Notes to Consolidated Financial Statements
(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) Summary of Significant Accounting Policies
-
(a)
-
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.
-
(b)
-
Use of Estimates
The
preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, including the recoverability of tangible assets, disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts
of revenue and expenses during the reported period. Management re-evaluates these estimates on an ongoing basis. The most significant estimates relate to the recognition of revenue and profits based
on the percentage of
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(2) Summary of Significant Accounting Policies (Continued)
completion
method of accounting for fixed-price contracts, income taxes, including reserves for uncertain tax positions, deferred taxes and liabilities, intangible assets, 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.
-
(c)
-
Foreign Currency Translation
The
functional currencies of the Company's non-U.S. subsidiaries are the local currency of the country in which the subsidiary operates except for Hungary, which uses the euro and
certain Netherlands entities, which uses the U.S. dollar. Operating and capital expenditures of the Company's subsidiaries
located in India, Sri Lanka, the Netherlands, Australia, Canada, Singapore, Malaysia, the Philippines, Germany, Austria, Sweden and the United Kingdom, are denominated in their local
currency which is the currency most compatible with their expected economic results. India and Sri Lanka local expenditures form the underlying basis for intercompany transactions which are
subsequently conducted in both U.S. dollars and U.K. pounds sterling. U.K. client sales contracts are primarily conducted in U.K. pounds sterling.
All
transactions and account balances are recorded in the functional currency. The Company translates the value of these non-U.S. subsidiaries' local currency denominated assets and
liabilities into U.S. dollars at the rates in effect at the balance sheet date. Resulting translation adjustments are recorded in stockholders' equity as a component of accumulated other comprehensive
income (loss). The local currency denominated statement of income amounts are translated into U.S. dollars using the average exchange rates in effect during the period. Realized foreign currency
transaction gains and losses are included in the consolidated statements of income. The Company's non-U.S. subsidiaries do not operate in "highly inflationary" countries.
-
(d)
-
Derivative Instruments and Hedging Activities
The
Company enters into forward foreign exchange contracts to mitigate the risk of changes in foreign exchange rates on intercompany transactions and forecasted transactions denominated
in foreign currencies. The Company also enters into interest rate swaps to mitigate interest rate risk on the Company's variable rate debt. The Company designates derivative contracts as cash flow
hedges and any ineffective portions if they satisfy the criteria for hedge accounting. Changes in fair values of derivatives designated as cash flow hedges are deferred and recorded as a component of
accumulated other comprehensive income, net of taxes, until the hedged transactions occur and are then recognized in the consolidated statements of income, the effective components are recognized in
the same line item as the underlying and any ineffective components would be recognized as other income/expense. Changes in fair value of derivatives not designated as hedging instruments are
recognized immediately in the consolidated statements of income.
With
respect to derivatives designated as cash flow hedges, the Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management
objectives and strategy for undertaking various hedge transactions. The Company also formally assesses both at the inception of the hedge and on an ongoing basis, whether each derivative will be
highly effective in
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(thousands, except share and per share amounts)
(2) Summary of Significant Accounting Policies (Continued)
offsetting
changes in fair values or cash flows of the hedged item. If the Company determines that a derivative or a portion thereof is not highly effective as a hedge, or if a derivative ceases to
qualify for hedge accounting, the Company prospectively discontinues hedge accounting with respect to that derivative.
-
(e)
-
Cash and Cash Equivalents and Restricted Cash
The
Company considers all highly liquid investments with an initial maturity of three months or less from the date of purchase to be cash equivalents. At March 31, 2018, cash
equivalents consisted of money market instruments and certificates of deposit. The Company had short-term and long-term restricted cash totaling $338 and $178 at March 31, 2018 and 2017,
respectively. Restricted cash includes escrow deposits related to acquisitions, restricted deposits with banks to secure the import of computer and other equipment and bank guarantees associated with
the purchase of property and equipment of the Company's facilities in India.
-
(f)
-
Investment Securities
The
Company classifies all debt and equity securities as "available for sale". These securities are classified as short-term investments and long-term investments on the consolidated
balance sheet based on their maturity dates and are carried at fair market value. Any unrealized gains and losses on available for sale securities are reported in accumulated other comprehensive
income, net of tax, as a separate component of stockholders' equity unless the decline in value is deemed to be other-than-temporary, in which case, investments are written down to fair value and the
loss is charged to the consolidated statement of income. Any realized gains and losses on trading securities are charged to the consolidated statement of income. The Company determines the cost of the
securities sold based on the specific identification method.
The
Company conducts a periodic review and evaluation of its investment securities to determine if the decline in fair value of any security is deemed to be other-than-temporary.
Other-than-temporary impairment losses are recognized on securities when: (i) the holder has an intention to sell the security; (ii) it is more likely than not that the security will be
required to be sold prior to recovery; or (iii) the holder does not expect to recover the entire amortized cost basis of the security. Other-than- temporary losses are reflected in earnings as
a charge against gain on sale of investments to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive
income. The Company has no intention to sell any securities in an
unrealized loss position at March 31, 2018 nor is it more likely than not that the Company would be required to sell such securities prior to the recovery of the unrealized losses. At
March 31, 2018, the Company believes that all impairments of investment securities are temporary in nature.
-
(g)
-
Goodwill and Other Intangible Assets
The
Company accounts for its business combinations under the acquisition method of accounting. The Company records the assets acquired and liabilities assumed based on their estimated
fair values at the date of acquisition. The excess of the purchase price for acquisitions over the fair value of the net assets acquired, including other intangible assets, is recorded as goodwill.
Goodwill is not amortized but is tested for impairment at the reporting unit level, defined as the Company level, at least annually in the fourth
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(thousands, except share and per share amounts)
(2) Summary of Significant Accounting Policies (Continued)
quarter
of each fiscal year or more frequently when events or circumstances occur that indicate that it is more likely than not that an impairment has occurred. In assessing goodwill for impairment,
an entity has the option to assess qualitative factors to determine whether events or circumstances indicate that it is not more likely than not that fair value of a reporting unit is less than its
carrying amount. If this is the case, then performing the quantitative two-step goodwill impairment test is unnecessary. An entity can choose not to perform a qualitative assessment for any or all of
its reporting units, and proceed directly to the use of the two-step impairment test. The two-step process begins with an estimation of the fair value of a reporting unit. Goodwill impairment exists
when a reporting unit's carrying value of goodwill exceeds its implied fair value. Significant judgment is applied when goodwill is assessed for impairment.
For
the Company's goodwill impairment analysis, the Company operates under one reporting unit. Any impairment would be measured based upon the fair value of the related assets. In
performing the first step of the goodwill impairment testing and measurement process, the Company compares its entity-wide estimated fair value to net book value to identify potential impairment.
Management estimates the entity-wide fair value utilizing the Company's market capitalization, plus an appropriate control premium. Market capitalization is determined by multiplying the shares
outstanding on the assessment date by the market price of the Company's common stock. If the fair value of the reporting unit is less than the book value, the second step is performed to determine if
goodwill is impaired. If the Company determines through the impairment evaluation process that goodwill has been impaired, an impairment charge would be recorded in the consolidated statement of
income. The Company completed the annual impairment test required during the fourth quarter of the fiscal year ended March 31, 2018 and determined that there was no impairment. The Company
continues to closely monitor its market capitalization. If the Company's market capitalization, plus an estimated control
premium, is below its carrying value for a period considered to be other-than-temporary, it is possible that the Company may be required to record an impairment of goodwill either as a result of the
annual assessment that the Company conducts in the fourth quarter of each fiscal year, or in a future quarter if an indication of potential impairment is evident. The estimated fair value of the
reporting unit on the assessment date significantly exceeded the carrying book value.
Other
intangible assets acquired in a business combination are recognized at fair value using generally accepted valuation methods appropriate for the type of intangible asset and
reported separately from goodwill. Intangible assets with definite lives are amortized over the estimated useful lives and are tested for impairment when events or circumstances occur that indicate
that it is more likely than not that an impairment has occurred. The Company tests other intangible assets with definite lives for impairment by comparing the carrying amount to the sum of the net
undiscounted cash flows expected to be generated by the asset whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the carrying amount
of the asset exceeds its net undiscounted cash flows, then an impairment loss is recognized for the amount by which the carrying amount exceeds its fair value.
-
(h)
-
Fair Value of Financial Instruments
At
March 31, 2018 and 2017, 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
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Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(2) Summary of Significant Accounting Policies (Continued)
debt,
approximate their fair values due to the nature of the items. See note 8 to the consolidated financial statements for further information of the fair value of the Company's other
financial instruments.
-
(i)
-
Concentration of Credit Risk and Significant Customers
Financial
instruments which potentially expose the Company to concentrations of credit risk are primarily comprised of cash and cash equivalents, investments, derivatives, accounts
receivable and unbilled accounts receivable. The Company places its cash, investments and derivatives in highly-rated
financial institutions. The Company adheres to a formal investment policy with the primary objective of preservation of principal, which contains credit rating minimums and diversification
requirements. Management believes its credit policies reflect normal industry terms and business risk. The Company does not anticipate non-performance by the counterparties and, accordingly, does not
require collateral.
At
March 31, 2018 and 2017, one client accounted for 10% and 11% respectively, of gross accounts receivable. Revenue from significant clients as a percentage of the Company's
consolidated revenue was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
March 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Customer A
|
|
|
19
|
%
|
|
17
|
%
|
|
3
|
%
|
Customer B
|
|
|
7
|
%
|
|
3
|
%
|
|
|
|
-
(j)
-
Property and Equipment
Property
and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized over the shorter of
their lease term or the estimated useful life of the related asset. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and
any resulting gain or loss is credited or charged to income. Repair and maintenance costs are expensed as incurred.
-
(k)
-
Long-Lived Assets
The
Company reviews the carrying value of its long-lived assets or asset groups with definite useful lives to be held and used for impairment whenever events or changes in circumstances
indicate that the carrying value of these assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying value of an asset to the future net undiscounted
cash flows directly associated with the asset. If assets are considered to be impaired, the impairment recognized is the amount by which the carrying value exceeds the fair value of the asset. The
Company uses a discounted cash flow approach or other methods, if appropriate, to assess fair value.
Long-lived
assets to be disposed of by sale are reported at the lower of carrying value or fair value less cost to sell and depreciation is ceased. Long-lived assets to be disposed of
other than by sale are considered to be held and used until disposal.
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Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(2) Summary of Significant Accounting Policies (Continued)
-
(l)
-
Internally-Developed Software
The
Company capitalizes costs incurred during the application development stage, which include costs to design the software configuration and interfaces, coding, installation and
testing. Costs incurred during the preliminary project stage, along with post-implementation stages of internal use computer software, are expensed as incurred. Capitalized development costs are
typically amortized over the estimated life of the software, typically three to ten years, using the straight line method, beginning with the date that an asset is ready for its intended use. At
March 31, 2018 and 2017, capitalized software development costs, which include software development work in progress, were approximately $11,022 and $9,658, respectively. These costs were
recorded in property and equipment. For the fiscal years ended March 31, 2018, 2017 and 2016, amortization of capitalized software development costs amounted to approximately $2,377, $1,702 and
$556, respectively.
-
(m)
-
Income Taxes
Income
taxes are accounted for using the asset and liability method whereby deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be recovered or settled. Changes to enacted tax rates would result in either increases or decreases in the provision for
income taxes in the period of changes. The Company evaluates the realizability of deferred tax assets and recognizes a valuation allowance when it is more likely than not that all, or a portion of,
deferred tax assets will not be realized.
The
calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax regulations in multiple jurisdictions. The Company records
liabilities for estimated tax obligations in the United States and other tax jurisdictions in which it has operations (see note 14 to the consolidated financial statements). The Company
recognizes the tax benefit from an uncertain tax
position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based upon the technical merits of the position. The tax benefit
recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Also, interest
and penalties expense are recognized on the full amount of deferred benefits for uncertain tax positions. The Company's policy is to include interest and penalties related to unrecognized tax benefits
in income tax expense.
-
(n)
-
Revenue Recognition
The
Company derives its revenue from a variety of IT consulting, technology implementation and application outsourcing services. Contracts for these services have different terms and
conditions based on the scope, deliverables, and complexity of the engagement which require management to make judgments and estimates in determining the overall cost to the customer. Fees for these
contracts may be in the form of time and materials or fixed price arrangements.
Revenue
is recognized as work is performed and amounts are earned. The Company considers amounts to be earned once evidence of an arrangement has been obtained, services are delivered,
fees are
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Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(2) Summary of Significant Accounting Policies (Continued)
fixed
or determinable, and collectability is reasonably assured. Volume discounts are recorded as a reduction of revenue over the contractual period as services are performed.
Revenue
on time and material contracts is recognized as the services are performed and amounts are earned.
Revenue
from fixed price contracts related to complex design, development and customization is accounted for under the percentage of completion method. Under the percentage of completion
method, management estimates the percentage of completion based upon efforts incurred as a percentage of the total estimated efforts for the specified engagement. When total cost estimates exceed
revenue, the Company accrues for the estimated losses immediately. The use of the percentage of completion method requires significant judgment relative to estimating total contract revenue and
efforts, including assumptions relative to the length of time to complete the project, the nature and complexity of the work to be performed, and anticipated changes in other engagement related costs.
The Company's analysis of these contracts also contemplates whether contracts should be combined or
segmented. The Company combines closely related contracts when all the applicable criteria under U.S. GAAP are met. Similarly, the Company may segment a project, which may consist of a single
contract or a group of contracts, with varying rates of profitability, only if all the applicable criteria under U.S. GAAP are met. Estimates of total contract revenue and 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.
Revenue
from fixed-price contracts related to consulting or other IT services is accounted for using a proportional performance method. Performance is generally measured based upon the
efforts incurred to date in relation to the total estimated efforts to the completion of the contract. The cumulative impact of any change in estimates of the contract revenue is reflected in the
period in which the changes become known.
Revenue
from fixed-price applications management, maintenance or support engagements is recognized as earned which generally results in straight-line revenue recognition as services are
performed continuously over the term of the engagement.
The
Company may enter into arrangements that consist of multiple elements and in these types of arrangements the transaction price is allocated to the individual units of accounting at
the inception of the arrangement based on the relative selling price. The Company uses a hierarchy to determine the selling prices to be used for allocating revenue: (i) vendor-specific
objective, evidence of fair value (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of the selling price (ESP).
The
Company may enter into hosting arrangements where revenue is recognized as the service is delivered, generally on a straight-line basis, over the contractual period of performance.
In these types of arrangements, the Company considers the rights provided to the customer in determining whether the arrangement includes the sale of a software license.
Differences
between the timing of billings and the recognition of revenue based on various methods of accounting are recorded as unbilled revenue or deferred revenue.
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Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(2) Summary of Significant Accounting Policies (Continued)
Revenue includes reimbursements of travel and out-of-pocket expenses, with equivalent amounts of
expense recorded in costs of revenue, of $12,924, $12,920 and $14,142 for the fiscal years ended March 31, 2018, 2017 and 2016, respectively.
Any
tax assessed by a governmental authority that is incurred as a result of a revenue transaction (e.g. sales tax) is excluded from revenue and reported on a net basis.
