

Controls and Procedures

 

42

PART II. OTHER INFORMATION

 

43

Item 1.

Legal Proceedings

 

43

Item 1A.

Risk Factors

 

43

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

43

Item 6.

Exhibits

 

44

SIGNATURES

 

46

 

2


Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Consolidated Financial Statements (Unaudited)

 

Virtusa Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share amounts)

 

 

 

September 30, 2018

 

March 31, 2018

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

176,981

 

$

194,897

 

Short-term investments

 

54,108

 

45,900

 

Accounts receivable, net of allowance of $2,914 and $3,328 at September 30, 2018 and March 31, 2018, respectively

 

162,497

 

151,455

 

Unbilled accounts receivable

 

96,605

 

103,829

 

Prepaid expenses

 

33,865

 

31,724

 

Restricted cash

 

1,298

 

301

 

Other current assets

 

19,221

 

21,229

 

Total current assets

 

544,575

 

549,335

 

Property and equipment, net

 

120,264

 

121,565

 

Investments accounted for using equity method

 

1,398

 

1,588

 

Long-term investments

 

1,410

 

4,140

 

Deferred income taxes

 

38,310

 

31,528

 

Goodwill

 

275,002

 

297,251

 

Intangible assets, net

 

94,212

 

96,001

 

Other long-term assets

 

15,728

 

11,772

 

Total assets

 

$

1,090,899

 

$

1,113,180

 

Liabilities, Series A convertible preferred stock, redeemable noncontrolling interest and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

27,717

 

$

29,541

 

Accrued employee compensation and benefits

 

62,925

 

71,500

 

Deferred revenue

 

6,175

 

7,908

 

Accrued expenses and other

 

109,677

 

91,306

 

Current portion of long-term debt

 

11,407

 

11,407

 

Income taxes payable

 

5,034

 

5,038

 

Total current liabilities

 

222,935

 

216,700

 

Deferred income taxes

 

17,462

 

21,341

 

Long-term debt, less current portion

 

314,524

 

288,227

 

Long-term liabilities

 

44,854

 

43,833

 

Total liabilities

 

599,775

 

570,101

 

Commitments and contingencies

 

 

 

Series A convertible preferred stock: par value $0.01 per share, 108,000 shares authorized, 108,000 shares issued and outstanding at September 30, 2018 and March 31, 2018; redemption amount and liquidation preference of $108,000 at September 30, 2018 and March 31, 2018, respectively

 

107,079

 

106,996

 

Redeemable noncontrolling interest

 

24,614

 

 

Stockholders’ equity:

 

 

 

 

 

Undesignated preferred stock, $0.01 par value: Authorized 5,000,000 shares at September 30, 2018 and March 31, 2018; zero shares issued and outstanding at September 30, 2018 and March 31, 2018

 

 

 

Common stock, $0.01 par value: Authorized 120,000,000 shares at September 30, 2018 and March 31, 2018; issued 32,769,705 and 32,469,092 shares at September 30, 2018 and March 31, 2018, respectively; outstanding 29,889,706 and 29,589,093 shares at September 30, 2018 and March 31, 2018, respectively

 

328

 

325

 

Treasury stock, 2,879,999 and 2,879,999 common shares, at cost, at September 30, 2018 and March 31, 2018, respectively

 

(39,652

)

(39,652

)

Additional paid-in capital

 

231,196

 

260,612

 

Retained earnings

 

231,517

 

238,019

 

Accumulated other comprehensive loss

 

(64,233

)

(40,681

)

Total Virtusa stockholders’ equity

 

359,156

 

418,623

 

Noncontrolling interest in subsidiaries

 

275

 

17,460

 

Total equity

 

359,431

 

436,083

 

Total liabilities, Series A convertible preferred stock, redeemable noncontrolling interest and stockholders’ equity

 

$

1,090,899

 

$

1,113,180

 

 

See accompanying notes to unaudited consolidated financial statements

 

3


Table of Contents

 

Virtusa Corporation and Subsidiaries

Consolidated Statements of Income (Loss)

(Unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended
September 30,

 

Six Months Ended
September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Revenue

 

$

305,520

 

$

248,174

 

605,551

 

$

475,519

 

Costs of revenue

 

216,346

 

178,404

 

432,827

 

344,683

 

Gross profit

 

89,174

 

69,770

 

172,724

 

130,836

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

75,155

 

59,491

 

144,781

 

114,487

 

Income from operations

 

14,019

 

10,279

 

27,943

 

16,349

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

589

 

928

 

1,353

 

1,932

 

Interest expense

 

(4,514

)

(1,413

)

(8,768

)

(3,071

)

Foreign currency transaction losses, net

 

(9,355

)

(1,480

)

(20,113

)

(1,557

)

Other, net

 

819

 

778

 

1,443

 

884

 

Total other expense

 

(12,461

)

(1,187

)

(26,085

)

(1,812

)

Income before income tax (benefit) expense

 

1,558

 

9,092

 

1,858

 

14,537

 

Income tax (benefit) expense

 

(402

)

1,500

 

5,463

 

2,298

 

Net income (loss)

 

$

1,960

 

$

7,592

 

$

(3,605

)

$

12,239

 

Less: net income attributable to noncontrolling interests, net of tax

 

455

 

2,824

 

1,186

 

3,813

 

Net income (loss) available to Virtusa stockholders

 

$

1,505

 

$

4,768

 

$

(4,791

)

$

8,426

 

Less: Series A Convertible Preferred Stock dividends and accretion

 

1,088

 

1,087

 

2,175

 

1,788

 

Net income (loss) available to Virtusa common stockholders

 

417

 

3,681

 

(6,966

)

6,638

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share available to Virtusa common stockholders

 

$

0.01

 

$

0.13

 

$

(0.23

)

$

0.23

 

Diluted earnings (loss) per share available to Virtusa common stockholders

 

$

0.01

 

$

0.12

 

$

(0.23

)

$

0.22

 

 

See accompanying notes to unaudited consolidated financial statements

 

4


Table of Contents

 

Virtusa Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(In thousands)

 

 

 

Three Months Ended
September 30,

 

Six Months Ended
September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,960

 

$

7,592

 

$

(3,605

)

$

12,239

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

$

(7,071

)

$

821

 

$

(17,724

)

$

4,426

 

Pension plan adjustment

 

113

 

47

 

(96

)

92

 

Unrealized gain (loss) on available-for-sale securities, net of tax

 

(452

)

(95

)

(315

)

204

 

Unrealized loss on effective cash flow hedges, net of tax

 

(3,337

)

(4,153

)

(7,138

)

(8,208

)

Other comprehensive loss

 

$

(10,747

)

$

(3,380

)

$

(25,273

)

$

(3,486

)

Comprehensive income (loss)

 

$

(8,787

)

$

4,212

 

$

(28,878

)

$

8,753

 

Less: comprehensive income (loss) attributable to noncontrolling interest, net of tax

 

200

 

2,045

 

(535

)

3,307

 

Comprehensive income (loss) available to Virtusa stockholders

 

$

(8,987

)

$

2,167

 

$

(28,343

)

$

5,446

 

 

See accompanying notes to unaudited consolidated financial statements

 

5


Table of Contents

 

Virtusa Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Six Months Ended
September 30,

 

 

 

2018

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

(3,605

)

$

12,239

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

14,593

 

13,646

 

Share-based compensation expense

 

17,062

 

10,930

 

Provision (recovery) for doubtful accounts

 

(236

)

723

 

Gain on disposal of property and equipment

 

(159

)

(49

)

Foreign currency transaction losses, net

 

20,113

 

1,557

 

Amortization of discounts and premiums on investments

 

76

 

185

 

Amortization of debt issuance cost

 

546

 

565

 

Deferred income taxes, net

 

(6,522

)

 

Net change in operating assets and liabilities:

 

 

 

 

 

Accounts receivable and unbilled receivable

 

(1,975

)

(4,492

)

Prepaid expenses and other current assets

 

(11,238

)

(4,450

)

Other long-term assets

 

(4,009

)

(815

)

Accounts payable

 

