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Sensitivity: Client Confidential

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2020

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

For the transition period from to

Commission File Number 001-33625

VIRTUSA CORPORATION

(Exact Name of Registrant as Specified in Its Charter)


Delaware				04-3512883
(State or Other Jurisdiction of				(I.R.S. Employer
Incorporation or Organization)				Identification Number)

132 Turnpike Rd

Southborough, Massachusetts

(Address of principal executive offices)

01772

(Zip Code)

(508) 389-7300

(Telephone Number,

Including Area Code,)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Common Stock, $0.01 par value per share

Trading Symbol(s)

VRTU

Name of each exchange on which registered
The NASDAQ Stock Market LLC

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

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

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

Large Accelerated Filer ☒		Accelerated Filer ☐

Non-Accelerated Filer ☐		Smaller reporting company ☐
		Emerging growth company ☐

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

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

Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of February 4, 2021:


Class		Number of Shares
Common Stock, par value $.01 per share		30,340,986

Table of Contents

Virtusa Corporation and Subsidiaries



		Page

PART I. FINANCIAL INFORMATION		3
Item 1.	Consolidated Financial Statements (Unaudited)	3
	Consolidated Balance Sheets at December 31, 2020 and March 31, 2020	3
	Consolidated Statements of Income for the Three and Nine Months Ended December 31, 2020 and 2019	4
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended December 31, 2020 and 2019	5
	Consolidated Statements of Stockholder’s Equity for the Three and Nine Months Ended December 31, 2020 and 2019	6
	Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2020 and 2019	8
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4.	Controls and Procedures	51
PART II. OTHER INFORMATION		52
Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 6.	Exhibits	56
SIGNATURES		57

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

Virtusa Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share amounts)


	December 31, 2020		March 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	347,173	$	290,837
Short-term investments		2,633		9,785
Accounts receivable, net of allowance of $1,085 and $1,541 at December 31, 2020 and March 31, 2020, respectively		140,012		148,950
Unbilled accounts receivable		79,681		137,839
Prepaid expenses		54,155		55,574
Restricted cash		5,786		659
Assets held for sale		—		8,334
Other current assets		33,338		29,214
Total current assets		662,778		681,192
Property and equipment, net		97,614		101,250
Operating lease right-of-use assets		40,750		48,684
Investments accounted for using equity method		—		1,336
Long-term investments		22		4
Deferred income taxes		29,715		30,225
Goodwill		295,591		296,493
Intangible assets, net		119,202		130,903
Other long-term assets		34,421		46,980
Total assets	$	1,280,093	$	1,337,067
Liabilities, Series A Convertible Preferred Stock and Stockholders’ equity
Current liabilities:
Accounts payable	$	25,253	$	38,537
Accrued employee compensation and benefits		97,364		79,373
Deferred revenue		15,484		8,054
Accrued expenses and other		82,733		95,124
Current portion of long-term debt		20,083		16,043
Operating lease liabilities		11,552		11,543
Income taxes payable		11,530		3,233
Total current liabilities		263,999		251,907
Deferred income taxes		15,239		16,067
Operating lease liabilities, noncurrent		34,468		41,697
Long-term debt, less current portion		358,441		480,154
Long-term liabilities		42,007		42,475
Total liabilities		714,154		832,300
Commitments and contingencies
Series A Convertible Preferred Stock: par value $0.01 per share, 108,000 shares authorized, 108,000 shares issued and outstanding at December 31, 2020 and March 31, 2020; redemption amount and liquidation preference of $108,000 at December 31, 2020 and March 31, 2020		107,450		107,326
Stockholders’ equity:
Undesignated preferred stock, $0.01 par value; Authorized 5,000,000 shares at December 31, 2020 and March 31, 2020		—		—
Common stock, $0.01 par value; Authorized 120,000,000 shares at December 31, 2020 and March 31, 2020; issued 33,717,535 and 33,518,389 shares at December 31, 2020 and March 31, 2020, respectively; outstanding 30,331,971 and 30,132,825 shares at December 31, 2020 and March 31, 2020, respectively		337		335
Treasury stock, 3,385,564 common shares, at cost, at December 31, 2020 and March 31, 2020		(58,332)		(58,332)
Additional paid-in capital		257,187		246,862
Retained earnings		325,679		293,831
Accumulated other comprehensive loss		(66,382)		(85,255)
Total Stockholders' equity		458,489		397,441
Total liabilities, Series A convertible preferred stock, and stockholders’ equity	$	1,280,093	$	1,337,067