-
(o)
-
Costs of Revenue and Operating Expenses
Costs
of revenue consist principally of salaries, employee benefits and share-based compensation expense, reimbursable and non-reimbursable travel costs, subcontractor fees, and
immigration related expenses for IT professionals. Selling and marketing expenses are charged to operating expenses as incurred. Selling and marketing expenses are those expenses associated with
promoting and selling the Company's services and include such items as sales and marketing personnel salaries, stock compensation expense and related fringe benefits, commissions, travel, and the cost
of advertising and other promotional activities. Advertising and promotional expenses incurred were approximately $306, $560 and $316 for the fiscal years ended March 31, 2018, 2017 and 2016,
respectively.
General
and administrative expenses include other operating items such as officers' and administrative personnel salaries, share-based compensation expense and related fringe benefits,
legal and audit expenses, public company related expenses, insurance, facility costs, provision for doubtful accounts, depreciation and amortization, including amortization of purchased intangibles
and operating lease expenses.
-
(p)
-
Share-Based Compensation
Share-based
compensation cost is determined by estimating the fair value at the grant date of the Company's common stock and expensing the total compensation cost on a straight-line
basis over the requisite employee service period or for grants issued with performance conditions, on a graded-vesting basis over the requisite employee service period. The requisite service period is
generally between three and four years. The Company changed its accounting policy from estimated forfeitures to actual forfeitures effective April 1, 2017 upon adoption of ASU 2016-09
Accounting Standard Update ("ASU") No. 2016-09, CompensationStock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
The
allocation of total share-based compensation expense between costs of revenue and selling, general and administrative expenses was as follows:
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|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Costs of revenue
|
|
$
|
895
|
|
$
|
2,501
|
|
$
|
1,204
|
|
Selling, general and administrative expenses
|
|
|
26,516
|
|
|
19,622
|
|
|
14,975
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
$
|
27,411
|
|
$
|
22,123
|
|
$
|
16,179
|
|
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Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(2) Summary of Significant Accounting Policies (Continued)
-
(q)
-
Allowance for Doubtful Accounts
The
Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of clients to make required payments. The allowance for doubtful accounts is
determined by evaluating the relative credit worthiness of each client, historical collections experience and other information, including the aging of the receivables. We evaluate the collectability
of our accounts receivables on an on-going basis and write-off accounts when they are deemed to be uncollectible.
-
(r)
-
Unbilled Accounts Receivable
Unbilled
accounts receivable represent revenue earned on contracts to be billed, in subsequent periods, as per the terms of the related contracts.
-
(s)
-
Recent accounting pronouncements
In March 2016, the FASB issued an update (ASU 2016-09) to the standard on Compensation- Stock Compensation, which simplifies several aspects of
the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the
statement of cash flows. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual
periods. Upon adoption, entities will be
required to apply a modified retrospective, prospective or retrospective transition method depending on the specific section of the guidance being adopted. The Company adopted this guidance effective
April 1, 2017 and the following describe the results of adoption:
-
-
The Company prospectively recognized income tax benefit of $1,481 in the income tax expense line item of its consolidated statements of income
in the fiscal year ended March 31, 2018, respectively, related to excess tax benefits on stock options;
-
-
The Company changed its accounting policy from estimated forfeitures to actual forfeitures effective April 1, 2017. The cumulative
impact of the change in the accounting policy did not have a material impact on the consolidated financial statements, therefore prior period amounts have not been restated;
-
-
The Company elected to adopt cash flow presentation of excess tax benefits retrospectively where these benefits are classified along with other
income tax cash flows as operating cash flows. Accordingly, prior period amounts in the consolidated statement of cash flows have been restated;
-
-
The Company adopted cash flow presentation of taxes paid when an employer withholds shares for tax-withholding purposes retrospectively and
classified as a financing activity in the Company's statement of cash flows. Accordingly, prior period amounts have been restated;
-
-
The remaining amendments to this standard, as noted above, are either not applicable, or do not change the Company's current accounting
practices and thus do not impact its consolidated financial statements.
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(thousands, except share and per share amounts)
(2) Summary of Significant Accounting Policies (Continued)
In
August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. These amendments are intended to better
align a company's risk management strategies and financial reporting for hedging relationships. Under the new guidance, more hedging strategies will be eligible for hedge accounting and the
application of hedge accounting is simplified. In addition, the new guidance amends presentation and disclosure requirements. The guidance is effective for fiscal years beginning after
December 15, 2018 with early adoption permitted, including the interim periods within those years. The guidance requires the use of a modified retrospective approach. The company early adopted
this guidance during the three months ended March 31, 2018. The adoption of this update did not have a material impact on the consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which 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. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it
becomes effective. The new standard is effective for the Company on April 1, 2018. Early application is permitted but not before periods beginning on or after January 1, 2017. 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 cumulative effect transition method. The Company has adopted the standard effective
April 1, 2018 using the modified retrospective method applied to those contracts which were not completed as of that date.
The
Company has completed its assessment of existing customer contracts and current accounting policies to identify and assess the potential differences that would result from applying
the requirements of the new standard including costs to obtain and fulfill a contract. Based on the assessment procedures completed, the Company has recognized an immaterial adjustment to retained
earnings as of April 1, 2018. The Company expects revenue recognition across its portfolio of services to remain largely unchanged and expects slightly longer periods of amortization for costs
to fulfill after adoption. Additionally, the Company is in the final stages of completion on changes to our processes and controls to meet the standard's updated disclosure requirements.
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. Early adoption of certain sections of this update is permitted. The adoption of this guidance on April 1, 2018 did not have a material impact on the consolidated financial
statements.
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(thousands, except share and per share amounts)
(2) Summary of Significant Accounting Policies (Continued)
In
February 2016, the FASB issued as update (ASU 2016-02) to the standard on leases to increase transparency and comparability among organizations. 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. The Company is currently evaluating the effect the new standard will
have on its consolidated financial statements and related disclosures.
In
June 2016, the FASB issued ASU 2016-13, Financial InstrumentsMeasurement of Credit Losses on Financial Instruments, which modifies the measurement of expected credit
losses of certain financial instruments. This standard update requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. This update is
effective for 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
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). This update is intended to reduce diversity in practice in how certain cash receipts and payments are
classified in the statement of cash flows. This standard update addresses eight specific cash flow issues, including debt prepayment or extinguishment costs, the settlement of contingent liabilities
arising from a business combination, proceeds from insurance settlements, and distributions from certain equity method investees. The guidance is effective for interim and annual periods beginning
after December 15, 2017, and early adoption is permitted. The guidance requires application using a retrospective transition
method. The adoption of this guidance on April 1, 2018 did not have an impact on the consolidated financial statements, as the Company's current presentation of consolidated statement of cash
flows is consistent with the new guidance.
In
October 2016, the FASB issued ASU 2016-16, an update to the standard on income taxes. This new standard requires the recognition of current and deferred income taxes when an
intra-entity transfer of assets other than inventory occurs. The update is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2017.
Early adoption is permitted in the first interim period. Upon adoption, the entities will be required to use a modified retrospective transition approach. The adoption of this guidance on
April 1, 2018 did not have an impact on 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 adoption of this guidance on
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Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(2) Summary of Significant Accounting Policies (Continued)
April 1,
2018 will impact the Company's presentation of the consolidated statements of cash flows. As of March 31, 2018 and March 31, 2017, the Company's restricted cash was $338
and $178, respectively.
In
January 2017, the FASB issued ASU 2017-01, an update on business combinations, which clarifies the definition of a business. The update requires a business to include at least an
input and a substantive process that together significantly contribute to the ability to create outputs. The update also states that the definition of a business is not met if substantially all of the
fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. The update is effective for fiscal years, and interim periods within
those fiscal years, beginning after January 1, 2018. Upon adoption, entities will be required to apply the update prospectively. The adoption of this guidance on April 1, 2018 did not
have an impact on the consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-04, an update on goodwill, which eliminates the need to calculate the implied fair value of goodwill when an impairment is indicated. The update
states that goodwill impairment is measured as the excess of a reporting unit's carrying value over its fair value, not to exceed the carrying amount of goodwill. The update is effective for fiscal
years, and interim
periods within those fiscal years, beginning after January 1, 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. The Company is currently
evaluating the impact of the new guidance on the consolidated financial statements.
In
March 2017, the FASB issued ASU 2017-07, 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 adoption of this guidance on April 1, 2018 did not have
a material impact on the consolidated financial statements. The Company's current presentation of service cost components is consistent with the requirements of the new standard. The Company will
present the other components of net periodic pension cost within other (income) expense beginning April 1, 2018.
In
March 2017, FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in
this update shorten the amortization period for certain callable debt securities that are held at a premium. The amendments require the premium to be amortized to the earliest call date. The
amendments do not require an accounting change for securities held at a discount, which would be amortized to maturity. This ASU is effective for fiscal years and interim periods within those fiscal
years, beginning after December 15, 2018, which for us is the first quarter ending December 31, 2019. Early adoption is permitted. The Company does not expect the adoption of this
guidance to have a material impact on the consolidated financial statements.
In
May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, an update that provides guidance about which changes to the terms or conditions of a share-based payment award
require an entity to apply modification accounting under ASC 718, CompensationStock Compensation. Under the amendments in ASU 2017-09, an entity should account for the effects of a
modification unless all of the
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Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(2) Summary of Significant Accounting Policies (Continued)
following
criteria are met: 1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modifiedif the
modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the
modification; 2) the vesting conditions of the modified award are the same as the conditions of the original award immediately before the original award is modified; 3) the
classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The
standard is effective for annual periods, and interim periods within
those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. The
adoption of this guidance on April 1, 2018 did not have an impact on the consolidated financial statements.
In
July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in
Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain
financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an
entity's own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded
conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial
instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is
treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject
to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, DebtDebt with Conversion and Other Options), including related EPS guidance (in Topic 260).
The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope
exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an
interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently evaluating the effect the new standard will have
on its consolidated financial statements and related disclosures.
In
February 2018, the FASB issued 2018-02, Income StatementReporting 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 2 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
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Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(2) Summary of Significant Accounting Policies (Continued)
December 15,
2018 with early adoption permitted, including interim periods within those years. The Company is currently evaluating the effect the new standard will have on its consolidated
financial statements and related disclosures.
-
(t)
-
Reclassification
Certain prior-year amounts have been reclassified to conform to the fiscal year ended March 31, 2018 presentation.
(3) Earnings (loss) per Share
Basic earnings (loss) per share available to Virtusa common stock holders ("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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Numerators:
|
|
|
|
|
|
|
|
|
|
|
Net income available to Virtusa stockholders
|
|
$
|
1,254
|
|
$
|
11,858
|
|
$
|
44,802
|
|
Less: Series A Convertible Preferred Stock dividends and accretion
|
|
|
(3,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to Virtusa common stockholders
|
|
$
|
(2,709
|
)
|
$
|
11,858
|
|
$
|
44,802
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominators:
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
29,397,350
|
|
|
29,650,026
|
|
|
29,233,861
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share available to Virtusa common stockholders
|
|
$
|
(0.09
|
)
|
$
|
0.40
|
|
$
|
1.53
|
|
|
|
|
|
|
|
|
|
|
|
|
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Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(3) Earnings (loss) per Share (Continued)
The components of diluted earnings (loss) per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Numerators:
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to Virtusa common stockholders
|
|
$
|
(2,709
|
)
|
$
|
11,858
|
|
$
|
44,802
|
|
Less: Series A Convertible Preferred Stock dividends and accretion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to Virtusa common stockholders
|
|
$
|
(2,709
|
)
|
$
|
11,858
|
|
$
|
44,802
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominators:
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
29,397,350
|
|
|
29,650,026
|
|
|
29,233,861
|
|
Dilutive effect of Series A Convertible Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of employee stock options and unvested restricted stock awards and restricted stock units
|
|
|
|
|
|
564,853
|
|
|
768,991
|
|
Dilutive effect of stock appreciation rights
|
|
|
|
|
|
292
|
|
|
2,130
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average sharesdiluted
|
|
|
29,397,350
|
|
|
30,215,171
|
|
|
30,004,982
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share available to Virtusa common stockholders
|
|
$
|
(0.09
|
)
|
$
|
0.39
|
|
$
|
1.49
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the fiscal years ended March 31, 2018, 2017, and 2016, unvested restricted stock awards and unvested restricted stock units issuable for, and options to purchase, 918,305,
378,627 and 68,991 shares of common stock in the aggregate for such fiscal years, respectively, were excluded from the calculations of diluted earnings per share as their effect would have been
anti-dilutive. For the fiscal year ended March 31, 2018, the 2,728,022 weighted average shares of the Series A Convertible Preferred Stock, on an as converted basis, were excluded from
diluted earnings per share as their effect would have been anti-dilutive using the if-converted method.
(4) Acquisitions
Fiscal 2018
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 equityholders 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 equityholders 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 will be paid in three tranches with
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Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(4) Acquisitions (Continued)
$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 (the "DDTL") funded pursuant to the Amended Credit Agreement (as defined below) 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 equityholders of eTouch US, and an amount equal to $14,000 to the
equityholders 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. The following are the preliminary fair values of assets and
liabilities based on information available as of March 31, 2018 and may be subject to change during the measurement period.
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Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(4) Acquisitions (Continued)
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
|
|
|
(2,224
|
)
|
|
|
|
|
|
|
|
Total purchase price, net of cash acquired
|
|
$
|
144,947
|
|
|
Assets and Liabilities:
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
2,224
|
|
|
Accounts receivable
|
|
|
14,901
|
|
|
Unbilled receivables
|
|
|
2,937
|
|
|
Prepaid expenses
|
|
|
776
|
|
|
Other current assets
|
|
|
473
|
|
|
Property and equipment
|
|
|
2,798
|
|
|
Other long-term assets
|
|
|
406
|
|
|
Goodwill
|
|
|
85,617
|
|
|
Trademark
|
|
|
800
|
|
2 years
|
Customer relationships
|
|
|
46,000
|
|
10 - 15 years
|
Accounts payable
|
|
|
(3,089
|
)
|
|
Deferred revenue
|
|
|
(852
|
)
|
|
Accrued expenses and other current liabilities
|
|
|
(539
|
)
|
|
Accrued employee compensation and benefits
|
|
|
(3,875
|
)
|
|
Income taxes payable
|
|
|
(20
|
)
|
|
Deferred income taxes
|
|
|
(368
|
)
|
|
Other long-term liabilities
|
|
|
(1,018
|
)
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
147,171
|
|
|
|
|
|
|
|
|
Acquisition
costs of $1,016 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.
The
following unaudited, pro forma information assumes the eTouch acquisition occurred on April 1, 2016. The unaudited pro forma consolidated results of operations are provided
for informational purposes only and do not purport to represent the Company's actual consolidated results of operations had each
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Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(4) Acquisitions (Continued)
acquisition
occurred on the dates assumed, nor are these necessarily indicative of the Company's future consolidated results of operations.