232

 

740

 

Accrued employee compensation and benefits

 

(5,834

)

(579

)

Accrued expenses and other current liabilities

 

11,179

 

4,712

 

Income taxes payable

 

3,133

 

(3,586

)

Other long-term liabilities

 

(73

)

(1,494

)

Net cash provided by operating activities

 

33,283

 

29,832

 

Cash flows from investing activities:

 

 

 

 

 

Proceeds from sale of property and equipment

 

451

 

180

 

Purchase of short-term investments

 

(68,803

)

(50,549

)

Proceeds from sale or maturity of short-term investments

 

60,571

 

62,829

 

Purchase of long-term investments

 

 

(12,273

)

Business acquisition, net of cash acquired

 

(34

)

(600

)

Purchase of property and equipment

 

(18,875

)

(8,195

)

Net cash used in investing activities

 

(26,690

)

(8,608

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from exercise of common stock options

 

428

 

2,717

 

Proceeds from exercise of subsidiary stock options

 

326

 

196

 

Proceeds from revolving credit facility

 

32,000

 

 

Payment of debt

 

(6,250

)

(81,000

)

Payments of withholding taxes related to net share settlements of restricted stock

 

(7,602

)

(2,431

)

Series A Convertible Preferred Stock proceeds, net of issuance costs of $1,154

 

 

106,846

 

Repurchase of common stock

 

 

(30,000

)

Principal payments on capital lease obligation

 

(43

)

(124

)

Payment of contingent consideration related to acquisition

 

(100

)

 

Payment of redeemable noncontrolling interest

 

(28,396

)

 

Payment of dividend on Series A convertible preferred stock

 

(2,092

)

(1,035

)

Net cash used in financing activities

 

(11,729

)

(4,831

)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

(11,694

)

1,753

 

Net (decrease) increase in cash, cash equivalents and restricted cash

 

(16,830

)

18,146

 

Cash, cash equivalents and restricted cash, beginning of period

 

195,236

 

145,086

 

Cash, cash equivalents and restricted cash, end of period

 

$

178,406

 

$

163,232

 

 

6


Table of Contents

 

Virtusa Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets:

 

 

 

September 30, 2018

 

March 31, 2018

 

Balance sheet classification

 

 

 

 

 

Cash and cash equivalents

 

$

176,981

 

$

194,897

 

 

 

 

 

 

 

Restricted cash in current assets

 

1,298

 

301

 

Restricted cash in other long-term assets

 

127

 

38

 

Total restricted cash

 

$

1,425

 

$

339

 

Total cash, cash equivalents and restricted cash

 

$

178,406

 

$

195,236

 

 

See accompanying notes to unaudited consolidated financial statements

 

7


Table of Contents

 

Virtusa Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts)

 

(1) Nature of the Business

 

Virtusa Corporation (the “Company”, “Virtusa”, “we”, “us” or “our”) is a global provider of digital 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, 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 strategy and 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.

 

Headquartered in Massachusetts, we have offices in the United States, Canada, the United Kingdom, the Netherlands, Germany, Switzerland, Sweden, Austria, the United Arab Emirates, Hong Kong, Japan, Australia and New Zealand, with global delivery centers in India, Sri Lanka, Hungary, Singapore and Malaysia, as well as near shore delivery centers in the United States.

 

(2) Unaudited Interim Financial Information

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with U.S. generally accepted accounting principles and Article 10 of Regulation S-X under the Securities and Exchange Act of 1934, as amended, and should be read in conjunction with the Company’s audited consolidated financial statements (and notes thereto) for the fiscal year ended March 31, 2018 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission, or SEC, on May 25, 2018. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such SEC rules and regulations. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation of the accompanying unaudited consolidated financial statements have been included, and all material adjustments are of a normal and recurring nature. Operating results for the interim periods are not necessarily indicative of results that may be expected to occur for the entire fiscal year.

 

Principles of Consolidation

 

The accompanying financial statements have been prepared on a consolidated basis and reflect the financial statements of Virtusa Corporation and all of its subsidiaries that are directly or indirectly more than 50% owned or controlled. When the Company does not have a controlling interest in an entity, but exerts a significant influence on the entity, the Company applies the equity method of accounting. For those majority-owned subsidiaries that are not 100% owned by the Company, the interests of the minority owners are accounted for as noncontrolling interests.

 

Use of Estimates

 

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including the recoverability of tangible assets, disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and

 

8


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expenses during the reported period. Management re-evaluates these estimates on an ongoing basis. The most significant estimates relate to the recognition of revenue and profits based on the percentage of completion method of accounting for fixed-price contracts, share-based compensation, income taxes, including reserves for uncertain tax positions, deferred taxes and liabilities, intangible assets, contingent consideration and valuation of financial instruments including derivative contracts and investments. Management bases its estimates on historical experience and on various other factors and assumptions that are believed to be reasonable under the circumstances. The actual amounts may vary from the estimates used in the preparation of the accompanying consolidated financial statements.

 

Fair Value of Financial Instruments

 

At September 30, 2018 and March 31, 2018, the carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, unbilled accounts receivable, restricted cash, accounts payable, accrued employee compensation and benefits, other accrued expenses and long-term debt, approximate their fair values due to the nature of the items. See Note 5 of the notes to our consolidated financial statements for a discussion of the fair value of the Company’s other financial instruments.

 

Recent accounting pronouncements

 

Recently Adopted Accounting Pronouncements

 

Unless otherwise discussed below, the adoption of new accounting standards did not have an impact on the consolidated financial statements.

 

In May 2014, the FASB issued an Accounting Standard Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“Accounting Standard Codification (“ASC”) Topic 606”) as well as other clarifications and technical guidance related to this new revenue standard, including ASC Topic 340-40, Other Assets and Deferred Costs — Contracts with Customers (“ASC 340-40”). ASC Topic 606 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. In March, April and May 2016, the FASB issued updates to the new revenue standard to clarify the implementation guidance on principal versus agent considerations for reporting revenue gross versus net, identifying performance obligations, accounting for licenses of intellectual property, transition, contract modifications, collectability, non-cash consideration and presentation of sales and other similar taxes with the same effective date. The standard permits the use of either the retrospective or modified retrospective method.

 

The Company adopted the standard effective April 1, 2018 using the modified retrospective method applied to those contracts which were not completed as of that date. Upon adoption of ASC Topic 606 on April 1, 2018, the Company recorded a net increase to opening retained earnings of approximately $464, after a tax impact of $142. The impact of adoption primarily relates to the longer period of amortization for costs to fulfill a contract compared to the amortization period prior to adoption.

 

The following table summarizes the cumulative effect of adopting ASC Topic 606 using the modified retrospective method of adoption as of April 1, 2018:

 

 

 

Balance as of
March 31, 2018

 

ASC Topic 606
Adjustments

 

Balance as of
April 1, 2018

 

Balance Sheet :

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Other current assets

 

$

21,229

 

(62

)

$

21,167

 

Deferred income taxes

 

31,528

 

(142

)

31,386

 

Other long-term assets

 

11,772

 

668

 

12,440

 

Stockholders’ equity

 

 

 

 

 

 

 

Retained earnings

 

238,019

 

464

 

238,483

 

 

See Note 8 “Revenues” in the consolidated financial statements for additional information regarding revenues.

 

In January 2016, the FASB issued an update (ASU 2016-01) to the standard on financial instruments. The update significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The update also amends certain disclosure requirements. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Upon adoption, entities will be required to make a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective. However, the specific guidance on equity securities without readily determinable fair value will apply prospectively to all equity investments that exist as of the date of adoption. The Company adopted this guidance on April 1,

 

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2018. The adoption of this guidance did not have a material impact on the consolidated financial statements, therefore, the Company did not record any cumulative adjustments to the opening retained earnings in the consolidated financial statements.