See accompanying notes to unaudited consolidated financial statement

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Virtusa Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2020		2019		2020		2019
Revenue	$	346,100	$	335,107	$	964,352	$	982,632
Costs of revenue		232,142		236,427		697,772		709,746
Gross profit		113,958		98,680		266,580		272,886
Operating expenses:
Selling, general and administrative expenses		72,507		68,270		205,248		209,813
Income from operations		41,451		30,410		61,332		63,073
Other income (expense):
Interest income		230		520		698		1,744
Interest expense		(5,187)		(4,873)		(16,222)		(14,616)
Foreign currency transaction gains (losses), net		1,126		(3,065)		3,983		(5,300)
Other, net		(397)		209		1,145		1,137
Total other expense		(4,228)		(7,209)		(10,396)		(17,035)
Income before income tax expense		37,223		23,201		50,936		46,038
Income tax expense		11,776		10,363		15,826		19,932
Net income		25,447		12,838		35,110		26,106
Less: net income attributable to noncontrolling interests, net of tax		—		118		—		450
Net income available to Virtusa stockholders		25,447		12,720		35,110		25,656
Less: Series A Convertible Preferred Stock dividends and accretion		1,087		1,087		3,262		3,262
Net income available to Virtusa common stockholders	$	24,360	$	11,633	$	31,848	$	22,394
Basic earnings per share available to Virtusa common stockholders	$	0.80	$	0.39	$	1.05	$	0.75
Diluted earnings per share available to Virtusa common stockholders	$	0.75	$	0.38	$	1.04	$	0.73

See accompanying notes to unaudited consolidated financial statements

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Virtusa Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(In thousands)


	Three Months Ended					Nine Months Ended
	December 31,					December 31,
	2020		2019		2020		2019

Net income	$	25,447	$	12,838	$	35,110	$	26,106
Other comprehensive income (loss):
Foreign currency translation adjustment		5,933		4,630		13,618		(2,106)
Pension plan adjustment, net of tax effect		114		79		285		(606)
Unrealized loss on available-for-sale debt securities, net of tax effect		—		—		—		—
Unrealized gain (loss) on effective cash flow hedges, net of tax effect		762		(2,817)		4,970		(5,031)
Other comprehensive income (loss)	$	6,809	$	1,892	$	18,873	$	(7,743)
Comprehensive income		32,256		14,730		53,983		18,363
Less: comprehensive income attributable to noncontrolling interest, net of tax		—		484		—		849
Comprehensive income available to Virtusa stockholders	$	32,256	$	14,246	$	53,983	$	17,514

See accompanying notes to unaudited consolidated financial statements

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Virtusa Corporation and Subsidiaries

Consolidated Statements of Stockholders’ Equity

For the Three and Nine Months Ended December 31, 2020 and 2019

(Unaudited)

(In thousands, except share amounts)


											Accumulated
							Additional				Other		Total
	Common Stock			Treasury Stock			Paid-in		Retained		Comprehensive		Stockholders’
	Shares	Amount		Shares	Amount		Capital		Earnings		Loss		Equity
Balance at March 31, 2020	33,518,389	$	335	(3,385,564)	$	(58,332)	$	246,862	$	293,831	$	(85,255)	$	397,441
Proceeds from the exercise of stock options	5,741		—	—		—		92		—		—		92
Restricted stock awards vested	108,414		1	—		—		(1)		—		—		—
Restricted stock awards withheld for tax	—		—	—		—		(1,914)		—		—		(1,914)
Share-based compensation	—		—	—		—		3,592		—		—		3,592
Series A Convertible Preferred Stock dividends and accretion	—		—	—		—		—		(1,087)		—		(1,087)
Other comprehensive income	—		—	—		—		—		—		4,281		4,281
Net income	—		—	—		—		—		894		—		894
Balance at June 30, 2020	33,632,544	$	336	(3,385,564)	$	(58,332)	$	248,631	$	293,638	$	(80,974)	$	403,299
Proceeds from the exercise of stock options	24,868		—	—		—		472		—		—		472
Restricted stock awards vested	37,661		1	—		—		(1)		—		—		—
Restricted stock awards withheld for tax	—		—	—		—		(167)		—		—		(167)
Share-based compensation	—		—	—		—		4,078		—		—		4,078
Series A Convertible Preferred Stock dividends and accretion	—		—	—		—		—		(1,088)		—		(1,088)
Other comprehensive income	—		—	—		—		—		—		7,783		7,783
Net income	—		—	—		—		—		8,769		—		8,769
Balance at September 30, 2020	33,695,073	$	337	(3,385,564)	$	(58,332)	$	253,013	$	301,319	$	(73,191)	$	423,146
Proceeds from the exercise of stock options	15,037		—	—		—		257		—		—		257
Restricted stock awards vested	7,425		—	—		—		—		—		—		—
Restricted stock awards withheld for tax	—		—	—		—		(110)		—		—		(110)
Share-based compensation	—		—	—		—		4,027		—		—		4,027
Series A Convertible Preferred Stock dividends and accretion	—		—	—		—		—		(1,087)		—		(1,087)
Other comprehensive income	—		—	—		—		—		—		6,809		6,809
Net income	—		—	—		—		—		25,447		—		25,447
Balance at December 31, 2020	33,717,535	$	337	(3,385,564)	$	(58,332)	$	257,187	$	325,679	$	(66,382)	$	458,489