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
2017
|
|
Revenue
|
|
$
|
1,105,394
|
|
$
|
944,881
|
|
Net income
|
|
$
|
1,123
|
|
$
|
9,176
|
|
Revenue
and net loss relating to eTouch since the acquisition dates, amounting to $5,662 and ($427) respectively, have been included in the consolidated statement of income for the
fiscal year ended March 31, 2018. The unaudited pro forma consolidated results of operations for the fiscal year ended March 31, 2018 and 2017 included amortization of intangible assets,
retention bonuses and changes in the fair value of deferred acquisition payments.
On
June 29, 2017, the Company acquired certain assets of a small consulting company located in India. The purchase price was approximately $750 payable in cash subject to a
holdback payment of $50 after one year and a payment of $100 in earn-out consideration after two years based on certain achievement. The purchase price allocation was as follows: goodwill of $150 and
customer relationships of $600.
Fiscal 2017
None
Fiscal 2016
On March 3, 2016, pursuant to a share purchase agreement (the "SPA"), dated as of November 5, 2015, by and among Virtusa
Consulting Services Private Limited ("Virtusa India"), a subsidiary of the Company, Polaris Consulting & Services Limited ("Polaris") and the Promoter Sellers named therein, as amended, the
Company completed the purchase of 53,133,127 shares, or approximately 51.7% of the fully-diluted capitalization of Polaris from certain Polaris shareholders for approximately $168,257 (Indian rupees
11,391,365) in cash (the "Polaris SPA Transaction"). In addition, on April 6, 2016, Virtusa India completed an unconditional mandatory open offer with successful tender to purchase an
additional 26% of the fully diluted outstanding shares of Polaris common stock from Polaris' public shareholders. The mandatory open offer was conducted in accordance with requirements of the
Securities and Exchange Board of India ("SEBI") and the applicable Indian rules on takeovers. Virtusa India purchased 26,719,942 shares of Polaris common stock for an aggregate purchase price of
approximately $89,147 (Indian rupees 5,935,260). Pursuant to the mandatory open offer, during the fiscal year ended March 31, 2016, the Company transferred $89,220 into an escrow account in
accordance with the India takeover rules, which was recorded as restricted cash at March 31, 2016, and the mandatory open offer closed on April 6, 2016. On April 6, 2016, the
restricted cash was released from the escrow account and used for settlement for the mandatory open offer.
Upon
the closing of the mandatory offering, Virtusa's ownership interest in Polaris increased from approximately 51.7% to 77.7% of Polaris' fully diluted shares of common stock
outstanding, and from approximately 52.9% to 78.8% of Polaris' basic shares of common stock outstanding. Under applicable
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Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(4) Acquisitions (Continued)
Indian
rules on takeovers, Virtusa India was required to sell within one year of the settlement of the unconditional mandatory offer its shares of common stock in Polaris in excess of 75% of the basic
outstanding shares of common stock of Polaris. In order to comply with the applicable Indian rules on takeovers, during the three months ended December 31, 2016, the Company sold 3.7% of its
shares of Polaris common stock through a public offering. The sale offer closed on December 14, 2016, and the Company received approximately $7,645 in proceeds, net of $188 in brokerage fees
and taxes. In addition to these costs, the Company incurred additional costs of $409 towards professional and legal fees and expense. The Company's ownership interest in Polaris prior to the sale
offer was 78.6% of the outstanding shares of common stock, and upon the closing of the sale offer, the Company's ownership interest decreased from 78.6% to 74.9% of Polaris' basic shares of common
stock outstanding.
On
October 26, 2017, the Company announced its intention to commence through its Indian subsidiary, Virtusa India, a process that could lead to the delisting of its Indian
subsidiary, Polaris, from all stock
exchanges on which Polaris' common shares are listed. In December 2017, the Company drew down $25,000 from its old revolving credit facility to prepare to meet the minimum escrow requirements in
accordance with the applicable SEBI delisting regulations. In addition, In January 2018, the Company funded the minimum escrow requirements of approximately $96,285 for the delisting offer towards the
purchase of up to 26,416,725 shares, comprised of a combination of cash and bank guarantee.
On
February 5, 2018, Virtusa India closed its delisting offer to all public shareholders of Polaris in accordance with the provisions of the SEBI Delisting Regulations, which
resulted in a discovered price of INR 480 per share. On February 8, 2018, Virtusa India accepted the discovered price of INR 480 per share (the "Exit Price") which will be offered to all
Polaris public shareholders. Upon settlement by Virtusa India of an amount of approximately $145,000, exclusive of transaction and closing costs, for the Polaris shares tendered during the delisting
process at the Exit Price, the shareholding of Virtusa India shall increase from approximately 74% to approximately 93% of the share capital of Polaris. Upon closing of the transaction and receipt of
final approvals from the stock exchanges on which Polaris is traded, the common shares of Polaris will be delisted from all public exchanges on which the Polaris shares are traded. The public
shareholders of Polaris who have yet to tender their shares to Virtusa India may offer their shares for sale to Virtusa India at the Exit Price for a period of one year following the date of the
delisting from all stock exchanges on which Polaris common shares are listed. On February 12, 2018 Virtusa completed its delisting offer with successful tender to purchase additional 18.77% of
the outstanding shares of Polaris common stock from Polaris public shareholders. Virtusa India purchased 19,285,807 shares of Polaris common stock for an aggregate purchase price of approximately
$147,026 (Indian rupees 9,453,998) inclusive of transaction costs. On February 12, 2018, upon the closing of the delisting the Company's ownership interest in Polaris increased to 92.8%. At
March 31, 2018 the Company is yet to receive the approval from SEBI for the delisting. At March 31, 2018 the Company had 92.64% ownership interest on Polaris basic shares of common
stock. The Polaris shares of common stock are not redeemable at March 31, 2018 and remain classified in permanent equity.
In
accordance with ASC 810-10, changes in a parent's ownership, while retaining its financial controlling interest are accounted for as equity transactions. Therefore, the purchase of
additional shares of Polaris through the Company's Indian subsidiary, did result in a reduction of minority interest and a decrease to the Company's equity. In connection with the Polaris delisting,
on February 6, 2018, the
117
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(4) Acquisitions (Continued)
Company
entered into an amended and restated credit agreement (the "Credit Agreement") dated as of February 6, 2018 (See Note 11 of the notes to the financial statements for further
information).
(5) Goodwill and Intangible Assets
The Company has one reportable segment at March 31, 2018. The following are details of the changes in goodwill balance at
March 31, 2018:
|
|
|
|
|
|
|
Amount
|
|
Balance at April 1, 2017
|
|
$
|
211,089
|
|
Goodwill arising from acquisitions
|
|
|
85,767
|
|
Foreign currency translation adjustments
|
|
|
395
|
|
|
|
|
|
|
Balance at March 31, 2018
|
|
$
|
297,251
|
|
|
|
|
|
|
The
acquisition costs and goodwill balance deductible for our business acquisitions for tax purposes are $156,965. The acquisition costs and goodwill balance not deductible for tax
purposes are $153,189 and relate to the Company's TradeTech acquisition (closed on January 2, 2014), the Polaris acquisition and the eTouch acquisition.
The following are details of the Company's intangible asset carrying amounts acquired and amortization for the fiscal year ended
March 31, 2018 and March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
Weighted
Average
Useful Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
12.1
|
|
$
|
129,264
|
|
$
|
34,296
|
|
$
|
94,968
|
|
Trademark
|
|
|
2.1
|
|
|
3,760
|
|
|
2,975
|
|
|
785
|
|
Technology
|
|
|
5.0
|
|
|
500
|
|
|
252
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.8
|
|
$
|
133,524
|
|
$
|
37,523
|
|
$
|
96,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(5) Goodwill and Intangible Assets (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
|
Weighted
Average
Useful
Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
10.9
|
|
$
|
82,191
|
|
$
|
25,629
|
|
$
|
56,562
|
|
Trademark
|
|
|
2.1
|
|
|
2,962
|
|
|
1,513
|
|
|
1,449
|
|
Technology
|
|
|
5.0
|
|
|
500
|
|
|
150
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.5
|
|
$
|
85,653
|
|
$
|
27,292
|
|
$
|
58,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company's amortization expense related to intangible assets acquired through acquisitions was $10,089, $9,523 and $5,491 for the fiscal years ended March 31, 2018, 2017 and
2016, respectively. The components included in the gross carrying amounts of amortization expense in the table above reflect the Company's previous acquisitions and the Company's recent acquisition of
eTouch on March 12, 2018. The intangible assets are being amortized on either a straight-line basis or using the most appropriate economic pattern of consumption over their estimated useful
lives.
The
estimated amortization expense related to the purchased intangible assets listed in the table above at March 31, 2018 is as follows for the following fiscal years:
|
|
|
|
|
Fiscal year
|
|
Amount
|
|
2019
|
|
$
|
11,205
|
|
2020
|
|
|
11,391
|
|
2021
|
|
|
10,474
|
|
2022
|
|
|
9,403
|
|
2023
|
|
|
9,019
|
|
Thereafter
|
|
|
44,509
|
|
|
|
|
|
|
Total
|
|
$
|
96,001
|
|
|
|
|
|
|
(6) Investment Securities
At March 31, 2018 and 2017, all of the Company's investment securities were classified as available-for-sale and 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 8 to the consolidated financial statements).
119
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(6) Investment Securities (Continued)
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following is a summary of investment securities at March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
36,722
|
|
$
|
7
|
|
$
|
(55
|
)
|
$
|
36,674
|
|
Non-current
|
|
|
17,511
|
|
|
3
|
|
|
(48
|
)
|
|
17,466
|
|
Preference shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
1,633
|
|
|
|
|
|
(75
|
)
|
|
1,558
|
|
Non-current
|
|
|
1,829
|
|
|
|
|
|
(101
|
)
|
|
1,728
|
|
Agency and short-term notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
1,816
|
|
|
|
|
|
(3
|
)
|
|
1,813
|
|
Non-current
|
|
|
803
|
|
|
|
|
|
(3
|
)
|
|
800
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
17,934
|
|
|
371
|
|
|
|
|
|
18,305
|
|
Commercial paper:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
2,993
|
|
|
|
|
|
|
|
|
2,993
|
|
Equity Shares/ Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
|
|
|
17
|
|
|
46
|
|
|
|
|
|
63
|
|
Time deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
10,685
|
|
|
|
|
|
|
|
|
10,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
$
|
91,943
|
|
$
|
427
|
|
$
|
(285
|
)
|
$
|
92,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(6) Investment Securities (Continued)
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 on its
available-for-sale securities at March 31, 2018 are temporary. The Company conducts a periodic review and evaluation of its investment securities to determine if the decline in fair value of
any security is deemed to be other-than-temporary. Other-than-temporary losses are reflected in earnings as a charge against gain on sale of investments to the extent the impairment is related to
credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income.
The
following tables show the gross unrealized losses and fair value of the Company's investment securities with unrealized losses that are not deemed to be other-than-temporarily
impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2018 and March 31, 2017:
Less Than 12 Months
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Gross
Unrealized
Loss
|
|
Available-for-sale securities at March 31, 2018:
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
22,081
|
|
$
|
(135
|
)
|
Agency bonds
|
|
|
|
|
|
|
|
Preference shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,081
|
|
$
|
(135
|
)
|
|
|
|
|
|
|
|
|
Available-for-sale securities at March 31, 2017:
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
44,098
|
|
$
|
(103
|
)
|
Agency bonds
|
|
|
2,613
|
|
|
(6
|
)
|
Mutual funds
|
|
|
3,286
|
|
|
(176
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
49,997
|
|
$
|
(285
|
)
|
|
|
|
|
|
|
|
|
Greater Than 12 Months
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Gross
Unrealized
Loss
|
|
Available-for-sale securities at March 31, 2018:
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
5,461
|
|
$
|
(13
|
)
|
Agency bonds
|
|
|
799
|
|
|
(1
|
)
|
Preference shares
|
|
|
1,656
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,916
|
|
$
|
(84
|
)
|
|
|
|
|
|
|
|
|
Available-for-sale securities at March 31, 2017:
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
121
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(6) Investment Securities (Continued)
At March 31, 2018, there were no investment securities owned by the Company for which the fair value was less than the carrying value for a period greater than 12 months.
Available-for-sale
securities by contractual maturity were as follows:
|
|
|
|
|
|
|
March 31,
2018
|
|
Due in one year or less
|
|
$
|
45,900
|
|
Due after 1 year through 5 years
|
|
|
4,140
|
|
Due after 5 years
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
50,040
|
|
|
|
|
|
|
Proceeds
from sales of available-for-sale investment securities and the gross gains and losses that have been included in earnings as a result of those sales were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Proceeds from sales of available-for-sale investment securities
|
|
$
|
158,800
|
|
$
|
138,232
|
|
$
|
124,597
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains
|
|
$
|
1,655
|
|
$
|
1,007
|
|
$
|
64
|
|
Gross losses
|
|
|
(127
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains on sales of available-for-sale investment securities
|
|
$
|
1,528
|
|
$
|
1,006
|
|
$
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
(7) Investments in Unconsolidated Affiliates
Investments in entities in which the Company owns between 20% and 50% of the voting interest or otherwise acquires management influence are accounted for using the equity method and
initially recognized at cost. Under the equity method, the Company's share of the post-acquisition profits and losses is recognized in the Consolidated Statements of Income. As of March 31,
2018, through its Polaris subsidiary, the Company owns a 50% interest in Intellect Polaris Design LLC, an LLC which holds certain real estate in New Jersey, which is being accounted for
using the equity method of accounting. As of March 31, 2018, the difference between the carrying amount and our equity in net assets of this investment was $528. This is due to fair value
measurement of the investment upon the Polaris acquisition.
(8) 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
122
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(8) Fair Value of Financial Instruments (Continued)
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 1Quoted prices in active markets for identical assets or liabilities.
-
-
Level 2Inputs 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 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of
the assets or liabilities.
An
entity is allowed to elect to record financial assets and financial liabilities at fair value upon their initial recognition on a contract- by- contract basis.