 

In November 2016, the FASB issued ASU 2016-18, Restricted Cash (Topic 230), which is intended to reduce diversity in practice on how changes in restricted cash are classified and presented in the statement of cash flows. This ASU requires amounts generally described as restricted cash to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The amendments in this update should be applied using a retrospective transition method to each period presented. The Company adopted the standard effective April 1, 2018 using the retrospective method. As a result of the adoption, the Company restated its consolidated statement of cash flows for all of the prior periods presented. The following table summarizes the impact of this standard on the Company’s consolidated cash flows for the six months ended September 30, 2017:

 

 

 

As Reported

 

Restated

 

Effect

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Increase in restricted cash

 

$

(799

)

$

 

$

799

 

Net cash used in investing activities

 

(9,407

)

(8,608

)

799

 

Effect of exchange rate changes on cash, cash equivalents, and restricted cash

 

1,755

 

1,753

 

(2

)

Net increase in cash, cash equivalents and restricted cash

 

17,349

 

18,146

 

797

 

Cash, cash equivalents and restricted cash, beginning of period

 

144,908

 

145,086

 

178

 

Cash, cash equivalents and restricted cash, end of period

 

162,257

 

163,232

 

975

 

 

In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715), “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”, a guidance on presentation of net periodic pension cost and net periodic postretirement benefit cost. The new standard requires that an employer disaggregate the service costs components of net benefit cost. The employer is required to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component, such as in other income and expense. The guidance is effective for fiscal years beginning after December 15, 2017. The Company adopted this guidance effective April 1, 2018. Upon adoption, the Company presented the service cost component in costs of revenue and selling, general and administrative expenses. The other components of net periodic pension cost are presented within other (income) expense in the Consolidated Statements of Income (Loss). The adoption of this guidance did not have a material impact on the consolidated financial statements, therefore, the Company did not retrospectively change the presentation of the financial statements.

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation — Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. The new standard is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with accounting for employee share-based compensation. The guidance is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption permitted but no earlier than an entity’s adoption date of Topic 606. The Company early adopted this guidance effective April 1, 2018. The adoption of this guidance did not have an impact on the consolidated financial statements.

 

New Accounting Pronouncements

 

Unless otherwise discussed below, the Company believes the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial statements.

 

In February 2016, the FASB issued an update (ASU 2016-02) to the standard on leases to increase transparency and comparability among organizations. The FASB subsequently issued ASU 2018-10 and ASU 2018-11 in July 2018, which provide clarifications and improvements to this new standard. ASU 2018-11 also provides the optional transition method which allows companies to apply the new lease standard at the adoption date instead of at the earliest comparative period presented.  The new standard replaces the existing guidance on leases and requires the lessee to recognize a right-of-use asset and a lease liability for all leases with lease terms equal to or greater than twelve months. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize total lease expense on a straight-line basis. For public business entities this standard is effective for the annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption of this new standard is permitted. Entities will be required to use a modified retrospective transition which provides for certain practical expedients. While the Company is continuing to assess the potential impact of this ASU, the Company anticipates this ASU will have a material impact on the consolidated balance sheets primarily due to recognizing a right-to-use-asset and a lease liability for operating leases.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Measurement of Credit Losses on Financial Instruments, which modifies the measurement of expected credit losses of certain financial instruments. This standard update requires financial assets

 

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measured at amortized cost basis to be presented at the net amount expected to be collected. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect of this new standard will have on its consolidated financial statements and related disclosures.

 

In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). The amendments in this Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this Update also require certain disclosures about stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including interim periods within those years. The Company is currently evaluating the effect of this new standard will have on its consolidated financial statements and related disclosures.

 

(3) Earnings (Loss) per Share

 

Basic earnings (loss) per share available to Virtusa common stockholders (“EPS”) is computed by dividing net income (loss), less any dividends and accretion of issuance cost on the Series A Convertible Preferred Stock by the weighted average number of shares of common stock outstanding for the period. In computing diluted EPS, the Company adjusts the numerator used in the basic EPS computation, subject to anti-dilution requirements, to add back the dividends (declared or cumulative undeclared) applicable to the Series A Convertible Preferred Stock. Such add-back would also include any adjustments to equity in the period to accrete the Series A Convertible Preferred Stock to its redemption price. The Company adjusts the denominator used in the basic EPS computation, subject to anti-dilution requirements, to include the dilution from potential shares resulting from the issuance of restricted stock units, unvested restricted stock and stock options along with the conversion of the Series A Convertible Preferred Stock to common stock. The following table sets forth the computation of basic and diluted EPS for the periods set forth below:

 

The components of basic earnings (loss) per share are as follows:

 

 

 

Three Months Ended
September 30,

 

Six Months Ended
September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss) available to Virtusa stockholders

 

$

1,505

 

$

4,768

 

$

(4,791

)

$

8,426

 

Less: Series A Convertible Preferred Stock dividends and accretion

 

1,088

 

1,087

 

2,175

 

1,788

 

Net income (loss) available to Virtusa common stockholders

 

417

 

3,681

 

(6,966

)

6,638

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

29,767,276

 

29,216,600

 

29,700,151

 

29,434,101

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share available to Virtusa common stockholders

 

$

0.01

 

$

0.13

 

$

(0.23

)

$

0.23

 

 

The components of diluted earnings (loss) per share are as follows:

 

 

 

Three Months Ended
September 30,

 

Six Months Ended
September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss) available to Virtusa common stockholders

 

$

417

 

$

3,681

 

$

(6,966

)

$

6,638

 

Add: Series A Convertible Preferred Stock dividends and accretion

 

 

 

 

 

Net income (loss) available to Virtusa common stockholders

 

417

 

3,681

 

(6,966

)

6,638

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

29,767,276

 

29,216,600

 

29,700,151

 

29,434,101

 

Dilutive effect of Series A Convertible Preferred Stock

 

 

 

 

 

Dilutive effect of employee stock options and unvested restricted stock awards and restricted stock units

 

859,768

 

603,981

 

 

601,764

 

Weighted average shares-diluted

 

30,627,044

 

29,820,581

 

29,700,151

 

30,035,865

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share available to Virtusa common stockholders

 

$

0.01

 

$

0.12

 

$

(0.23

)

$

0.22

 

 

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During the three months ended September 30, 2018 and 2017, unvested restricted stock awards and unvested restricted stock units issuable for, and options to purchase 20,617 and 62,576 shares of common stock, respectively, were excluded from the calculations of diluted earnings (loss) per share as their effect would have been anti-dilutive. For the three months ended September 30, 2018 and 2017, the weighted average shares of Series A Convertible Preferred Stock of 3,000,000 were excluded from the diluted earnings (loss) per share as their effect would have been anti-dilutive using the if-converted method.

 

During the six months ended September 30, 2018 and 2017, unvested restricted stock awards and unvested restricted stock units issuable for, and options to purchase 1,710,551 and 180,367 shares of common stock, respectively, were excluded from the calculations of diluted earnings (loss) per share as their effect would have been anti-dilutive. For the six months ended September 30, 2018 and 2017, the weighted average shares of Series A Convertible Preferred Stock of 3,000,000 and 2,456,044, respectively, were excluded from the diluted earnings (loss) per share as their effect would have been anti-dilutive using the if-converted method.

 

(4) Investment Securities

 

At September 30, 2018 and March 31, 2018, all of the Company’s investment securities were classified as available-for-sale securities and equity securities. These were carried on its balance sheet at their fair market value. A fair market value hierarchy based on three levels of inputs was used to measure each security (See Note 5 of the notes to our consolidated financial statements for a discussion of the fair value of the Company’s other financial instruments).

 

The following is a summary of investment securities at September 30, 2018:

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Available-for-sale securities :

 

 

 

 

 

 

 

 

 

Corporate bonds:

 

 

 

 

 

 

 

 

 

Current

 

$

13,158

 

$

 

$

(42

)

$

13,116

 

Preference shares: Non-current

 

1,524

 

 

(242

)

1,282

 

Time Deposits:

 

 

 

 

 

 

 

 

 

Current

 

25,461

 

 

 

25,461

 

Equity securities:

 

 

 

 

 

 

 

 

 

Mutual funds:

 

 

 

 

 

 

 

 

 

Current

 

15,423

 

108

 

 

15,531

 

Equity Shares/ Options:

 

 

 

 

 

 

 

 

 

Non-current

 

7

 

121

 

 

128

 

Total available-for-sale and equity securities

 

$

55,573

 

$

229

 

$

(284

)

$

55,518

 

 

The following is a summary of investment securities at March 31, 2018:

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Corporate bonds:

 

 

 

 

 

 

 

 

 

Current

 

$

25,397

 

$

 

$

(126

)

$

25,271

 

Non-current

 

2,293

 

 

(22

)

2,271

 

Preference shares:

 

 

 

 

 

 

 

 

 

Non-current

 

1,726

 

 

(70

)

1,656

 

Agency and short-term notes:

 

 

 

 

 

 

 

 

 

Current

 

800

 

 

(1

)

799

 

Mutual funds:

 

 

 

 

 

 

 

 

 

Current

 

1,540

 

11

 

 

1,551

 

Equity Shares/ Options:

 

 

 

 

 

 

 

 

 

Non-current

 

15

 

198

 

 

213

 

Time deposits:

 

 

 

 

 

 

 

 

 

Current

 

18,279

 

 

 

18,279

 

Total available-for-sale securities

 

$

50,050

 

$

209

 

$

(219

)

$

50,040

 

 

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The Company evaluates investments with unrealized losses to determine if the losses are other than temporary. The Company has determined that the gross unrealized losses at September 30, 2018 and March 31, 2018 are temporary. In making this determination, the Company considered the financial condition, credit ratings and near-term prospects of the issuers, the underlying collateral of the investments, and the magnitude of the losses as compared to the cost and the length of time the investments have been in an unrealized loss position. Additionally, while the Company classifies the securities as available for sale, the Company does not currently intend to sell such investments and it is more likely than not that the Company will not be required to sell such investments prior to the recovery of their carrying value.

 

Proceeds from sales of available-for-sale investment securities and equity securities and the gross gains and losses that have been included in earnings as a result of those sales were as follows:

 

 

 

Three Months Ended
September 30,

 

Six Months Ended
September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Proceeds from sales or maturities of available-for-sale investment securities and equity securities

 

$

31,279

 

$

33,827

 

$

60,571

 

$

62,829

 

Gross gains

 

$

261

 

$

656

 

$

386

 

$

675

 

Gross losses

 

(14

)

(1

)

(32

)

(91

)

Net realized gains on sales of available-for-sale investment securities and equity securities

 

$

247

 

$

655

 

$

354

 

$

584

 

 

(5) Fair Value of Financial Instruments

 

The Company uses a framework for measuring fair value under U.S. generally accepted accounting principles and enhanced disclosures about fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The Company’s financial assets and liabilities reflected in the consolidated financial statements at carrying value include marketable securities and other financial instruments which approximate fair value. Fair value for marketable securities is determined using a market approach based on quoted market prices at period end in active markets. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following.

 

·                  Level 1—Quoted prices in active markets for identical assets or liabilities.

 

·                  Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

·                  Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis at September 30, 2018:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

Available-for-sales securities—current

 

$

 

$

38,577

 

$

 

$

38,577

 

Equity securities—current

 

 

 

15,531

 

 

15,531

 

Available-for-sales securities—non-current

 

 

1,282

 

 

1,282

 

Equity securities—non-current

 

 

 

128

 

 

128

 

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

Foreign currency derivative contracts

 

 

26

 

 

26

 

Interest Rate Swap Contracts

 

 

2,509

 

 

2,509

 

Total assets

 

$

 

$

58,053

 

$

 

$

58,053

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency derivative contracts

 

$

 

$

8,851

 

$

 

8,851

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

$

 

$

8,851

 

$

 

 

$

8,851

 

 

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Table of Contents

 

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis at March 31, 2018:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

Available-for-sales securities—current

 

$

 

$

45,900

 

$

 

$

45,900

 

Available-for-sales securities—non-current

 

 

4,140

 

 

4,140

 

Foreign currency derivative contracts

 

 

2,122

 

 

2,122

 

Interest Rate Swap Contracts

 

 

2,486

 

 

2,486

 

Total assets

 

$

 

$

54,648

 

$

 

$

54,648

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency derivative contracts

 

$

 

$

1,023

 

$

 

1,023

 

Interest Rate Swap Contracts

 

 

 

 

 

Contingent consideration

 

 

 

100

 

100

 

Total liabilities

 

$

 

$

1,023

 

$

100

 

$

1,123

 

 

(6) Derivative Financial Instruments

 

The Company evaluates its foreign exchange policy on an ongoing basis to assess its ability to address foreign exchange exposures on its consolidated balance sheets, statements of income and consolidated statement of cash flows from all foreign currencies, including most significantly the U.K. pound sterling and Indian rupee. The Company enters into hedging programs with highly rated financial institutions in accordance with its foreign exchange policy (as approved by the Company’s audit committee and board of directors) which permits hedging of material, known foreign currency exposures. There is no margin required, no cash collateral posted or received by us related to our foreign exchange forward contracts.

 

The U.S. dollar notional value of all outstanding foreign currency derivative contracts was $173,461 and $140,347 at September 30, 2018 and March 31, 2018, respectively. Unrealized net losses related to these contracts which are expected to be reclassified from AOCI to earnings during the next 12 months are $8,331 at September 30, 2018. At September 30, 2018, the maximum outstanding term of any derivative instrument was 18 months.

 

The Company also uses interest rate swaps to mitigate the Company’s interest rate risk on the Company’s variable rate debt. The Company’s objective is to limit the variability of cash flows associated with changes in LIBOR interest rate payments due on the Credit Agreement (See Note 13 to the consolidated financial statements), by using pay-fixed, receive-variable interest rate swaps to offset the future variable rate interest payments. The Interest Rate Swap agreements require the Company to make monthly fixed interest rate payments based on the amortized notional amount at a blended weighted average rate of 1.025% and the Company will receive 1-month LIBOR on the same notional amounts.

 

The following table sets forth the fair value of derivative instruments included in the consolidated balance sheets at September 30, 2018 and March 31, 2018:

 

Derivatives designated as hedging instruments

 

 

 

September 30, 2018

 

March 31, 2018

 

Foreign currency exchange contracts:

 

 

 

 

 

Other current assets

 

$

24

 

$

2,109

 

Other long-term assets

 

$

2

 

$

13

 

Accrued expenses and other

 

$

8,354

 

$

1,023

 

Long-term liabilities

 

$

497

 

$

 

 

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September 30, 2018

 

March 31, 2018

 

Interest rate swap contracts:

 

 

 

 

 

Other long-term assets

 

$

2,509

 

$

2,486

 

 

The following tables set forth the effect of the Company’s foreign currency exchange contracts and interest rate swap contracts on the consolidated financial statements of the Company for the three and six months ended September 30, 2018 and 2017:

 

 

 

Amount of Gain or (Loss) Recognized in AOCI on Derivative

 

Derivatives Designated as Cash Flow

 

Three Months Ended September 30,

 

Six Months Ended September 30,

 

Hedging Relationships

 

2018

 

2017

 

2018

 

2017

 

Foreign currency exchange contracts

 

$

(6,309

)

$

93

 

$

(11,601

)

$

598

 

Interest rate swaps

 

$

193

 

$

37

 

$

466

 

$

(237

)

 

Location of Gain ((Loss) Reclassified

 

Amount of Gain (Loss) Reclassified from AOCI into Income (loss)

 

from AOCI into Income (loss) (Effective

 

Three Months Ended September 30,

 

Six Months Ended September 30,

 

Portion)

 

2018

 

2017

 

2018

 

2017

 

Revenue

 

$

(807

)

$

2,919

 

$

(1,163

)

$

5,511

 

Costs of revenue

 

$

(659

)

$

1,987

 

$

(341

)

$

4,052

 

Operating expenses

 

$

(343

)

$

1,150

 

$

(173

)

$

2,310

 

Interest expense

 

$

236

 

$

34

 

$

443

 

$

34

 

 

 

 

 

 