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 securitiescurrent
|
|
$
|
|
|
$
|
45,900
|
|
|
|
|
$
|
45,900
|
|
Available-for-sales securitiesnon-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
|
|
123
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(8) Fair Value of Financial Instruments (Continued)
The
following table summarizes the Company's financial assets and liabilities measured at fair value on a recurring basis at March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sales securitiescurrent
|
|
$
|
|
|
$
|
72,028
|
|
|
|
|
$
|
72,028
|
|
Available-for-sales securitiesnon-current
|
|
|
|
|
|
20,057
|
|
|
|
|
|
20,057
|
|
Foreign currency derivative contracts
|
|
|
|
|
|
16,431
|
|
|
|
|
|
16,431
|
|
Interest Rate Swap Contracts
|
|
|
|
|
|
1,842
|
|
|
|
|
|
1,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
|
|
$
|
110,358
|
|
$
|
|
|
$
|
110,358
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivative contracts
|
|
$
|
|
|
|
|
|
$
|
|
|
|
|
|
Interest Rate Swap Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
9) Property and Equipment
Property and equipment and their estimated useful lives in years consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
Estimated Useful
Life (Years)
|
|
|
|
2018
|
|
2017
|
|
Computer and other equipment
|
|
3 - 5
|
|
$
|
50,154
|
|
$
|
41,650
|
|
Furniture and fixtures
|
|
7
|
|
|
14,862
|
|
|
13,755
|
|
Vehicles
|
|
3 - 5
|
|
|
1,753
|
|
|
2,085
|
|
Software
|
|
3 - 10
|
|
|
23,963
|
|
|
21,893
|
|
Leasehold improvements
|
|
Over the lease period or estimated useful life of the assets whichever is lower
|
|
|
10,558
|
|
|
8,987
|
|
Buildings
|
|
15 - 30
|
|
|
32,382
|
|
|
29,913
|
|
Land
|
|
|
|
|
56,611
|
|
|
56,715
|
|
Capital work-in-progress
|
|
|
|
|
1,745
|
|
|
1,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
192,028
|
|
$
|
176,545
|
|
Lessaccumulated depreciation and amortization
|
|
|
|
|
70,463
|
|
|
57,655
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
$
|
121,565
|
|
$
|
118,890
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense for the fiscal years ended March 31, 2018, 2017 and 2016 was $17,448, $16,329 and $10,988, respectively. Capital work-in-progress represents
advances paid towards the acquisition of property and equipment, and the cost of property and equipment including internally developed software not placed in service before the balance sheet date. The
cost and accumulated amortization of assets under capital leases at March 31, 2018 were $262 and $174, respectively. The cost
124
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
9) Property and Equipment (Continued)
and
accumulated amortization of assets under capital leases at March 31, 2017 were $384 and $218, respectively.
(10) Accrued Expenses and Other
Accrued expenses and other consists of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
March 31,
2017
|
|
Accrued other taxes
|
|
$
|
6,776
|
|
$
|
5,667
|
|
Accrued professional fees
|
|
|
18,422
|
|
|
12,895
|
|
Acquisition related liabilities
|
|
|
50,619
|
|
|
|
|
Hedge liability
|
|
|
1,043
|
|
|
|
|
Accrued discounts
|
|
|
6,255
|
|
|
5,534
|
|
Accrued employee travel and other expense
|
|
|
3,413
|
|
|
4,088
|
|
Accrued other
|
|
|
4,778
|
|
|
5,067
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
91,306
|
|
$
|
33,251
|
|
|
|
|
|
|
|
|
|
(11) Debt
On February 6, 2018, in connection with the delisting process of Polaris, as well as the eTouch acquisition, the Company entered into a credit agreement (the "Credit Agreement")
dated as of February 6, 2018, by and among the Company, its guarantor subsidiaries party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and J.P. Morgan
Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint book runners and lead arrangers. The Credit Agreement replaces the prior $300,000 credit agreement ("Prior
Credit Facility") with J.P. Morgan Securities and Merrill Lynch, Pierce, Fenner & Smith Incorporated. and provides for a $200,000 revolving credit facility and a $250,000 delayed-draw term loan
(together, the "Credit Facility"). To finance the delisting process of Polaris and to refinance the balance on the Prior Credit Facility term loan balance of $109,000 and line of credit balance of
$75,000, on February 6, 2018, the Company drew down $180,000 of the term loan and $55,000 of the line of credit on the Credit Agreement. On March 12, 2018 the company drew down the
remaining $70,000 on the term loan to finance the eTouch acquisition. Interest under these facilities accrues at a rate per annum of LIBOR plus 3.0%, subject to step-downs based on the Company's ratio
of debt to adjusted earnings before interest, taxes, depreciation, amortization, and stock compensation expense ("EBITDA"). The Company is required under the terms of the Credit Agreement to make
quarterly principal payments on the term loan. For the fiscal year ending March 31, 2019 we are required to make principal payments of $3,125 per quarter. The Credit Agreement includes
customary maximum debt to EBITDA and minimum fixed charge coverage covenants. The term of the Credit Agreement is five years ending February 6, 2023. At March 31, 2018, the interest
rates on the term loan and line of credit were 4.63% and 4.45% respectively.
The
Credit Agreement has financial covenants that require that the Company maintain a Total Leverage Ratio of not more than 3.50 to 1.00 commencing with December 31, 2017 and for
all quarters
thereafter ending prior to December 31, 2019 and of not more than 3.25 to 1.00 commencing with December 31, 2019 and for all quarters thereafter ending prior to September 30,
2020, and 3.00 : 1.00,
125
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(11) Debt (Continued)
commencing
with September 30, 2020 and tested for all quarters thereafter. The financial covenants also require that the Company maintain a Fixed Charge Coverage Ratio, commencing on
December 31, 2017, of not less than 1.25 to 1.00, as of the last day of any Reference Period. For purposes of these covenants, "Total Leverage Ratio" means, as of the last day of any fiscal
quarter, the ratio of Funded Debt to Adjusted EBITDA for the reference period ended on such date. "Funded Debt" refers generally to total indebtedness to third-parties for borrowed money, capital
leases, deferred purchase price and earn-out obligations and related guarantees and "Adjusted EBITDA" is defined as consolidated net income plus (a) (i) GAAP depreciation and amortization,
(ii) non-cash equity-based compensation expenses, (iii) fees and expenses incurred during such period in connection with the Credit Facility and loans made thereunder, (iv) fees
and expenses incurred during such period in connection with any permitted acquisition, (v) one-time regulatory charges, (vi) other extraordinary and non-recurring losses or expenses, and
(vii) all other non-cash charges, expenses and losses for such period, (viii) taxes net of tax credits, minus (b) (i) extraordinary or non-recurring income or gains for such
period, and (ii) any cash payments made during such period in respect of non-cash charges, expenses or losses described in clauses (a)(ii), (a)(v) and (a)(vi) above taken in a prior
period, subject to other adjustments and certain caps and limits on adjustments. The Fixed Charge Coverage Ratio is calculated under the Credit Agreement generally as the ratio of Adjusted EBITDA,
excluding capital expenditures made during such period (to the extent not financed with indebtedness (other than Revolving Loans), an issuance of equity interests or capital contributions, or proceeds
of asset sales, the proceeds of casualty insurance used to replace or restore assets, to fixed charges (regularly scheduled consolidated interest expense paid in cash, plus regularly scheduled
dividends paid in cash for such period on or with respect to any Disqualified Equity Interests, including the Orogen Series A Preferred Stock, regularly scheduled amortization payments on
indebtedness in cash, income taxes paid in cash and the interest component of capital lease obligation payments), on a consolidated basis.
The
Credit Facility is secured by substantially all of the Company's assets, including all intellectual property and all securities in domestic subsidiaries (other than certain domestic
subsidiaries where the material assets of such subsidiaries are equity in foreign subsidiaries), subject to customary exceptions and exclusions from the collateral. All obligations under the Credit
Agreement are unconditionally guaranteed by substantially all of the Company's material direct and indirect domestic subsidiaries, with certain exceptions. These guarantees are secured by
substantially all of the present and future property and assets of the guarantors, with certain exclusions.
At
March 31, 2018, the Company is in compliance with our debt covenants and have 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 at March 31, 2018 and through the date of this filing.
126
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(11) Debt (Continued)
Current portion of long-term debt
The following summarizes our short-term debt balance as of:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2018
|
|
2017
|
|
Notes outstanding under the revolving credit facility
|
|
$
|
|
|
$
|
|
|
Term loan- current maturities
|
|
|
12,500
|
|
|
10,000
|
|
Less: deferred financing costs, current
|
|
|
(1,093
|
)
|
|
(1,130
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,407
|
|
$
|
8,870
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
The following summarizes our long-term debt balance as of:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2018
|
|
2017
|
|
Term loan
|
|
$
|
250,000
|
|
$
|
190,000
|
|
Borrowings under revolving credit facility
|
|
|
55,000
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
Current maturities
|
|
|
(12,500
|
)
|
|
(10,000
|
)
|
Deferred financing costs, long-term
|
|
|
(4,273
|
)
|
|
(3,278
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
288,227
|
|
$
|
176,722
|
|
|
|
|
|
|
|
|
|
In
accordance with the recently adopted FASB ASU 2015-03, the Company has presented debt issuance costs in the balance sheet as a direct deduction from the carrying value of that debt
liability.
The
following represents the schedule of maturities of long-term debt:
|
|
|
|
|
Fiscal year ending March 31:
|
|
|
|
2019
|
|
$
|
12,500
|
|
2020
|
|
|
12,500
|
|
2021
|
|
|
18,750
|
|
2022
|
|
|
25,000
|
|
2023
|
|
|
236,250
|
|
|
|
|
|
|
Total
|
|
$
|
305,000
|
|
|
|
|
|
|
In
July 2016, the Company entered into 12-month forward starting interest rate swap transactions to mitigate Company's interest rate risk on Company's variable rate debt (collectively,
"The Interest Rate Swap Agreements"). The Company's objective is to limit the variability of cash flows associated with changes in LIBOR interest rate payments due on the Prior Credit Agreement by
using pay-fixed, receive-variable interest rate swaps to offset the future variable rate interest payments. The Company will recognize these transactions in accordance with ASC 815
"Derivatives and Hedging,"
and have designated the swaps as cash flow hedges.
127
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(11) Debt (Continued)
The
three Interest Rate Swap Agreements have an effective date of July 31, 2017 and a maturity date of July 31, 2020. As of March 31, 2018, the swaps have an
aggregate notional amount of $90,000 and hedge approximately 29.5% of our outstanding debt balance. The notional amount of the swaps amortizes over the remaining swap periods. 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 unrealized gain associated with the 2016 Swap Agreement was $2,486 at March 31, 2018, which represents the estimated amount that the Company would
receive from the counterparties in the event of an early termination.
The
Credit Facility amortizes at a rate of 5% per annum of the outstanding principal amount of the term loan for first two years, 7.5% per annum in the third year, 10% in the fourth year
and 15% in the fifth year, in each case payable in equal quarterly instalments. To the extent funded, the delayed draw term loan will amortize in equal quarterly instalments on the same amortization
schedule described above.
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.
The
Credit Agreement contains customary affirmative covenants for transactions of this type and other affirmative covenants agreed to by the parties, including, among others, the
provision of annual and quarterly financial statements and compliance certificates, maintenance of property, insurance, compliance with laws and environmental matters. The Credit Agreement contains
customary negative covenants, including, among others, restrictions on the incurrence of indebtedness, granting of liens, making investments and acquisitions, paying dividends, repurchases of equity
interests in the Company, entering into affiliate transactions and asset sales. The Credit Agreement also provides for a number of customary events of default, including, among others, payment,
bankruptcy, covenant, representation and warranty, change of control and judgment defaults.
Beginning
in fiscal 2009, the Company's U.K. subsidiary entered into an agreement with an unrelated financial institution to sell, without recourse or continuing involvement, certain of
its European-based accounts receivable balances from one client to such third party financial institution. During the course of the fiscal year ended March 31, 2018, $25,704 of receivables were
sold under the terms of the financing agreement. Fees paid pursuant to this agreement were immaterial during the fiscal year ended March 31, 2018. No amounts were due as of March 31,
2018, but the Company may elect to use this program again in future periods. However, the Company cannot provide any assurances that this or any other financing facilities will be available or
utilized in the future.
(12) Series A Convertible Preferred Stock
On May 3, 2017, the Company and Orogen Viper LLC (the "Purchaser"), entered into an Investment Agreement (the "Investment Agreement"), pursuant to which the Company issued
and sold to the Purchaser, and the Purchaser purchased from the Company, an aggregate of 70,000 shares of voting convertible preferred stock of the Company, designated as the Company's 3.875%
Series A Convertible Preferred Stock, par value $0.01 per share (the "Series A Voting Preferred Stock"), and 38,000 shares of a separate class of non-voting convertible preferred stock
of the Company, designated as the Company's
128
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(12) Series A Convertible Preferred Stock (Continued)
3.875%
Series A-1 Convertible Preferred Stock, par value $0.01 per share (the "Series A-1 Preferred Stock" and, together with the Series A Voting Preferred Stock, the
"Series A Convertible Preferred Stock"), in each case for a purchase price of $1,000 per share, representing $108,000 of gross proceeds to the Company.
The
Investment Agreement provides the Purchaser the right, pursuant to the terms of the Series A Convertible Preferred Stock, to appoint a director to serve on our Board. Pursuant
to the Investment Agreement, in connection with the closing of the transactions contemplated by the Investment Agreement (the "Closing"), our Board of Directors (the "Board") increased the size of the
Board from nine directors to ten directors and elected Vikram S. Pandit, the initial nominee designated by the Purchaser, to the Board, subject to replacement pursuant to the procedures described in
the Investment Agreement. Such appointment right will terminate if the Purchaser and its affiliates fail to retain beneficial ownership of at least 50% of the number of shares of our common stock
underlying the Series A Convertible Preferred Stock held by the Purchaser immediately following the Closing.
Following
the conversion of the Series A Convertible Preferred Stock into shares of our common stock, so long as the Purchaser retains beneficial ownership of at least 50% of the
number of shares of our common stock underlying the Series A Convertible Preferred Stock held by the Purchaser immediately following the Closing, we have agreed to include one nominee of the
Purchaser for election as a director of the same class (whether Class I, Class II or Class III) as the other directors nominated by us for election at our next meeting of
stockholders following such conversion, and to renominate such individual thereafter at each meeting of stockholders electing such class of directors. We are required to use our reasonable efforts to
cause the election of such person.
Pursuant
to the Investment Agreement, the Purchaser has agreed, subject to certain exceptions, that until the later of (1) the first date on which there is no Purchaser-affiliated
director serving on our Board, and (2) May 3, 2019 (the "Standstill Period"), the Purchaser will not, among other things, subject to certain exceptions described in the Investment
Agreement: (i) acquire any securities of the Company if, immediately after such acquisition, the Purchaser would collectively own in the aggregate more than 20.0% of the then outstanding common
stock of the Company, (ii) propose or seek to effect any tender or exchange offer, merger or other business combination involving the Company or its securities, or make any public statement
with respect to such transaction, (iii) make, or in any way participate in any "proxy contest" or other solicitation of proxies, (iv) seek election or appointment to, or representation
on, our Board other than as set forth in the Investment Agreement or the Series A Certificate of Designations (as defined below), or seek the removal of any of our directors, or
(v) conduct any referendum of stockholders of the Company or make or be the proponent of any stockholder proposal.
The
Investment Agreement restricts the Purchaser's ability to transfer the Series A Convertible Preferred Stock or shares of our common stock issued or issuable upon conversion of
the Series A Convertible Preferred Stock, subject to certain exceptions specified in the Investment Agreement. In particular, prior to the earliest of (i) May 3, 2019,
(ii) a change of control of the Company or entry into a definitive agreement for a transaction that, if consummated, would result in a change of control of the Company, and (iii) the
later of May 3, 2018 and the first date on which there is no Purchaser-affiliated director serving on our Board, the Purchaser will be restricted from selling, offering, transferring,
assigning, pledging, mortgaging, hypothecating, gifting or disposing the Series A Convertible Preferred Stock or shares of common stock issued or issuable upon conversion of the Series A
Convertible Preferred
129
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(12) Series A Convertible Preferred Stock (Continued)
Stock.