Amount of Gain or (Loss) Recognized in Income
(loss) on Derivatives

 

Derivatives not Designated

 

Location of Gain or (Loss)

 

Three Months Ended
September 30,

 

Six Months Ended
September 30,

 

as Hedging Instrument

 

Recognized in Income (loss) on Derivatives

 

2018

 

2017

 

2018

 

2017

 

Foreign currency exchange contracts

 

Revenue

 

$

287

 

$

(155

)

$

1,106

 

$

(336

)

 

 

Costs of revenue

 

$

(220

)

$

89

 

$

(753

)

$

231

 

 

 

Selling, general and administrative expenses

 

$

(19

)

$

22

 

$

(19

)

$

53

 

 

(7) Acquisitions

 

On March 12, 2018, (i) the Company entered into an equity purchase agreement by and among the Company, eTouch Systems Corp. (“eTouch US”) and each of the equity holders of eTouch US to acquire all of the outstanding shares of eTouch US, and (ii) certain of the Company’s Indian subsidiaries entered into a share purchase agreement by and among those Company subsidiaries, eTouch Systems (India) Pvt. Ltd (“eTouch India,” together with eTouch US, “eTouch”) and the equity holders of eTouch India to acquire all of the outstanding shares of eTouch India (together with the acquisition of eTouch US, the “Acquisition”). The Acquisition strengthens our digital engineering capabilities, and establishes a solid base in Silicon Valley.

 

Under the terms of the equity purchase agreement and the share purchase agreement, on March 12, 2018, the Company acquired all of the outstanding shares of eTouch US and eTouch India for approximately $140,000 in cash, subject to certain adjustments, with up to an additional $15,000 set aside for retention bonuses to be paid to eTouch management and key employees, in equal installments on the first and second anniversary of the transaction. The purchase price is being paid in three tranches with $80,000 paid at closing, $42,500 on the 12-month anniversary of the close of the transaction, and $17,500 on the 18-month anniversary of the close of the transaction, subject in each case to certain adjustments. The Company utilized the net cash proceeds of a $70,000 delayed draw term loan funded pursuant to the Credit Agreement (as defined in note 13 to the consolidated financial statements) and $10,000 of cash on hand to make the payments due at the closing of the Acquisition. The Company paid an amount equal to $66,000 to the equity holders of eTouch US, and an amount equal to $14,000 to the equity holders of eTouch India, which together comprise the first of three tranches of the purchase price to be paid in connection with the closing of the Acquisition.

 

The purchase price is subject to adjustment after the closing in the event the working capital associated with eTouch deviates from a threshold amount and other contractual adjustments.

 

Under the purchase method of accounting, assets acquired and liabilities assumed are recorded at their estimated fair values. The Company may continue to adjust the preliminary estimated fair values after obtaining more information regarding asset valuations, liabilities assumed, and revision of preliminary estimates. During the three months ended September 30, 2018, the Company recorded $7,100 as a reduction of goodwill related to updating the fair value assessment of customer relationships and trademark and $308 as an

 

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increase in goodwill related to other adjustments. The following are the preliminary fair values of assets and liabilities based on information available as of September 30, 2018 and may be subject to change during the measurement period.

 

A summary of the fair values for eTouch is as follows:

 

 

 

Amount

 

Useful Life

 

Consideration Transferred:

 

 

 

 

 

Cash paid at closing

 

$

80,000

 

 

 

Fair value of the future payments

 

57,858

 

 

 

Tax related liability

 

9,313

 

 

 

Fair value of consideration

 

147,171

 

 

 

Less: Cash acquired

 

2,241

 

 

 

Total purchase price, net of cash acquired

 

$

144,930

 

 

 

Assets and Liabilities:

 

 

 

 

 

Cash and cash equivalents

 

2,241

 

 

 

Accounts receivable

 

15,143

 

 

 

Unbilled receivables

 

2,986

 

 

 

Prepaid expenses

 

815

 

 

 

Other current assets

 

869

 

 

 

Property and equipment

 

2,798

 

 

 

Other long-term assets

 

98

 

 

 

Goodwill

 

78,824

 

 

 

Trademark

 

900

 

2 years

 

Customer relationships

 

53,000

 

10 - 15 years

 

Accounts payable

 

(3,248

)

 

 

Deferred revenue

 

(852

)

 

 

Accrued expenses and other current liabilities

 

(607

)

 

 

Accrued employee compensation and benefits

 

(4,160

)

 

 

Income taxes payable

 

(250

)

 

 

Deferred income taxes

 

(368

)

 

 

Other long-term liabilities

 

(1,018

)

 

 

Total purchase price

 

$

147,171

 

 

 

 

Acquisition costs are recorded in selling, general and administrative expenses. The primary items that generated goodwill are the value of the acquired assembled workforces and synergies between eTouch and the Company, neither of which qualify as an amortizable intangible asset.

 

(8) Revenues

 

Effective April 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (“Topic 606”) as amended. The Company adopted the new guidance using the modified retrospective method by recognizing the cumulative effect of adoption as an adjustment to retained earnings as of April 1, 2018. Results for reporting periods beginning after April 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with Revenue Recognition (“Topic 605”). The impact of adoption of the new guidance on the Company’s consolidated financial statements as of April 1, 2018 is presented in Note 2 to the Company’s consolidated financial statements.

 

Revenue recognition

 

The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

 

Revenues are recognized when control of the promised services is transferred to its customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.

 

The Company generally recognizes revenue for services over time as the Company’s performance creates or enhances an asset that the customer controls from fixed price contracts related to complex design, development and customization. For these contracts, the Company measures the progress and recognizes revenue using effort-based input methods, as the Company performs, based on actual efforts spent compared to the total expected efforts for the contract. The use of the effort based input method requires significant judgment relative to estimating total efforts, including assumptions relative to the length of time to complete the project and the nature

 

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and complexity of the work to be performed. Estimates of total efforts are continuously monitored during the term of the contract and are subject to revision as the contract progresses. When revisions in estimated contract revenue and efforts are determined, such adjustments are recorded in the period in which they are first identified. An input method is used to recognize revenue as the value of services provided to the customer is best represented by the hours expended to deliver those services.

 

The Company generally recognizes revenue for services over time as the customer simultaneously receives and consumes the benefits as the Company performs for fixed-price contracts related to consulting or other IT services. For these contracts, the Company measures the progress and recognizes revenue using effort-based input methods as the Company performs based on actual efforts spent compared to the total expected efforts for the contract. The cumulative impact of any change in estimates of the contract revenue is reflected in the period in which the changes become known.

 

The Company has applied the as-invoiced practical expedient to recognize revenues for services the Company renders to customers on time and material basis contracts.

 

The Company generally recognizes revenue from fixed-price applications management, maintenance, or support engagements over time as customers receive and consume the benefits of such services and have applied the as-invoiced practical expedient to recognize revenue for services the Company renders to customers based on the amount the Company has a right to invoice, which is representative of the value being delivered.

 

Contracts are often modified to account for changes in contract specification and requirements. The Company considers a contract modification when the modification either creates new or changes the existing enforceable rights and obligations. The accounting for modifications involves assessing whether the services added to an existing contract are distinct and whether the pricing is at the standalone selling price. Services added that are not distinct are accounted for on a cumulative catch up basis, while those that are distinct are accounted for prospectively, either as a separate contract if the additional services are priced at the standalone selling price, or as a termination of the existing contract and creation of a new contract if not priced at the standalone selling price.

 

Certain customers may receive discounts, incentive payments or service level credits. A portion of the revenues relating to such arrangements are accounted for as variable consideration when the amount of revenue to be recognized can be estimated to the extent that it is probable that a significant reversal of any revenue will not occur. The Company estimates these amounts based on the expected amount to be provided to customers and adjusts revenues recognized. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the transaction price may involve judgment and are based largely on an assessment of the Company’s anticipated performance and all information that is reasonably available to us.

 

From time to time, the Company may enter into contracts with customers that include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on an expected cost plus a margin approach.

 

The Company’s warranties generally provide a customer with assurance that the related deliverable will function as the parties intended because it complies with agreed-upon specifications and is therefore not considered as an additional performance obligation in the contract.

 

When the Company receives consideration from a customer prior to transferring services to the customer under the terms of a contract, the Company records deferred revenue, which represents a contract liability. The Company recognizes deferred revenue as revenue after the Company has transferred control of the services to the customer and all revenue recognition criteria are met.

 

The Company’s payment terms vary by the type and location of its customers. The term between invoicing and when payment is due is not significant. As a practical expedient, the Company does not assess the existence of a significant financing component when the difference between payment and transfer of deliverables is one year or less.

 

The Company reports gross reimbursable “out-of-pocket” expenses incurred as both revenues and cost of revenues.

 

Any tax assessed by a governmental authority that is incurred as a result of a revenue transaction (e.g. sales tax) is excluded from the Company’s assessment of transaction prices.

 

Costs to obtain and fulfill

 

The Company’s costs to obtain contracts are generally expensed as incurred, as the liability is not solely a result of obtaining the contract. The costs to obtain contracts are triggered by multiple conditions such as being contingent on future performance, including continued employment and revenue recognized associated with the contract.

 

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The Company’s recurring operating costs for contracts with customers are recognized as expense as incurred. Certain eligible costs incurred in the initial phases of the Company’s application maintenance, business process outsourcing and infrastructure services contracts (i.e. set-up or transition costs) are capitalized when such costs (1) relate directly to the contract, (2) generate or enhance resources of the Company that will be used in satisfying the performance obligation in the future, and (3) are expected to be recovered. These costs are expensed ratably over the estimated life of the customer relationship, including expected renewals. In determining the estimated life of the customer relationship, the Company evaluates the contract term, the expected life of the enhanced assets as well as the rate of technological and industry change. Capitalized amounts are monitored regularly for impairment. Impairment losses are recorded when projected remaining undiscounted operating cash flows are not sufficient to recover the carrying amount of the capitalized costs to fulfill.

 

The following table presents information related to the capitalized costs to fulfill, such as set-up or transition activities, for the six months ended September 30, 2018:

 

 

 

Costs to Fulfill

 

Balance at April 1, 2018

 

$

4,278

 

Costs capitalized

 

1,539

 

Amortization expense

 

(1,075

)

Foreign currency translation adjustments

 

(183

)

Balance at September 30, 2018

 

$

4,559

 

 

Costs to fulfill are recorded in “Other current assets” and “Other long-term assets” in the consolidated balance sheets.

 

The following table summarizes the impacts of changes in accounting policies after adoption of ASC 606 on the Company’s consolidated financial statements as of and for the three and six months ended September 30, 2018:

 

 

 

As of September 30, 2018

 

 

 

As reported

 

Pro-forma Amounts

 

Impacts of the New
Revenue standard

 

Balance Sheet :

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Other current assets (1)

 

$

19,221

 

$

18,862

 

$

359

 

Total current assets

 

 

 

 

 

359

 

Deferred income taxes (3)

 

38,310

 

38,486

 

(176

)

Other long-term assets (1)

 

15,728

 

15,671

 

57

 

Total Assets

 

 

 

 

 

$

240

 

Liabilities

 

 

 

 

 

 

 

Deferred revenue (2)

 

6,175

 

6,442

 

(267

)

Total current liabilities

 

 

 

 

 

(267

)

Stockholders’ equity:

 

 

 

 

 

 

 

Retained earnings

 

231,517

 

231,010

 

507

 

Total liabilities, Series A convertible preferred stock and stockholders’ equity

 

 

 

 

 

$

240

 

 

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Table of Contents

 

 

 

Three Months Ended
September 30, 2018

 

Six Months Ended
September 30, 2018

 

 

 

As reported

 

Pro-forma
Amounts

 

Impact from
New Revenue
Standard

 

As reported

 

Pro-forma
Amounts

 

Impact from
New Revenue
Standard

 

Revenue (2)

 

$

305,520

 

$

305,541

 

$

(21

)

605,551

 

$

605,284

 

$

267

 

Costs of revenue (1)

 

216,346

 

216,589

 

(243

)

432,827

 

433,243

 

(416

)

Gross profit

 

89,174

 

88,952

 

222

 

172,724

 

172,041

 

683

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

75,155

 

75,155

 

 

144,781

 

144,781

 

 

Income from operations

 

14,019

 

13,797

 

222

 

27,943

 

27,260

 

683

 

Other expense

 

(12,461

)

(12,461

)

 

(26,085

)

(26,085

)

 

Income before income tax expense (benefit)

 

1,558

 

1,336

 

222

 

1,858

 

1,175

 

683

 

Income tax (benefit) expense (3)

 

(402

)

(463

)

61

 

5,463

 

5,287

 

176

 

Net income (loss)

 

$

1,960

 

$

1,799

 

$

161

 

$

(3,605

)

(4,112

)

$

507

 

Less: net income attributable to noncontrolling interests, net of tax

 

455

 

455

 

 

1,186

 

1,186

 

 

Net income (loss) available to Virtusa stockholders

 

$

1,505

 

$

1,344

 

$

161

 

$

(4,791

)

(5,298

)

$

507

 

Less: Series A Convertible Preferred Stock dividends and accretion

 

1,088

 

1,088

 

 

2,175

 

2,175

 

 

Net income (loss) available to Virtusa common stockholders

 

417

 

256

 

161

 

(6,966

)

(7,473

)

507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share available to Virtusa common stockholders

 

$

0.01

 

$

 

$

0.01

 

$

(0.23

)

(0.25

)

$

0.02

 

Diluted earnings (loss) per share available to Virtusa common stockholders

 

$

0.01

 

$

 

$

0.01

 

$

(0.23

)

(0.25

)

$

0.02

 

 


Notes

(1) Reflects the impact of a longer period of amortization for costs to fulfill a contract.

(2) Reflects the impact of changes in timing of revenue recognition on our software licenses and certain fixed-price application maintenance contracts.

(3) Reflects the income tax impact of the above items.

 

Receivables and Contract Balances

 

The Company classifies its right to consideration in exchange for deliverables as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional (i.e. only the passage of time is required before payment is due). The Company presents such receivables in accounts receivable or unbilled accounts receivable, in its consolidated statements of financial position at their net estimated realizable value.

 

Contract assets included in unbilled accounts receivable are recorded when services have been provided but the Company does not have an unconditional right to receive consideration. Contracts assets are primarily related to unbilled amounts on fixed-price contracts utilizing the input method of revenue recognition. The timing between services rendered and timing of payment is less than one year. The Company recognizes an impairment loss when the contract carrying amount is greater than the remaining consideration receivable, less directly related costs to be incurred.

 

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The table below shows significant movements during the six months ended September 30, 2018 in contract assets:

 

 

 

Contract Assets

 

Balance at April 1, 2018

 

$

15,998

 

Revenues recognized during the period but not yet billed

 

63,983

 

Amounts billed

 

(64,231

)

Other

 

(278

)

Balance at September 30, 2018

 

$

15,472

 

 

Contract liabilities comprise amounts billed to customers for revenues not yet earned. Such amounts are anticipated to be recorded as revenues when services are performed in subsequent periods.

 

The table below shows significant movements in the deferred revenue balances during the six months ended September 30, 2018:

 

 

 

Contract
Liabilities

 

Balance at April 1, 2018

 

$

7,908

 

Amounts billed but not yet recognized as revenues

 

4,918

 

Revenues recognized related to the opening balance of deferred revenue

 

(6,354

)

Other

 

(297

)

Balance at September 30, 2018

 

$

6,175

 

 

Remaining performance obligation

 

ASC 606 requires that the Company discloses the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of September 30, 2018. This disclosure is not required for:

 

(1)         contracts with an original duration of one year or less, including contracts that can be terminated for convenience without a substantive penalty,

(2)         contracts for which the Company recognizes revenues based on the right to invoice for services performed,

(3)         variable consideration allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation in accordance with ASC 606-10-25-14(b), for which the criteria in ASC 606- 10-32-40 have been met, or

(4)         variable consideration in the form of a sales-based or usage-based royalty promised in exchange for a license of intellectual property.