Such restrictions also prohibit the Purchaser from entering into or engaging in any hedge, swap, short sale, derivative transaction or other agreement or arrangement that transfers any
ownership of, or interests in, the shares of Series A Convertible Preferred Stock or shares of common stock issued or issuable upon conversion of the Series A Convertible Preferred
Stock. These restrictions do not apply to, among others, transfers to affiliates or in connection with certain third-party tender offers.
Subject
to certain limitations, the Investment Agreement provides the Purchaser with certain registration rights for the shares of common stock underlying the Series A Convertible
Preferred Stock (including any shares issued or issuable as dividends on the Series A Convertible Preferred Stock) held by the Purchaser. The Investment Agreement contains other customary terms
for private investments in public companies, including representations, warranties and covenants.
On
May 3, 2017, we filed with the Secretary of State of the State of Delaware (i) a Certificate of the Powers, Designations, Preferences and Rights of the 3.875%
Series A Preferred Stock (the "Series A Certificate of Designations") and (ii) a Certificate of the Powers, Designations, Preferences and Rights of the 3.875% Series A-1
Preferred Stock (the "Series A-1 Certificate of Designations" and, together with the Series A Certificate of Designations, the "Certificates of Designations"). Generally, except with
respect to certain voting rights, and a conversion trigger applicable to the Series A-1 Preferred Stock described below as the "HSR Conversion," the rights, preferences and privileges of the
Series A Preferred Stock and the Series A-1 Preferred Stock are substantially identical.
The
Series A Convertible Preferred Stock has a liquidation preference of $1,000 per share. In addition, cumulative Series A Convertible Preferred Stock dividends accumulate
on the Series A Convertible Preferred Stock at a rate of 3.875% per annum, and are payable quarterly in arrears. The payments on such dividends may be paid in cash or, at our option, in shares
of our common stock. We may only pay such dividends in shares of common stock on or after August 1, 2018, subject to an aggregate share cap and so long as we have paid full cumulative dividends
on the Series A Convertible Preferred Stock for all past dividend periods, and there is adequate current public information with respect to the Company and no volume limitations would apply to
the resale of such shares, in each case under Rule 144 under the Securities Act of 1933.
The
Series A Convertible Preferred Stock is convertible at the option of the holders at any time into shares of the Company's common stock at an initial conversion rate of
27.77778 shares of the Company's common stock per share of Series A Convertible Preferred Stock (which is equal to an initial conversion price of approximately $36.00 per share of the Company's
common stock), subject to certain customary anti-dilution adjustments. If at any time after May 3, 2020, the closing sale price of our common stock exceeds 150% of the then applicable
conversion price of the Series A Convertible Preferred Stock for at least 20 trading days during a period of 30 consecutive trading days, the Company may cause some or all of the
Series A Convertible Preferred Stock to be converted into shares of common stock at the then applicable conversion rate. Upon the conversion of the Series A Convertible Preferred Stock
into common stock, we are required to pay all accumulated but unpaid
dividends in additional shares of common stock valued at the then applicable conversion price on the date of such conversion.
Holders
of Series A Convertible Preferred Stock are entitled to vote generally with the holders of common stock on an as-converted basis (including with respect to election of the
members of our Board). Holders of Series A Convertible Preferred Stock are also entitled to certain limited special approval rights,
130
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(12) Series A Convertible Preferred Stock (Continued)
including
with respect to amendments to the Company's organizational documents that have an adverse effect on the Series A Convertible Preferred Stock, certain issuances of senior or pari passu
securities, certain purchases, redemptions or other acquisitions of junior securities or payments, dividends or distributions thereon. In addition, so long as any shares of Series A Convertible
Preferred Stock are outstanding and the Purchaser and its affiliates collectively beneficially own at least a majority of the shares of Series A Convertible Preferred Stock beneficially owned
by such holders immediately following the Closing, the holders of Series A Convertible Preferred Stock, voting as a separate class by majority vote, are entitled to elect one director to serve
on our Board.
Holders
of Series A-1 Preferred Stock generally have no voting rights except as required by law and with respect to amendments to the Company's organizational documents that have
an adverse effect on the Series A-1 Preferred Stock. At such time as any waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 applicable to the acquisition of shares of
Preferred Stock expires or is terminated, all shares of the Series A-1 Preferred Stock then issued and outstanding shall immediately and automatically convert on a one for one basis to shares
of Series A Preferred Stock (the "HSR Conversion"). Upon such HSR Conversion (which occurred in May 2017), all accumulated but unpaid dividends on such shares of Series A-1 Preferred
Stock immediately prior to such HSR Conversion converted into an equivalent amount of accumulated but unpaid dividends on shares of Series A Preferred Stock immediately following such HSR
Conversion.
With
certain exceptions, upon a Fundamental Change (as defined in the Certificates of Designations), the holders of the Series A Convertible Preferred Stock may require that the
Company repurchase for cash all or any whole number of shares of Series A Convertible Preferred Stock at a per-share repurchase price equal to 100% of the liquidation preference of such shares,
plus accumulated and unpaid dividends. 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 of the date that the Company is required to effect such repurchase, 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. The definition of Fundamental Change includes a sale of substantially all the Company's assets, a change of control of the Company by way of a
tender offer, merger or similar event, the adoption of a plan relating to the Company's liquidation or dissolution and certain delistings of our common stock, except in certain cases described in the
Certificates of Designations in which the
consideration received or to be received by the Company's common stockholders in a sale or change of control transaction consists primarily of publicly listed and traded securities.
Holders
of Series A Convertible Preferred Stock that are converted in connection with a Make-Whole Fundamental Change, as defined in the Certificates of Designations, are, under
certain circumstances, entitled to an increase in the conversion rate for such shares of Series A Convertible Preferred Stock based on the effective date of such event and the applicable price
attributable to the event as set forth in a table contained in the Certificates of Designations. The definition of Make-Whole Fundamental Change includes a sale of substantially all the Company's
assets, a change of control of the Company by way of a tender offer, merger or similar event, the adoption of a plan relating to the Company's liquidation or dissolution and certain delistings of our
common stock.
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
131
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(12) Series A Convertible Preferred Stock (Continued)
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 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 fiscal year ended March 31, 2018, the Company recorded $150, as an accretion to the Series A Convertible
Preferred Stock. 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 fiscal year
ended March 31, 2018, the Company has paid $3,127 as cash dividend on Series A Convertible Preferred Stock. As of March 31, 2018, the Company had declared and accrued dividends of
$686 associated with the Series A Convertible Preferred Stock.
(13) Stock Options, Restricted Stock Awards and Stock Appreciation Rights
The Company's Amended and Restated 2000 Stock Option Plan (the "2000 Plan") was adopted in the fiscal year ended March 31, 2001. Under the 2000 Plan, shares were reserved for
issuance to the Company's employees, directors, and consultants. As of March 31, 2018, there were no shares reserved for issuance under this plan. Options granted under the 2000 Plan may be
incentive stock options, nonqualified stock options or restricted stock. Incentive stock options may only be granted to employees. Options granted have a term of ten years and generally vest over four
years. The Company settles employee stock option exercises with newly issued shares. The compensation committee of the board of directors determines (upon board of director approval) the term of
awards on an individual case basis. The exercise price of incentive stock options shall be no less than 100% of the fair market value per share of the Company's common stock on the grant date. If an
individual owns stock representing more than 10% of the outstanding shares, the price of each share shall be at least 110% of fair market value. In May 2007, the Company's board of directors
determined that no further grants would be made under the 2000 Plan.
In
July 2005, the Company adopted the Virtusa Corporation 2005 Stock Appreciation Rights Plan (the "SAR Plan"). Under the SAR Plan, the Company may grant up to 479,233 SARs to employees
and consultants of Virtusa and its foreign subsidiaries, and settles the SARs in cash or common stock, as set forth in the SAR Plan. Prior to the Company's initial public offering ("IPO"), the SARs
could only be settled in cash. After the Company's IPO, the cash settlement feature of the SARs ceased and exercises may only be settled in shares of the Company's common stock. In May 2007, the
Company's board of directors determined that no further grants would be made under the SAR Plan.
The
Company's board of directors and its stockholders approved the Company's 2007 Stock Option and Incentive Plan (the "2007 Plan"), in May 2007, and the stockholders of the Company
again approved the 2007 Plan in September 2008. The 2007 Plan permits the Company to make grants of incentive stock options, non-qualified stock options, SARs, deferred stock awards, restricted stock
awards, unrestricted
132
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(13) Stock Options, Restricted Stock Awards and Stock Appreciation Rights (Continued)
stock
awards, and dividend equivalent rights. The Company reserved 830,670 shares of its common stock for the issuance of awards under the 2007 Plan. The 2007 Plan provides that the number of shares
reserved and available for issuance under the plan will be automatically increased each April 1, beginning in 2008, by 2.9% of the outstanding number of shares of common stock on the
immediately preceding March 31 or such lower number of shares of common stock as determined by the board of directors. This number is subject to adjustment in the event of a stock split, stock
dividend or other change in the Company's capitalization. Generally, shares that are forfeited, cancelled or withheld to settle tax liabilities from awards under the 2007 Plan also will be available
for future awards. In addition, available shares under the 2000 Plan and the SAR Plan, as a result of the forfeiture, expiration, cancellation, termination or net issuances of awards, are
automatically made available for issuance under the 2007 Plan. In May 2015, the Company's board of directors determined that no further grants would be made under the 2007 Plan.
In
May 2015, the Company adopted the 2015 Stock Option and Incentive Plan ("2015 Plan") which was also approved the Company's stockholders on September 1, 2015. The 2015 Plan
replaces the 2007 Plan and permits the granting of incentive stock options, non-qualified stock options, restricted stock awards, restricted stock units, unrestricted stock awards, performance share
awards, performance-based awards to covered employees, cash-based awards and dividend equivalent rights. Stock options, restricted stock and restricted stock units generally vest over four years.
Performance share awards and performance-based awards generally vest over three years. The Company reserved 3,000,000 shares of its common stock for the issuance of awards under the 2015 Plan as well
as the number of shares of stock as is equal to the shares underlying any stock options and awards that are returned to the Company's 2007 Plan after the 2015 Plan's effective date as a result of the
expiration, forfeiture, acquisition by the Company prior to vesting, cancellation or termination of such stock options and awards (other than by exercise) as set forth in the 2007 Plan. Additionally,
shares that are forfeited or cancelled or otherwise terminated (other than by exercise) or held back by the Company or tendered by the grantee of any equity award to settle applicable taxes on any
equity award under the 2015 Plan shall be added back to the shares of common stock available for future issuance under the 2015 Plan. At March 31, 2018, the number of shares reserved for
issuance under the 2015 Plan was 1,671,797.
133
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(13) Stock Options, Restricted Stock Awards and Stock Appreciation Rights (Continued)
The following tables summarize stock option and restricted stock activity under the 2000 Plan, the 2007 Plan and the 2015, as the case may be, Plan for the fiscal years ended
March 31, 2018, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Activity
|
|
|
|
Number of
Options
to Purchase
Common
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Life
(in years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at March 31, 2015
|
|
|
806,856
|
|
$
|
13.15
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(127,718
|
)
|
|
10.87
|
|
|
|
|
|
|
|
Forfeited or cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2016
|
|
|
679,138
|
|
|
13.58
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(104,853
|
)
|
|
14.18
|
|
|
|
|
|
|
|
Forfeited or cancelled
|
|
|
(4,624
|
)
|
|
31.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
569,661
|
|
|
13.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(322,317
|
)
|
|
12.60
|
|
|
|
|
|
|
|
Forfeited or cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2018
|
|
|
247,344
|
|
$
|
14.24
|
|
|
2.93
|
|
$
|
8,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2018
|
|
|
247,344
|
|
$
|
14.24
|
|
|
2.93
|
|
$
|
8,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Award Activity
|
|
|
|
Number of
Restricted
Stock Awards
|
|
Weighted Average
Grant Date Fair Value
|
|
Unvested at March 31, 2015
|
|
|
638,478
|
|
$
|
24.60
|
|
Awarded
|
|
|
140,185
|
|
|
46.25
|
|
Vested
|
|
|
(273,675
|
)
|
|
22.22
|
|
Forfeited
|
|
|
(27,597
|
)
|
|
35.51
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2016
|
|
|
477,391
|
|
|
31.69
|
|
Awarded
|
|
|
|
|
|
|
|
Vested
|
|
|
(226,838
|
)
|
|
26.41
|
|
Forfeited
|
|
|
(32,993
|
)
|
|
42.59
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2017
|
|
|
217,560
|
|
|
35.55
|
|
|
|
|
|
|
|
|
|
Awarded
|
|
|
|
|
|
|
|
Vested
|
|
|
(126,843
|
)
|
|
32.64
|
|
Forfeited
|
|
|
(15,090
|
)
|
|
37.55
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2018
|
|
|
75,627
|
|
$
|
40.04
|
|
|
|
|
|
|
|
|
|
134
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(13) Stock Options, Restricted Stock Awards and Stock Appreciation Rights (Continued)
|
|
|
|
|
|
|
|
|
|
Restricted Stock Unit Activity
|
|
|
|
Number of
Restricted
Stock Units
|
|
Weighted Average
Grant Date Fair Value
|
|
Unvested at March 31, 2015
|
|
|
404,797
|
|
$
|
31.16
|
|
Awarded
|
|
|
426,456
|
|
|
49.10
|
|
Vested
|
|
|
(182,697
|
)
|
|
27.93
|
|
Forfeited
|
|
|
(41,316
|
)
|
|
35.52
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2016
|
|
|
607,240
|
|
|
44.43
|
|
Awarded
|
|
|
1,863,658
|
|
|
24.63
|
|
Vested
|
|
|
(339,582
|
)
|
|
39.54
|
|
Forfeited
|
|
|
(151,700
|
)
|
|
35.82
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2017
|
|
|
1,979,616
|
|
|
27.29
|
|
|
|
|
|
|
|
|
|
Awarded
|
|
|
731,363
|
|
|
35.99
|
|
Vested
|
|
|
(436,225
|
)
|
|
39.14
|
|
Forfeited
|
|
|
(752,765
|
)
|
|
25.06
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2018
|
|
|
1,521,989
|
|
$
|
29.18
|
|
|
|
|
|
|
|
|
|
The
aggregate intrinsic value of options exercised during the fiscal years ended March 31, 2018, 2017 and 2016 was $7,816, $1,629 and $4,246, respectively. There were no options
granted during the fiscal year ended March 31, 2018, 2017 and 2016. During the fiscal years ended March 31, 2018, 2017 and 2016, the Company realized $1,481, $(719) and $2,775
respectively, of income tax (expense) benefits from the exercise of stock options as a windfall (shortfall). The Company adopted ASU 2016-09 on April 1, 2017. All excess tax benefits and all
tax deficiencies are recognized as income tax expense or benefit in the consolidated statement of income for the fiscal year ending March 31, 2018.
As
of March 31, 2018, there was $35,154 of total unrecognized compensation cost related to unvested stock options, restricted stock awards, deferred stock awards and restricted
stock units granted under the Company's Amended and Restated 2000 Option Plan, the Company's 2007 Stock Option and Incentive Plan and the Company's 2015 Stock Option and Incentive Plan. The
unrecognized compensation cost is expected to be recognized over a remaining weighted average period of 1.69 years.
135
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(13) Stock Options, Restricted Stock Awards and Stock Appreciation Rights (Continued)
The
tables below summarizes information about the SAR Plan activity for the fiscal years ended March 31, 2018, 2017 and 2016 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SAR Plan Activity
|
|
|
|
Number of
SARs
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Life (in years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at March 31, 2015
|
|
|
5,110
|
|
$
|
4.04
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,902
|
)
|
|
3.84
|
|
|
|
|
|
|
|
Forfeited or cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2016
|
|
|
1,208
|
|
|
4.70
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(857
|
)
|
|
4.91
|
|
|
|
|
|
|
|
Forfeited or cancelled
|
|
|
(351
|
)
|
|
4.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate intrinsic value of SARs exercised during the fiscal years ended March 31, 2018, 2017 and 2016 was $0, $23 and $180, respectively.
(14) Income Taxes
The income before income tax expense shown below is based on the geographic location to which such income is attributed for each of the fiscal years ended March 31, 2018, 2017 and
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
United States
|
|
$
|
(31,526
|
)
|
$
|
(52,390
|
)
|
$
|
4,556
|
|
Foreign
|
|
|
73,362
|
|
|
71,208
|
|
|
53,113
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41,836
|
|
$
|
18,818
|
|
$
|
57,669
|
|
|
|
|
|
|
|
|
|
|
|
|
136
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(14) Income Taxes (Continued)
The
provision for income taxes for each of the fiscal years ended March 31, 2018, 2017 and 2016 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
18,747
|
|
$
|
(1,966
|
)
|
$
|
6,367
|
|
State
|
|
|
(108
|
)
|
|
170
|
|
|
1,961
|
|
Foreign
|
|
|
24,195
|
|
|
15,213
|
|
|
9,719
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
$
|
42,834
|
|
$
|
13,417
|
|
$
|
18,047
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred (benefit) provision:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,289
|
)
|
$
|
(7,870
|
)
|
$
|
(2,753
|
)
|
State
|
|
|
(2,726
|
)
|
|
(2,888
|
)
|
|
(724
|
)
|
Foreign
|
|
|
(5,931
|
)
|
|
(98
|
)
|
|
(1,921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred (benefit) provision
|
|
$
|
(9,946
|
)
|
$
|
(10,856
|
)
|
$
|
(5,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
32,888
|
|
$
|
2,561
|
|
$
|
12,649
|
|
|
|
|
|
|
|
|
|
|
|
|
The
items which gave rise to differences between the income taxes in the statements of income and the income taxes computed at the blended U.S. statutory rate (30.7%) are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Tax on income before income tax expense at U.S. statutory rate
|
|
$
|
12,865
|
|
$
|
6,398
|
|
$
|
20,184
|
|
U.S. state and local taxes (benefit), net of U.S. federal income tax effects
|
|
|
(2,800
|
)
|
|
(2,776
|
)
|
|
701
|
|
Benefit from foreign subsidiaries' tax holidays
|
|
|
(7,727
|
)
|
|
(7,973
|
)
|
|
(7,477
|
)
|
Foreign rate difference
|
|
|
(2,215
|
)
|
|
(7,688
|
)
|
|
(4,549
|
)
|
Tax rate change
|
|
|
9,915
|
|
|
|
|
|
|
|
Nondeductible transactions costs
|
|
|
53
|
|
|
354
|
|
|
1,321
|
|
Nondeductible business costs
|
|
|
994
|
|
|
1,736
|
|
|
1,614
|
|
Repatriated foreign earnings
|
|
|
|
|
|
5,879
|
|
|
|
|
Deemed repatriated foreign earnings
|
|
|
17,834
|
|
|
|
|
|
|
|
Nondeductible interest
|
|
|
6,500
|
|
|
6,138
|
|
|
544
|
|
Other adjustments
|
|
|
(2,531
|
)
|
|
493
|
|
|
311
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
32,888
|
|
$
|
2,561
|
|
$
|
12,649
|
|
|
|
|
|
|
|
|
|
|
|
|
137
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(14) Income Taxes (Continued)
Deferred
tax assets (liabilities) at March 31, 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2018
|
|
2017
|
|
Deferred revenue
|
|
$
|
649
|
|
$
|
785
|
|
Bad debt reserve
|
|
|
774
|
|
|
699
|
|
Tax credit carry forwards
|
|
|
2,836
|
|
|
2,247
|
|
Accrued expenses and reserves
|
|
|
13,825
|
|
|
18,787
|
|
Share-based compensation expense
|
|
|
3,985
|
|
|
4,135
|
|
Intangible assets
|
|
|
3,477
|
|
|
4,189
|
|
Net operating loss
|
|
|
15,160
|
|
|
4,584
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
$
|
40,706
|
|
$
|
35,426
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(2,535
|
)
|
|
(3,155
|
)
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
38,171
|
|
$
|
32,271
|
|
|
|
|
|
|
|
|
|
Depreciable assets
|
|
|
(10,054
|
)
|
|
(10,441
|
)
|
Unrealized gains
|
|
|
(698
|
)
|
|
(5,884
|
)
|
Acquisition and other liabilities
|
|
|
(11,052
|
)
|
|
(12,780
|
)
|
Goodwill
|
|
|
(6,180
|
)
|
|
(6,755
|
)
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$
|
(27,984
|
)
|
$
|
(35,860
|
)
|
|
|
|
|
|
|
|
|
Net deferred tax assets/(liabilities)
|
|
$
|
10,187
|
|
$
|
(3,589
|
)
|
|
|
|
|
|
|
|
|
The
ultimate realization of deferred tax assets is dependent upon management's assessment of the Company's ability to generate sufficient taxable income to realize the deferred tax
assets during the periods in which the temporary differences become deductible. Management considers the historical level of taxable income, projections for future taxable income, and tax planning
strategies in making
this assessment. Net income in the United States has decreased, resulting in net losses for the years ended March 31, 2018 and 2017. The Company has a significant deferred tax asset in the
United States. The Company assessed the available positive and negative evidence to estimate if sufficient future taxable income will be generated to realize the existing deferred tax assets. The
Company recorded a decrease to the valuation allowance totaling $620 during the fiscal year ended March 31, 2018 related to realization of capital losses, which was recorded in income tax
expense. The Company has determined for all other deferred assets that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred
tax assets. We continue to monitor all positive and negative evidence related to this asset.
Net
loss in the United States has decreased during the fiscal year ended March 31, 2018 compared with the fiscal year ended March 31, 2017. The Company has $24,045 of
deferred tax assets in the United States at March 31, 2018. The Company has not completed its valuation allowance assessment related to the Tax Cuts and Jobs Act (the "Tax Act"), primarily
related to the impact of the global intangible low taxed income ("GILTI"), interest expense limitation, foreign tax credit utilization and executive pay, which might impact the need for a valuation
allowance.
138
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(14) Income Taxes (Continued)
At March 31, 2018, the Company has $329 of US foreign tax credits which begin to expire in March
2022 and for which a full valuation allowance has been recorded, $2,506 of Indian Minimum Alternative Tax ("MAT") credits which begin to expire at various dates through March 2028, $14,024 of NOLs,
which begin to expire in 2037 and $1,136 of capital loss carryover which begin to expire in 2020. The Company has determined that it is more likely than not that the results of future operations will
generate sufficient taxable income to realize $15,461 of these deferred tax assets for which a valuation allowance is not provided.
During
the fiscal year ended March 31, 2018, the Company recorded $4,640 of net income tax expense directly in other comprehensive income related to the unrealized gain/loss on
available for sale securities, the unrealized gain/loss on effective cash flow hedges and the foreign currency loss on certain long- term intercompany balances. During the fiscal year ended
March 31, 2018, the Company recognized $1,481 of net income tax benefit related to a windfall in the tax benefits of share-based compensation which was recorded as an income tax benefit in the
consolidated statement of income (loss) pursuant to ASU 2016-09.
The
Company's effective tax rate for the fiscal year ended March 31, 2018 was significantly impacted by 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. 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 jurisdictions in which the Company operates and applicable tax holiday benefits of the Company, obtained primarily
in India and Sri Lanka.
The
Tax Act contains several key tax provisions that will impact 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 repatriation tax on accumulated foreign earnings deemed repatriated, 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 will require 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 and a provisional charge of
$4,890 primarily to remeasure our 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. The $17,834 for deemed repatriation will be paid over the next 8 years, of which approximately $1,427 is included in income tax payable and $16,407 is included in long-term
liabilities in the consolidated balance sheet as of March 31, 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
139
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(14) Income Taxes (Continued)
accumulated
earnings and profits balances as of March 31, 2018. We are continuing to analyze certain aspects of the Tax Act and may refine our estimates, which could potentially affect the
measurement of our 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 our 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. Given the complexity of the GILTI provisions, we are still evaluating the effects of the GILTI
provisions and have not yet determined our accounting policy. At March 31, 2018, because we are still evaluating the GILTI provisions and our analysis of future taxable income that is subject
to GILTI, we are unable to make a reasonable estimate and have not reflected any adjustments related to GILTI in our financial statements. The Company continues to review the anticipated impacts of
the base erosion anti-abuse tax ("BEAT"), which is not effective until fiscal year 2019. The Company has not recorded any impact associated with BEAT in the tax rate for the fiscal year ended
March 31, 2018.
The
Company's Indian subsidiaries operate several development centers in areas designated as a 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 elected to claim SEZ Co-developer income tax benefits starting in fiscal year ended
March 31, 2013. In addition, the Company has leased facilities in SEZ designated locations in Hyderabad and Chennai, India. The Company's profits from the Hyderabad and Chennai SEZ operations
are eligible for certain income tax exemptions for a period of up to 15 years beginning in fiscal March 31, 2009. The Company's India profits ineligible for SEZ benefits are subject to
corporate income tax at the current rate of 34.6%. In the fiscal years ended March 31, 2013 and March 31, 2014, the Company leased a facility in an SEZ
designated location in Bangalore and Pune, India each of which is eligible for tax holidays for up to 15 years beginning in the fiscal years ended March 31, 2013 and March 31,
2014 respectively. During the fiscal years ended March 31, 2018 and 2016, the Company established new units in Bangalore and Hyderabad, respectively, in SEZ designated areas, for which it is
eligible for tax holiday for up to 15 years. Based on the latest changes in tax laws, book profits of SEZ units are subject to MAT, commencing April 1, 2011, which will continue to
negatively impact the Company's cash flows.
140
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(14) Income Taxes (Continued)
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. The current agreement provides income tax exemption for all export business
income. On November 23, 2017, the Company received confirmation from the Board of Investments that it had satisfied investment criteria through March 31, 2017 and is eligible for holiday
benefits. At March 31, 2018, the Company believes it is eligible for continued benefits for the entire 12 year tax holiday.
The
India and Sri Lanka income tax holidays reduced the overall tax provision and increased both net income and diluted earnings per share in the fiscal years ended March 31,
2018, 2017 and 2016 by $7,727 $7,973 and $7,477, respectively, and by $0.26, $0.27 and $0.25, respectively. As of March 31, 2018, two SEZ tax holidays in Chennai and Hyderabad, India are in the
tenth year, subject to a partial expiration of fifty percent of their tax benefits through March 2018 and may be extended on a limited basis for an additional five years per unit if certain
reinvestment criteria are met. The partial expiration of SEZ tax holidays in Chennai and Hyderabad, respectively, negatively impacted net income and diluted earnings per share in the fiscal year ended
March 31, 2018, by $899 and $1,078 and by $0.03 and $0.04, respectively.
The
Company intends to indefinitely reinvest all of its accumulated and future foreign earnings outside the United States. At March 31, 2018, the Company had $191,013 of cash,
cash equivalents, short-term investments and long-term investments that would otherwise be available for potential distribution, if not indefinitely reinvested. Due to the various methods by which
such earnings could be repatriated in the future, the amount of taxes attributable to the undistributed earnings are dependent on circumstances existing if, and when remittance occurs. The Company
does not provide for U.S. income taxes on foreign currency translation or applicable withholding tax until a distribution is declared. In the fiscal year ended March 31, 2018, the Company
repatriated $15,782 from Virtusa C.V., a subsidiary of the Company, organized to finance the acquisition of Polaris. There was no US tax was recorded during the current fiscal year as the distribution
did not incur any tax under the new dividends received provisions in the US Tax Act.
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, 2014. In the foreign jurisdictions, the Company generally remains subject to examination for
tax years ended after March 31, 2005.
Each
fiscal year, unrecognized tax benefits may be adjusted upon the closing of the statute of limitations for income tax returns filed in various jurisdictions. The total amount of
unrecognized tax benefits that would reduce income tax expense and the effective income tax rate, if recognized, is $7,544, $7,612 and $6,693 as of March 31, 2018, 2017 and 2016, respectively.
Although it would be difficult to
141
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(14) Income Taxes (Continued)
anticipate
the final outcome on timing of resolution of any particular uncertain tax position, the Company anticipates that $71 of unrecognized tax benefits will reverse during the twelve month period
ending March 31, 2019 due to settlement or expiration of statute of limitations on open tax years. All of these benefits are expected to have an impact on the effective tax rate as they are
realized.
The
following summarizes the activity related to the gross unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Balance at beginning of the fiscal year
|
|
$
|
7,612
|
|
$
|
6,693
|
|
$
|
546
|
|
Balance acquired as part of the Polaris SPA Transaction
|
|
|
|
|
|
|
|
|
6,172
|
|
Foreign currency translation related to prior year tax positions
|
|
|
105
|
|
|
122
|
|
|
(42
|
)
|
Decreases related to prior year tax positions
|
|
|
(332
|
)
|
|
|
|
|
|
|
Decreases related to prior year tax positions due to settlements or lapse in applicable statute of limitations
|
|
|
(335
|
)
|
|
(597
|
)
|
|
(117
|
)
|
Increases related to prior year tax positions
|
|
|
494
|
|
|
1,394
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the fiscal year
|
|
$
|
7,544
|
|
$
|
7,612
|
|
$
|
6,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company continues to classify accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the fiscal years ended March 31, 2018 and 2017,
the Company expensed accrued interest and penalties of $162 and $522, respectively, through income tax expense consistent with its prior positions, to reflect interest and penalties on certain
unrecognized tax benefits as part of income tax. The total accrued interest and penalties, including foreign currency translation relating to certain foreign and domestic tax matters at
March 31, 2018 and 2017, were $1,567 and $1,941, respectively. During the fiscal year ended March 31, 2018, the Company's unrecognized tax benefits decreased by $68. The decrease in the
unrecognized tax benefits during the fiscal year ended March 31, 2018 was primarily related to settlement of prior tax positions of or matters related to tax returns where the statute of
limitations has expired. The net movement in unrecognized tax benefits for the fiscal year ended March 31, 2018 was as follows: $166 benefit recorded to income tax expense and $7 for cash
settlements offset by $106 to other comprehensive income ("OCI") for foreign currency impact. The Company has recorded unrecognized tax benefits in long-term liabilities if settlement is not expected
in the next year.