 

Many of the Company’s performance obligations meet one or more of these exemptions. As of September 30, 2018, the aggregate amount of transaction price allocated to remaining performance obligations, other than those meeting the exclusion criteria above, was $46,164 and will be recognized as revenue within 4 years.

 

Disaggregation of Revenue

 

The table below presents disaggregated revenues from the Company’s contracts with customers by geography, industry groups, service offerings and contract-type. The Company believes this disaggregation best depicts how the nature, amount, timing and uncertainty of its revenues and cash flows are affected by industry, market and other economic factors.

 

Revenue by geography:

 

Three Months Ended
September 30, 2018

 

Six Months Ended
September 30, 2018

 

North America

 

$

218,303

 

$

427,932

 

Europe

 

60,393

 

127,129

 

Rest of World

 

26,824

 

50,490

 

Consolidated revenue

 

$

305,520

 

$

605,551

 

 

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Revenue by Customer’s Industry Groups

 

Three Months Ended
September 30, 2018

 

Six Months Ended
September 30, 2018

 

Banking financial services insurance

 

$

192,071

 

$

380,809

 

Communications and Technology

 

85,341

 

168,368

 

Media & Information and Other

 

28,108

 

56,374

 

Consolidated revenue

 

$

305,520

 

$

605,551

 

 

Revenue by service offerings

 

Three Months Ended
September 30, 2018

 

Six Months Ended
September 30, 2018

 

Application outsourcing

 

$

161,890

 

$

322,599

 

Consulting

 

143,630

 

282,952

 

Consolidated revenue

 

$

305,520

 

$

605,551

 

 

Revenue by contract type

 

Three Months Ended
September 30, 2018

 

Six Months Ended
September 30, 2018

 

Time-and-materials

 

$

184,170

 

$

363,396

 

Fixed-price*

 

121,350

 

242,155

 

Consolidated revenue

 

$

305,520

 

$

605,551

 

 


*Fixed-price includes both retainer-billing basis and fixed-price progress towards completion

 

(9)  Series A Convertible Preferred Stock

 

On May 3, 2017, the Company entered into an investment agreement with The Orogen Group (“Orogen”) pursuant to which Orogen purchased 108,000 shares of the Company’s newly issued Series A Convertible Preferred Stock, initially convertible into 3,000,000 shares of common stock, for an aggregate purchase price of $108,000 with an initial conversion price of $36.00 (the “Orogen Preferred Stock Financing”). Under the terms of the investment, the Series A Convertible Preferred Stock has a 3.875% dividend per annum, payable quarterly in additional shares of common stock and/or cash at the Company’s option. If any shares of Series A Convertible Preferred Stock have not been converted into common stock prior to May 3, 2024, the Company will be required to repurchase such shares at a repurchase price equal to the liquidation preference of the repurchased shares plus the amount of accumulated and unpaid dividends thereon. If the Company fails to effect such repurchase, the dividend rate on the Series A Convertible Preferred Stock will increase by 1% per annum and an additional 1% per annum on each anniversary of May 3, 2024 during the period in which such failure to effect the repurchase is continuing, except that the dividend rate will not increase to more than 6.875% per annum.

 

In connection with the issuance of the Series A Convertible Preferred Stock, the Company incurred direct and incremental expenses of $1,154, including financial advisory fees, closing costs, legal expenses and other offering-related expenses. These issuance costs are recorded as a reduction to the proceeds received from issuance of Series A Convertible Preferred Stock. These direct and incremental expenses reduced the Series A Convertible Preferred Stock, and will be accreted through retained earnings as a deemed dividend from the date of issuance through the first possible known redemption date, May 3, 2024. During the three and six ended September 30, 2018 and 2017, the Company recorded accretions to the Series A Convertible Preferred Stock related to its issuance cost. Holders of Series A Convertible Preferred Stock are entitled to a cumulative dividend at the rate of 3.875% per annum, payable quarterly in arrears. During the six months ended September 30, 2018 and 2017, the Company has paid $2,092 and $1,035, respectively, as cash dividend on Series A Convertible Preferred Stock. As of September 30, 2018, the Company had declared and accrued dividends of $686 associated with the Series A Convertible Preferred Stock.

 

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(10) Goodwill and Intangible Assets

 

Goodwill:

 

The Company has one operating segment. The following are details of the changes in goodwill balance at September 30, 2018:

 

 

 

Amount

 

Balance at April 1, 2018

 

$

297,251

 

Preliminary fair value adjustment

 

(7,223

)

Foreign currency translation adjustments

 

(15,026

)

Balance at September 30, 2018

 

$

275,002

 

 

The acquisition costs and goodwill balance deductible for our business acquisitions for tax purposes are $145,936. The acquisition costs and goodwill balance not deductible for tax purposes are $141,970 and relate to the Company’s TradeTech acquisition (closed on January 2, 2014), the Polaris acquisition and the eTouch India acquisition.

 

Intangible Assets:

 

The following are details of the Company’s intangible asset carrying amounts acquired and amortization at September 30, 2018.

 

 

 

Weighted Average
Useful Life

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

Customer relationships

 

12.2

 

$

132,207

 

$

38,866

 

$

93,341

 

Trademark

 

2.1

 

3,597

 

2,915

 

682

 

Technology

 

5.0

 

500

 

311

 

189

 

 

 

12.0

 

$

136,304

 

$

42,092

 

$

94,212

 

 

The intangible assets are being amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized.

 

(11) Income Taxes

 

The Company applies an estimated annual effective tax rate to its year-to-date operating results to determine the interim provision (benefit) for income tax expense. The Company’s effective tax (benefit) rate was (25.8%) and 294.0% for the three and six months ended September 30, 2018, as compared to an effective tax rate of 16.5% and 15.8% for the three and six months ended September 30, 2017. The Company’s effective tax rate for the three and six months ended September 30, 2018 was significantly impacted by electing disregarded entity treatment for certain foreign subsidiaries, Global Intangible Low—taxed Income (“GILTI”) provisions and executive compensation limitations enacted in the Tax Cuts and Jobs Act (the “Tax Act”), enacted on December 22, 2017 by the U.S. government. The Company’s reported effective tax rate is also impacted by jurisdictional mix of profits and losses in which the Company operates, foreign statutory tax rates in effect, unusual or infrequent discrete items requiring a provision during the period and certain exemptions or tax holidays applicable to the Company.

 

During the three and six months ended September 30, 2018, the Company elected to treat several foreign entities as disregarded entities. The earnings of these subsidiaries will be subject to US taxation as well as local taxation with a corresponding foreign tax credit, at the election of the Company. The election resulted in a deferred tax charge of $6,288 during the six months ended September 30, 2018. The election also makes available to the Company benefits of foreign tax credits. The Company’s income tax provision for the three and six months ended September 30, 2018 includes a reasonable estimate of the expected impact of GILTI and executive compensation limitations of the Tax Act impacting our operating results for the 2019 fiscal year. The Company’s aggregate income tax rate in foreign jurisdictions is comparable to its income tax rate in the United States, as a result of the Tax Act, other than in jurisdictions in which the Company has tax holiday benefits.