The
Company has been under income tax examination in India and the U.K and the United states. The Indian taxing authorities issued an assessment order with respect to their examination
of the various tax returns for the fiscal years ended March 31, 2005 to March 31, 2014 of the Company's Indian subsidiary, Virtusa (India) Private Ltd, now merged with and into
Virtusa Consulting Services Private Limited (collectively referred to as "Virtusa India"). At issue were several matters, the most significant of which was the redetermination of the arm's-length
profit which should be recorded by Virtusa India on the intercompany transactions with its affiliates. During the fiscal year ended March 31, 2011, the Company entered into a competent
authority settlement and settled the uncertain tax position for the fiscal years ended March 31, 2004 and 2005. However, the redetermination of arm's-length profit on transactions with respect
to the Company's subsidiaries and Virtusa UK Limited has not been resolved and remains under appeal for the fiscal year ended March 31, 2005. The Company is currently appealing assessments for
fiscal years ended March 31, 2005 through 2014. In the U.K. the Company is currently under examination for
142
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(14) Income Taxes (Continued)
transfer
pricing matters for the year ended March 2014. In the U.S. the IRS has initiated an examination of fiscal years ended March 31, 2015 and March 31, 2017.
(15) Post-retirement Benefits
The Company has noncontributory defined benefit plans (the "Benefit Plans") covering its employees in India and Sri Lanka as mandated by the Indian and Sri Lankan governments. Benefits
are based on the employee's years of service and compensation at the time of termination. The Company uses March 31 as the measurement date for its plans.
Cost of pension plans
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Components of net periodic pension expense
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets
|
|
$
|
(692
|
)
|
$
|
(606
|
)
|
$
|
(336
|
)
|
Service costs for benefits earned
|
|
|
1,464
|
|
|
1,326
|
|
|
780
|
|
Interest cost on projected benefit obligation
|
|
|
660
|
|
|
580
|
|
|
281
|
|
Amortization of prior service cost
|
|
|
9
|
|
|
9
|
|
|
9
|
|
Recognized net actuarial loss
|
|
|
138
|
|
|
135
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension expense
|
|
$
|
1,579
|
|
$
|
1,444
|
|
$
|
885
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial assumptions
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Discount rate
|
|
7.30% - 10.34%
|
|
6.75% - 12.00%
|
|
7.50% - 11.00%
|
Compensation increases (annual)
|
|
5.00% - 8.00%
|
|
5.00% - 7.50%
|
|
5.00% - 7.50%
|
Expected return on assets
|
|
7.50% - 12.20%
|
|
7.50% - 11.98%
|
|
7.50% - 12.00%
|
The
discount rate is based upon high quality fixed income investments in India and Sri Lanka. The discount rates at March 31, 2018 were used to measure the year-end benefit
obligations and the pension cost for the subsequent year.
To
determine the expected long-term rate of return on pension plan assets, the Company considers the current and expected asset allocations, as well as historical and expected returns on
various categories of plan assets. The Company amortizes unrecognized actuarial gains or losses over a period no longer than the average future service of employees.
The
Company's benefit obligations are described in the following tables. Accumulated and projected benefit obligations ("ABO" and "PBO", respectively) represent the obligations of a
pension plan for past service as of the measurement date. ABO is the present value of benefits earned to date with benefits computed based on current compensation levels. PBO is ABO increased to
reflect expected future compensation.
143
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(15) Post-retirement Benefits (Continued)
Accumulated benefit obligation and projected benefit obligation
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
|
2018
|
|
2017
|
|
Accumulated benefit obligation
|
|
$
|
7,260
|
|
$
|
6,685
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation:
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
9,148
|
|
$
|
7,312
|
|
Service cost
|
|
|
1,779
|
|
|
1,326
|
|
Interest cost
|
|
|
660
|
|
|
580
|
|
Actuarial (gain) loss
|
|
|
(62
|
)
|
|
637
|
|
Benefits paid
|
|
|
(930
|
)
|
|
(1,277
|
)
|
Polaris SPA transaction & plan combination
|
|
|
|
|
|
449
|
|
Exchange rate adjustments
|
|
|
(71
|
)
|
|
121
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
10,524
|
|
$
|
9,148
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
|
2018
|
|
2017
|
|
Balance at April 1, 2017
|
|
$
|
7,832
|
|
$
|
6,633
|
|
Employer contributions
|
|
|
2,646
|
|
|
1,772
|
|
Actual return on plan assets
|
|
|
394
|
|
|
625
|
|
Actuarial (gain) loss
|
|
|
(9
|
)
|
|
|
|
Benefits paid
|
|
|
(930
|
)
|
|
(1,277
|
)
|
Polaris SPA Transaction
|
|
|
|
|
|
|
|
Exchange rate adjustments
|
|
|
(48
|
)
|
|
79
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2018
|
|
$
|
9,885
|
|
$
|
7,832
|
|
|
|
|
|
|
|
|
|
At
March 31, 2018, 2017 India and Sri Lanka together had $639, $1,316, respectively, net projected benefit obligation recorded in the consolidated balance sheets as "accrued
employee compensation and benefits".
Plan asset allocation
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
Target
Allocation
|
|
Actual
Allocation
|
|
Government securities
|
|
30% - 40%
|
|
|
40
|
%
|
Corporate debt
|
|
40% - 50%
|
|
|
48
|
%
|
Other
|
|
1% - 20%
|
|
|
12
|
%
|
The
Company's plan assets are being managed by insurance companies in India and Sri Lanka.
144
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(15) Post-retirement Benefits (Continued)
Plan Assets
The following table presents the fair values of the Company's pension plan assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
Asset Category
|
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant
Observable
Inputs
(Level 2)
|
|
At March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Government Bonds(1)
|
|
$
|
3,991
|
|
$
|
|
|
$
|
3,991
|
|
Corporate Bonds(2)
|
|
|
4,723
|
|
|
|
|
|
4,723
|
|
Equity Shares and Others(3)
|
|
|
1,171
|
|
|
365
|
|
|
806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,885
|
|
$
|
365
|
|
$
|
9,520
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Government Bonds(1)
|
|
$
|
3,065
|
|
$
|
|
|
$
|
3,065
|
|
Corporate Bonds(2)
|
|
|
3,804
|
|
|
|
|
|
3,804
|
|
Equity Shares and Others(3)
|
|
|
963
|
|
|
257
|
|
|
706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,832
|
|
$
|
257
|
|
$
|
7,575
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
This
category comprises government fixed income investments with investments in India and Sri Lanka.
-
(2)
-
This
category represents investment in bonds and debentures from diverse industries.
-
(3)
-
This
category represents equity shares, money market investments and other investments.
The
fair values of the government bonds are measured based on market quotes. Corporate bonds and other bonds are valued based on market quotes as of the balance sheet date. Equity share
funds are valued at their market prices as of the balance sheet date. Money market funds are valued at their market price.
Pension liability
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2018
|
|
2017
|
|
PBO
|
|
$
|
10,524
|
|
$
|
9,148
|
|
Fair value of plan assets
|
|
|
9,885
|
|
|
7,832
|
|
|
|
|
|
|
|
|
|
Funded status recognized
|
|
$
|
639
|
|
$
|
1,316
|
|
Amount recorded in accumulated other comprehensive income
|
|
$
|
1,763
|
|
$
|
1,397
|
|
|
|
|
|
|
|
|
|
The
amount in accumulated other comprehensive income (loss) that is expected to be recognized as a component of net periodic benefit cost over the fiscal year ended March 31, 2019
is $167. The Company expects to contribute $1,794 to its gratuity plans during the fiscal year ending March 31, 2019.
145
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(15) Post-retirement Benefits (Continued)
The
pretax amounts of prior service cost and actuarial gain (loss) recognized from accumulated other comprehensive income consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Prior service cost
|
|
$
|
(9
|
)
|
$
|
(9
|
)
|
$
|
(9
|
)
|
Net amortization gain (loss)
|
|
|
(138
|
)
|
|
(135
|
)
|
|
(151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(147
|
)
|
$
|
(144
|
)
|
$
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Estimated future benefits payments
|
|
|
|
|
Fiscal year ending March 31:
|
|
|
|
2019
|
|
$
|
1,795
|
|
2020
|
|
|
1,776
|
|
2021
|
|
|
1,970
|
|
2022
|
|
|
2,221
|
|
2023
|
|
|
2,546
|
|
2024 - 2027
|
|
$
|
14,105
|
|
(16) 401(k) Plan
The Company sponsors a defined contribution retirement savings plan, qualified under Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). Eligible employees may defer
a portion of their compensation into the Company's 401(k) Plan on a pre-tax and/or Roth basis. The Company's 401(k) Plan currently offers a safe harbor match feature that provides Company matching
contributions for certain employee contributions. For the fiscal periods ended March 31, 2018 and 2017, the Company recorded $1,407 and $1,305 for the employer match, respectively. The
Company's 401(k) Plan may be amended at the discretion of the Company's board of directors to discontinue the safe harbor match program at any time.
(17) Restructuring
During the three months ended September 30, 2017, the Company implemented certain cost saving and restructuring initiatives related to a workforce reduction. During the fiscal
year ended March 31, 2018, the Company incurred $1,371, primarily related to termination benefits, which have been included in selling, general and administrative expenses in the consolidated
statements of income. The Company completed these initiatives by March 31, 2018.
The
following table summarizes the above restructuring charges during the period ending March 31, 2018:
|
|
|
|
|
|
|
March 31, 2018
|
|
Balance at April 1, 2017
|
|
$
|
|
|
Provisions
|
|
|
1,371
|
|
Cash Payments
|
|
|
969
|
|
|
|
|
|
|
Balance at March 31, 2018
|
|
$
|
402
|
|
|
|
|
|
|
146
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(18) Accumulated Other Comprehensive Loss
The changes in the components of accumulated other comprehensive loss were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
57
|
|
$
|
23
|
|
$
|
(18
|
)
|
Other comprehensive income (loss) (OCI) before reclassifications, net of tax of $108, $57,
$35
|
|
|
175
|
|
|
72
|
|
|
102
|
|
Reclassifications from OCI to other income, net of tax of $(246), $3, $(22)
|
|
|
(190
|
)
|
|
6
|
|
|
(64
|
)
|
Less: Noncontrolling interests, net of tax of $15, $(23), $0
|
|
|
27
|
|
|
(44
|
)
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) on investment securities, net of tax of $(123), $37, $13
|
|
|
12
|
|
|
34
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing Balance
|
|
$
|
69
|
|
$
|
57
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
(50,415
|
)
|
$
|
(45,211
|
)
|
$
|
(35,565
|
)
|
OCI before reclassifications
|
|
|
8,262
|
|
|
(3,810
|
)
|
|
(9,324
|
)
|
Less: Noncontrolling interests
|
|
|
946
|
|
|
(1,394
|
)
|
|
(322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) on currency translation adjustments
|
|
|
9,208
|
|
|
(5,204
|
)
|
|
(9,646
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Closing balance
|
|
$
|
(41,207
|
)
|
$
|
(50,415
|
)
|
$
|
(45,211
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
11,789
|
|
$
|
3,934
|
|
$
|
2,387
|
|
OCI before reclassifications net of tax of $1,265, $6,713, $1,797
|
|
|
2,428
|
|
|
16,328
|
|
|
3,373
|
|
Reclassifications from OCI to
|
|
|
|
|
|
|
|
|
|
|
Revenue, net of tax of $(3,036), $(1,432), $(94)
|
|
|
(5,651
|
)
|
|
(2,706
|
)
|
|
(178
|
)
|
Costs of revenue, net of tax of $(1,543), $(1,015), $55
|
|
|
(4,855
|
)
|
|
(3,526
|
)
|
|
(446
|
)
|
Selling, general and administrative expenses, net of tax of $(852), $(611), $42
|
|
|
(2,748
|
)
|
|
(2,107
|
)
|
|
(236
|
)
|
Interest expenses, net of tax of $(64),$0, $0
|
|
|
(160
|
)
|
|
|
|
|
|
|
Less: Noncontrolling interests, net of tax of $571 $(71), $(512)
|
|
|
1,078
|
|
|
(134
|
)
|
|
(966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) on cash flow hedges, net of tax of $(3,659) $3,583, $1,288
|
|
|
(9,908
|
)
|
|
7,855
|
|
|
1,547
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing balance
|
|
$
|
1,881
|
|
$
|
11,789
|
|
$
|
3,934
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit plans
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
(1,180
|
)
|
$
|
(885
|
)
|
$
|
(932
|
)
|
OCI before reclassifications net of tax of $(198), $(227), $(52)
|
|
|
(364
|
)
|
|
(379
|
)
|
|
(173
|
)
|
Reclassifications from net actuarial gain (loss) amortization to:
|
|
|
|
|
|
|
|
|
|
|
Costs of revenue, net of tax of $34, $32,$24
|
|
|
62
|
|
|
53
|
|
|
78
|
|
Selling, general and administrative expenses, net of tax of $15, $18, $11
|
|
|
27
|
|
|
32
|
|
|
36
|
|
Reclassifications from OCI for prior service credit (cost) to:
|
|
|
|
|
|
|
|
|
|
|
Costs of revenue, net of tax of $3, $3,$2
|
|
|
5
|
|
|
5
|
|
|
6
|
|
Selling, general and administrative expenses, net of tax of $0 for all periods
|
|
|
1
|
|
|
1
|
|
|
1
|
|
Other adjustments
|
|
|
20
|
|
|
12
|
|
|
99
|
|
(Less): Noncontrolling interests, net of tax $2, $(10), $0
|
|
|
5
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) on benefit plans, net of tax of $(144), $(184), $15
|
|
|
(244
|
)
|
|
(295
|
)
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing balance
|
|
|
(1,424
|
)
|
$
|
(1,180
|
)
|
$
|
(885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(40,681
|
)
|
$
|
(39,749
|
)
|
$
|
(42,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(19) Commitments, Contingencies and Guarantees
The Company leases office space under operating leases, which expire at various dates through fiscal year 2025. Certain leases contain renewal provisions and generally require the
Company to pay utilities, insurance, taxes, and other operating expenses.
147
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(19) Commitments, Contingencies and Guarantees (Continued)
Future
minimum lease payments under non-cancelable leases for the five fiscal years following March 31, 2018 and thereafter are:
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
Capital
Leases
|
|
Fiscal year ending March 31:
|
|
|
|
|
|
|
|
2019
|
|
$
|
11,274
|
|
|
56
|
|
2020
|
|
|
10,783
|
|
|
35
|
|
2021
|
|
|
9,933
|
|
|
12
|
|
2022
|
|
|
8,398
|
|
|
1
|
|
2023
|
|
|
5,483
|
|
|
|
|
2024 and thereafter
|
|
|
14,661
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
60,532
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amount representing interest
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
Present value of future lease payments
|
|
|
|
|
|
89
|
|
Less: current portion
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
Long term capital lease obligation
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
rental expense for operating leases was approximately $12,011 $11,701 and $9,350 for the fiscal years ended March 31, 2018, 2017 and 2016, respectively. Total amortization
expenses for the assets purchased under capital leases were $88, $116 and $130 for the fiscal year ended March 31, 2018, 2017 and 2016 respectively.