 

The Tax Act contains several key tax provisions that have impacted the Company, including the reduction of the corporate income tax rate to 21% effective January 1, 2018. The Tax Act also includes a variety of other changes, such as a deemed repatriation tax on accumulated foreign earnings, a limitation on the tax deductibility of interest expense, acceleration of business asset expensing, and reduction in the amount of executive pay that could qualify as a tax deduction, among others. The lower corporate income tax rate required the Company to remeasure its U.S. deferred tax assets and liabilities as well as reassess the realizability of its deferred tax assets and liabilities. ASC Topic 740, Income Taxes, requires the Company to recognize the effect of the tax law changes in the period of enactment. However, the Securities and Exchange Commission has issued Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Job Act (“SAB 118”), which will allow the Company to record provisional amounts during a measurement period of up to one year after the enactment of the Tax Act to finalize the recording of the related tax impacts. During the fiscal year ended March 31, 2018, the Company recorded a provisional charge of $17,834 for deemed repatriation of unremitted earnings

 

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and a provisional charge of $4,890 primarily to remeasure the Company’s opening U.S. deferred tax assets to reflect the lower statutory rate at which they will be realized. Both provisional charges are based on the Company’s reasonable estimates. During the three and six months ended September 30, 2018, the Company recorded no additional provisional charge for deemed repatriation of unremitted earnings or remeasurement of deferred tax assets to reflect the lower statutory rate at which they will be realized. The $17,834 for deemed repatriation will be paid over the next 8 years. In July 2018, the Company paid approximately $1,427 related to deemed repatriation. As of September 30, 2018, of the remaining deemed repatriation balance, approximately $1,427 is included in income taxes payable and $14,980 is included in long-term liabilities in the consolidated balance sheet as of September 30, 2018.

 

Due to the complexities involved in determining the previously unremitted earnings of all our foreign subsidiaries, the Company is still in the process of obtaining, preparing and analyzing the computations of accumulated earnings and profits balances as of September 30, 2018. The Company is continuing to analyze certain aspects of the Tax Act and may refine its estimates, which could potentially affect the measurement of its net deferred tax assets or give rise to new deferred tax amounts. The U.S. Government and state tax authorities are expected to continue to issue guidance regarding the Tax Act, which may result in adjustments to the Company’s provisional estimates. The final determination of these provisional amounts will be completed as additional information becomes available, but no later than one year from the enactment date.

 

The changes included in the Tax Act are broad and complex. The final impacts of the Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the Company has utilized to calculate the impacts, including impacts from changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries.

 

The U.S. Tax Act subjects a U.S. shareholder to GILTI earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. The Company has elected to provide for GILTI in the year incurred. The Company’s results for the six months ended September 30, 2018 include a reasonable estimate for the impact of GILTI. Given the complexity of the GILTI provisions, and future guidance that might be released, the Company continues to evaluate the effects of the GILTI provisions on our results. The Company continues to review the anticipated impacts of the base erosion anti-abuse tax (“BEAT”), which is effective for our fiscal year ended March 31, 2019. The Company has not recorded any impact associated with BEAT in the tax rate for the six months ended September 30, 2018 given the Company’s understanding of current guidance.

 

A valuation allowance is required if, based on available evidence, it is more likely than not that all or some portion of the asset will not be realized due to the inability of the Company to generate sufficient taxable income in a specific jurisdiction. Net loss in the United States has decreased during the six months ended September 30, 2018 compared with the months ended September 30, 2017. The Company has $31,343 of net deferred tax assets in the United States at September 30, 2018. The Company has not completed its valuation allowance assessment related to the Tax Act, primarily related to the impact of the GILTI, interest expense limitation and executive pay, which might impact the need for a valuation allowance. However, as a result of the Company’s election to treat several foreign entities as disregarded entities, U.S. taxable income has significantly increased. The Company also has a deferred tax asset in the United Kingdom for loss carryovers, which in the determination of management is more likely than not to be utilized before expiration.

 

The Company’s Indian subsidiaries operate several development centers in areas designated a special economic zone, or SEZ, under the SEZ Act of 2005. In particular, the Company was approved as an SEZ Co-developer and has built a campus on a 6.3 acre parcel of land in Hyderabad, India that has been designated as an SEZ. As an SEZ Co-developer, the Company is entitled to certain tax benefits for any consecutive period of 10 years during the 15 year period starting in fiscal year 2008. The Company has other units at various stages of tax holiday benefit.

 

In addition, the Company’s Sri Lankan subsidiary, Virtusa (Private) Limited, is operating under a 12-year income tax holiday arrangement that is set to expire on March 31, 2019 and required Virtusa (Private) Limited to retain certain job creation and investment criteria through the expiration of the holiday period. During the fiscal year ended March 31, 2018, the Company believes it had fulfilled its hiring and investment commitments and is eligible for tax holiday through March 2019. At September 30, 2018, the Company believes it is eligible for continued benefits for the entire 12-year tax holiday.

 

Due to the geographical scope of the Company’s operations, the Company is subject to tax examinations in various jurisdictions. The Company’s ongoing assessments of the more-likely-than-not outcomes of these examinations and related tax positions require judgment and can increase or decrease the Company’s effective tax rate, as well as impact the Company’s operating results. The specific timing of when the resolution of each tax position will be reached is uncertain. The Company does not believe that the outcome of any ongoing examination will have a material effect on its consolidated financial statements within the next twelve months. The Company’s major taxing jurisdictions include the United States, the United Kingdom, India and Sri Lanka. In the United States, the Company remains subject to examination for all tax years ended after March 31, 2015. In the foreign jurisdictions, the Company

 

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generally remains subject to examination for tax years ended after March 31, 2005. The Company has been under income tax examination in India, the U.K. and the United States. The Company is currently appealing assessments in India for fiscal years ended March 31, 2005 through 2014. In the United Kingdom, the Company is currently under examination for transfer pricing matters for the year ended March 2014. In the United States, the IRS has initiated an examination of fiscal years ended March 31, 2015 and March 31, 2017.

 

Unrecognized tax benefits represent uncertain tax positions for which the Company has established reserves. At September 30, 2018 and March 31, 2018, the total liability for unrecognized tax benefits was $6,702 and $7,544, respectively. Unrecognized tax benefits may be adjusted upon the closing of the statute of limitations for income tax returns filed in various jurisdictions. During the six months ended September 30, 2018, the unrecognized tax benefits decreased by $842 and decreased by $24 during the six months ended September 30, 2017. The decrease in unrecognized tax benefits in the six months period ending September 30, 2018 was predominantly due to foreign currency movements and the settlement of a prior period position offset by increases for incremental interest accrued on existing uncertain tax positions.

 

Undistributed Earnings of Foreign Subsidiaries

 

A substantial amount of the Company’s income before provision for income tax is from operations earned in its Indian and Sri Lankan subsidiaries and is subject to tax holiday. The Company intends to use accumulated and future earnings of foreign subsidiaries to expand operations outside the United States and, accordingly, undistributed income is considered indefinitely reinvested. The Company does not provide for U.S. income taxes on foreign currency translation or applicable withholding tax until a distribution is declared. At September 30, 2018, the Company had approximately $180,348 of cash, cash equivalents, short-term and long-term investments that would otherwise be available for potential distribution, if not indefinitely reinvested. If required, such cash and investments could be repatriated to the United States. Due to the various methods by which such earnings could be repatriated in the future, the amount of taxes attributable to the undistributed earnings is not practicably determinable.

 

(12) Concentration of Revenue and Assets

 

Total revenue is attributed to geographic areas based on the location of the client. Long-lived assets represent property, plant and equipment, intangible assets and goodwill, net of accumulated depreciation and amortization, and are attributed to geographic area based on their location. Geographic information is summarized as follows:

 

 

 

Three Months Ended
September 30,

 

Six Months Ended
September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Client revenue:

 

 

 

 

 

 

 

 

 

United States of America

 

$

208,543

 

$

150,765

 

$

409,683

 

$

290,465

 

United Kingdom

 

48,810

 

47,881

 

102,566

 

90,013

 

Rest of World

 

48,167

 

49,528

 

93,302

 

95,041

 

Consolidated revenue

 

$

305,520

 

$

248,174

 

$

605,551

 

$

475,519

 

 

 

 

September 30,
2018

 

March 31,
2018

 

Long-lived assets, net of accumulated depreciation and amortization:

 

 

 

 

 

United States of America

 

$

211,512

 

$

213,024

 

India

 

252,799

 

276,512

 

Rest of World

 

25,168

 

25,281

 

Consolidated long-lived assets, net

 

$

489,479

 

$

514,817

 

 

Revenue from significant clients as a percentage of the Company’s consolidated revenue was as follows:

 

 

 

Three Months Ended
September 30,

 

Six Months Ended
September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Customer 1

 

18.0

%

19.6

%

17.6

%

18.8

%

 

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