The
Company indemnifies its officers and directors for certain events or occurrences under its charter or by-laws and under indemnification agreements while the officer or director is,
or was, serving at its request in a defined capacity. The term of the indemnification period is with respect to the period that such person was an officer or director of the Company. The maximum
potential amount of future payments the Company could be required to make under these indemnification obligations is unlimited. The costs incurred to defend lawsuits or settle claims related to these
indemnification obligations have not been material. As a result, the Company believes that its estimated exposure on these obligations is minimal. Accordingly, the Company had no liabilities recorded
for these obligations as of March 31, 2018.
The
Company is insured against any actual or alleged act, error, omission, neglect, misstatement or misleading statement or breach of duty by any current or former officer, director or
employee while rendering information technology services. The Company believes that its financial exposure from such actual or alleged actions, should they arise, is minimal and no liability was
recorded at March 31, 2018.
The
Company is not a party to any pending litigation or other legal proceedings that are likely to have a material adverse effect on its consolidated financial statements.
(20) 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,
148
Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(20) Derivative Financial Instruments (Continued)
Indian
rupee and Sri Lankan 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. Currently, the Company maintains four hedging programs, each with varying contract types, duration and purposes. The Company's "Cash Flow Program" is designed to mitigate
the impact of volatility in the U.S. dollar equivalent of the Company's Indian rupee denominated expenses over a rolling 18-month period. The Cash Flow Program transactions currently meet the criteria
for hedge accounting as cash flow hedges. In addition, as part of the Polaris acquisition, the Company has assumed a cash flow program designed to mitigate the impact of the volatility of the
translation of Polaris U.S. dollar denominated revenue into Indian rupees over a rolling 18 month period ("Polaris Cash Flow Program"). These cash flow hedges meet the criteria for hedge
accounting as cash flow hedges. The Company's "Balance Sheet Program" involves the use of 30-day derivative instruments designed to mitigate the monthly impact of foreign exchange gains/losses on
certain intercompany balances and payments. The Company's Balance Sheet Program is currently inactive. The Company's "Economic Hedge Program" involves the purchase of derivative instruments with
maturities of up to 92 days, and is designed to mitigate the impact of foreign exchange on U.K. pound sterling, the euro and Swedish krona denominated revenue and costs with respect to the
quarter for which such instruments are purchased. The Balance Sheet Program and the Economic Hedge Program are treated as economic hedges as these programs do not meet the criteria for hedge
accounting and all gains and losses are recognized in consolidated statement of income under the same line item as the underlying exposure being hedged.
The
Company is exposed to credit losses in the event of non-performance by the counterparties on its financial instruments. All counterparties currently have investment grade credit
ratings. The Company anticipates that these counterparties will be able to fully satisfy their obligations under the contracts. The Company has derivative contracts with six counterparties as of
March 31, 2018.
The
Company's agreements with its counterparties contain provisions pursuant to which the Company could be declared in default of its derivative obligations. As of March 31, 2018,
the Company had not posted any collateral related to these agreements. If the Company had breached any of these provisions as of March 31, 2018, it could have been required to settle its
obligations under these agreements at amounts which approximate the March 31, 2018 fair values reflected in the table below. During the fiscal year ended March 31, 2018, the Company was
not in default of any of its derivative obligations.
Changes
in fair value of the designated cash flow hedges for our Cash Flow Program as well as the Polaris Cash Flow Program are recorded as a component of accumulated other comprehensive
income (loss) ("AOCI"), net of tax until the forecasted hedged transactions occur and are then recognized in the consolidated statements of income in the same line item as the item being hedged. The
Company evaluates hedge effectiveness at the time a contract is entered into, as well as on an ongoing basis. If and when hedge relationships are discontinued, and should the forecasted transaction be
deemed probable of not occurring by the end of the originally specified period or within an additional two-month period of time thereafter, any related derivative amounts recorded in equity are
reclassified to earnings in other income (expense). There were no amounts reclassified to earnings as a result of hedge ineffectiveness for the fiscal year ended March 31, 2018 and 2017.
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Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(20) Derivative Financial Instruments (Continued)
Changes
in the fair value of the hedges for the Balance Sheet Program and the Economic Hedge Program, if any, are recognized in the same line item as the underlying exposure being hedged
and the ineffective portion of cash flow hedges, if any, is recognized as other income (expense). The Company values its derivatives based on market observable inputs including both forward and spot
prices for currencies. Any significant change in the forward or spot prices for hedged currencies would have a significant impact on the value of the Company's derivatives.
The
U.S. dollar notional value of all outstanding foreign currency derivative contracts was $140,347 and $153,435 at March 31, 2018 and 2017, respectively. Unrealized net gains
related to these contracts which are expected to be reclassified from AOCI to earnings during the next 12 months are $1,086 at March 31, 2018. At March 31, 2018, the maximum
outstanding term of any derivative instrument was 15 months.
The
Company also uses interest rate swaps to mitigate the Company's interest rate risk on the Company's variable rate debt. The Company's objective is to limit the variability of cash
flows associated with changes in LIBOR interest rate payments due on the Credit Agreement (see note 11 to the Consolidated financial statements), by using pay-fixed, receive-variable interest
rate swaps to offset the future variable rate interest payments. The Company will recognize these transactions in accordance with ASC 815
"Derivatives and
Hedging,"
and have designated the swaps as cash flow hedges.
The
Interest Rate Swap Agreements have an effective date of July 31, 2017 and a maturity date of July 31, 2020. The swaps have an aggregate notional amount of $90,000 and
hedge approximately 29.5% of the Company's outstanding debt balance as of March 31, 2018. The notional amount of the swaps amortizes over the remaining swap periods. 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
counterparties to the Interest Rate Swap Agreements could demand an early termination of the 2016 Swap Agreements if the Company is in default under the Prior Credit Agreement, or
any agreement that amends or replaces the Prior Credit Agreement in which the counterparty is a member, and the Company is unable to cure the default. An event of default under the Prior Credit
Agreement includes customary events of default and failure to comply with financial covenants, including a maximum consolidated leverage ratio commencing on December 31, 2016, of not more than
3.25 to 1.00 for the first year of the Prior Credit Agreement, of not more than 3.00 to 1.00 for the second year of the Prior Credit Agreement, and 2.75 to 1.00 thereafter, each as determined for the
four consecutive quarter period ending on each fiscal quarter and a minimum consolidated fixed charge coverage ratio of 1.25 to 1.00. As of March 31, 2018, the Company was in compliance with
these covenants. The unrealized gain associated with the 2016 Swap Agreements was $2,486 and $1,842 at March 31, 2018 and March 31, 2017, respectively, which represents the estimated
amount that the Company would receive from the counterparties in the event of an early termination.
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Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(20) Derivative Financial Instruments (Continued)
The
following tables set forth the fair value of derivative instruments included in the consolidated balance sheets at March 31, 2018 and March 31, 2017:
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
March 31, 2017
|
|
Foreign currency exchange contracts:
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
2,109
|
|
$
|
15,544
|
|
Other long-term assets
|
|
|
13
|
|
$
|
887
|
|
Accrued expenses and other
|
|
|
1,023
|
|
$
|
|
|
Long-term liabilities
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
March 31, 2017
|
|
Interest rate swap contracts
:
|
|
|
|
|
|
|
|
Other long-term assets
|
|
|
2,486
|
|
$
|
1,842
|
|
The
following tables set forth the effect of the Company's foreign currency exchange and interest rate swap contracts on the consolidated financial statements of the Company for the
fiscal years ended March 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss)
Recognized in AOCI on
Derivatives
|
|
Derivatives Designated as
Cash Flow Hedging Relationships
|
|
March 31, 2018
|
|
March 31, 2017
|
|
Foreign currency exchange contracts
|
|
$
|
2,825
|
|
$
|
21,199
|
|
Interest rate swaps
|
|
$
|
868
|
|
$
|
1,842
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss)
Reclassified from AOCI into
Income
|
|
Location of Gain or (Loss) Reclassified
from AOCI into Income
|
|
March 31, 2018
|
|
March 31, 2017
|
|
Revenue
|
|
$
|
8,687
|
|
$
|
4,138
|
|
Costs of revenue
|
|
$
|
6,398
|
|
$
|
4,541
|
|
Operating expenses
|
|
$
|
3,600
|
|
$
|
2,718
|
|
Interest Expenses
|
|
$
|
224
|
|
|
|
|
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Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(20) Derivative Financial Instruments (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss)
Recognized in Income
on Derivatives
|
|
Derivatives not Designated
as Hedging Instruments
|
|
Location of Gain Or (Loss)
Recognized in Income on Derivatives
|
|
March 31, 2018
|
|
March 31, 2017
|
|
Foreign currency exchange contracts
|
|
Foreign currency transaction gains (losses)
|
|
$
|
|
|
$
|
(180
|
)
|
|
|
Revenue
|
|
$
|
(171
|
)
|
$
|
(409
|
)
|
|
|
Costs of revenue
|
|
$
|
73
|
|
$
|
111
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
(47
|
)
|
$
|
(17
|
)
|
(21) Business Segment Information
Accounting pronouncements establish standards for the manner in which public companies report information about operating segments in annual and interim financial statements. Operating
segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker on deciding on how to allocate
resources and in assessing performance. The Company's chief operating decision-maker is considered to be the Company's Chief Executive Officer. The Company's Chief Executive Officer reviews financial
information presented on an entity level basis for purposes of making operating decisions and assessing financial performance. Therefore, the Company has determined that it operates in a single
operating and reportable segment.
Geographic information:
Total revenue is attributed to geographic areas based on location of the client. Geographic information is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Customer revenue:
|
|
|
|
|
|
|
|
|
|
|
United States of America
|
|
$
|
628,147
|
|
$
|
532,244
|
|
$
|
413,914
|
|
United Kingdom
|
|
|
195,547
|
|
|
164,970
|
|
|
109,015
|
|
Rest of World
|
|
|
196,975
|
|
|
161,517
|
|
|
77,373
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenue
|
|
$
|
1,020,669
|
|
$
|
858,731
|
|
$
|
600,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2018
|
|
2017
|
|
Long-lived assets, net of accumulated depreciation and amortization:
|
|
|
|
|
|
|
|
United States of America
|
|
$
|
213,024
|
|
$
|
91,500
|
|
India
|
|
|
276,512
|
|
|
271,345
|
|
Rest of World
|
|
|
25,281
|
|
|
25,495
|
|
|
|
|
|
|
|
|
|
Consolidated long-lived assets, net
|
|
$
|
514,817
|
|
$
|
388,340
|
|
|
|
|
|
|
|
|
|
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Table of Contents
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(22) Quarterly Results of Operations (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
2018
|
|
December 31,
2017
|
|
September 30,
2017
|
|
June 30,
2017
|
|
March 31,
2017
|
|
December 31,
2016
|
|
September 30,
2016
|
|
June 30,
2016
|
|
Revenue
|
|
$
|
281,341
|
|
$
|
263,809
|
|
$
|
248,174
|
|
$
|
227,345
|
|
$
|
225,962
|
|
$
|
217,209
|
|
$
|
210,089
|
|
$
|
205,471
|
|
Costs of revenue
|
|
|
197,342
|
|
|
183,420
|
|
|
178,404
|
|
|
166,279
|
|
|
160,174
|
|
|
154,847
|
|
|
152,369
|
|
|
153,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
83,999
|
|
|
80,389
|
|
|
69,770
|
|
|
61,066
|
|
|
65,788
|
|
|
62,362
|
|
|
57,720
|
|
|
51,911
|
|
Operating expenses
|
|
|
67,624
|
|
|
66,726
|
|
|
59,491
|
|
|
54,996
|
|
|
55,564
|
|
|
55,904
|
|
|
54,183
|
|
|
53,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
16,375
|
|
|
13,663
|
|
|
10,279
|
|
|
6,070
|
|
|
10,224
|
|
|
6,458
|
|
|
3,537
|
|
|
(1,848
|
)
|
Other income (expense)
|
|
|
(5,582
|
)
|
|
2,843
|
|
|
(1,187
|
)
|
|
(625
|
)
|
|
5,485
|
|
|
(2,331
|
)
|
|
1,418
|
|
|
(4,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
10,793
|
|
|
16,506
|
|
|
9,092
|
|
|
5,445
|
|
|
15,709
|
|
|
4,127
|
|
|
4,955
|
|
|
(5,973
|
)
|
Income tax expense (benefit)
|
|
|
6,163
|
|
|
24,427
|
|
|
1,500
|
|
|
798
|
|
|
3,939
|
|
|
(1,414
|
)
|
|
499
|
|
|
(463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
4,630
|
|
|
(7,921
|
)
|
|
7,592
|
|
|
4,647
|
|
|
11,770
|
|
|
5,541
|
|
|
4,456
|
|
|
(5,510
|
)
|
Noncontrolling interest
|
|
|
1,747
|
|
|
2,134
|
|
|
2,824
|
|
|
989
|
|
|
1,305
|
|
|
1,106
|
|
|
1,242
|
|
|
746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to Virtusa stockholders.
|
|
$
|
2,883
|
|
$
|
(10,055
|
)
|
$
|
4,768
|
|
$
|
3,658
|
|
$
|
10,465
|
|
$
|
4,435
|
|
$
|
3,214
|
|
$
|
(6,256
|
)
|
Less: Series A Convertible Preferred Stock dividends and accretion
|
|
|
1,088
|
|
|
1,087
|
|
|
1,087
|
|
|
701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to Virtusa common stockholders
|
|
|
1,795
|
|
|
(11,142
|
)
|
$
|
3,681
|
|
$
|
2,957
|
|
$
|
10,465
|
|
$
|
4,435
|
|
$
|
3,214
|
|
$
|
(6,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.06
|
|
$
|
(0.38
|
)
|
$
|
0.13
|
|
$
|
0.10
|
|
$
|
0.35
|
|
$
|
0.15
|
|
$
|
0.11
|
|
$
|
(0.21
|
)
|
Diluted earnings (loss) per share
|
|
$
|
0.06
|
|
$
|
(0.38
|
)
|
$
|
0.12
|
|
$
|
0.10
|
|
$
|
0.34
|
|
$
|
0.15
|
|
$
|
0.11
|
|
$
|
(0.21
|
)
|
(23) Subsequent Events
On April 18, 2018, the Company purchased multiple foreign currency forward contracts designed to hedge fluctuation in the U.K. pound sterling ("GBP") against the U.S. dollar and
the Euro ("EUR") against the U.S. dollar (the "Euro contracts"), each of which will expire on various dates during the period ending June 29, 2018. The GBP contracts have an aggregate notional
amount of approximately £2,346 (approximately $3,336) and the EUR contracts have an aggregate notional amount of approximately EUR 1,130 (approximately $1,402). The weighted average
U.S. dollar settlement rate associated with the GBP contracts is $1.422 and the weighted average U.S. dollar settlement rate associated with the EUR contracts is approximately $1.241.
153
Table of Contents