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											Accumulated		Total
							Additional				Other		Virtusa				Total		Redeemable
	Common Stock			Treasury Stock			Paid-in		Retained		Comprehensive		Stockholders’		Noncontrolling		Stockholders’		Noncontrolling
	Shares	Amount		Shares	Amount		Capital		Earnings		Loss		Equity		Interest		Equity		Interest
Balance at March 31, 2019	33,012,775	$	330	(2,879,999)	$	(39,652)	$	239,204	$	250,279	$	(59,387)	$	390,774	$	—	$	390,774	$	23,576
Proceeds from the exercise of stock options	13,416		—	—		—		194		—		—		194		—		194		8
Restricted stock awards vested	96,763		1	—		—		(1)		—		—		—		—		—		—
Restricted stock awards withheld for tax	—		—	—		—		(2,011)		—		—		(2,011)		—		(2,011)		—
Share-based compensation	—		—	—		—		6,674		—		—		6,674		—		6,674		—
Adjustments of redeemable noncontrolling interest to redemption value	—		—	—		—		18		—		—		18		—		18		170
Purchase of redeemable noncontrolling interest related to Polaris	—		—	—		—		—		—		—		—		—		—		(5,549)
Foreign currency translation on redeemable noncontrolling interest	—		—	—		—		—		—		—		—		—		—		116
Series A Convertible Preferred Stock dividends and accretion	—		—	—		—		—		(1,087)		—		(1,087)		—		(1,087)		—
Other comprehensive income (loss)	—		—	—		—		—		—		(1,194)		(1,194)		—		(1,194)		144
Net income	—		—	—		—		—		5,834		—		5,834		—		5,834		186
Balance at June 30, 2019	33,122,954	$	331	(2,879,999)	$	(39,652)	$	244,078	$	255,026	$	(60,581)	$	399,202	$	—	$	399,202	$	18,651
Restricted stock awards vested	101,178		1	—		—		(1)		—		—		—		—		—		—
Restricted stock awards withheld for tax	—		—	—		—		(1,647)		—		—		(1,647)		—		(1,647)		—
Share-based compensation	—		—	—		—		5,829		—		—		5,829		—		5,829		—
Repurchase of common stock	—		—	(505,565)		(18,680)		—		—		—		(18,680)		—		(18,680)		—
Adjustments of redeemable noncontrolling interest to redemption value	—		—	—		—		25		—		—		25		—		25		101
Purchase of redeemable noncontrolling interest related to Polaris	—		—	—		—		—		—		—		—		—		—		(3,126)
Foreign currency translation on redeemable noncontrolling interest	—		—	—		—		—		—		—		—		—		—		(533)
Reclassification of noncontrolling interest from temporary equity to permanent equity	—		—	—		—		—		—		—		—		15,093		15,093		(15,093)
Series A Convertible Preferred Stock dividends and accretion	—		—	—		—		—		(1,088)		—		(1,088)		—		(1,088)		—
Other comprehensive income (loss)	—		—	—		—		—		—		(8,474)		(8,474)		(111)		(8,585)		—
Net income	—		—	—		—		—		7,102		—		7,102		146		7,248		—
Balance at September 30, 2019	33,224,132	$	332	(3,385,564)	$	(58,332)	$	248,284	$	261,040	$	(69,055)	$	382,269	$	15,128	$	397,397	$	—
Proceeds from the exercise of stock options	15,914		—	—		—		233		—		—		233		—		233		—
Restricted stock awards vested	6,027		—	—		—		—		—		—		—		—		—		—
Restricted stock awards withheld for tax	—		—	—		—		(126)		—		—		(126)		—		(126)		—
Share-based compensation	—		—	—		—		5,750		—		—		5,750		—		5,750		—
Reclassification of noncontrolling interest from permanent equity to liability	—		—	—		—		—		—		—		—		(13,564)		(13,564)		—
Adjustments for reclassification of noncontrolling interest	—		—	—		—		2,011		—		—		2,011		(2,048)		(37)		—
Series A Convertible Preferred Stock dividends and accretion	—		—	—		—		—		(1,087)		—		(1,087)		—		(1,087)		—
Other comprehensive income (loss)	—		—	—		—		—		—		1,526		1,526		366		1,892		—
Net income	—		—	—		—		—		12,720		—		12,720		118		12,838		—
Balance at December 31, 2019	33,246,073	$	332	(3,385,564)	$	(58,332)	$	256,152	$	272,673	$	(67,529)	$	403,296	$	—	$	403,296	$	—

See accompanying notes to unaudited consolidated financial statements

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Virtusa Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)


	Nine Months Ended
	December 31,
	2020		2019
Cash flows from operating activities:
Net income	$	35,110	$	26,106
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		25,930		23,672
Share-based compensation expense		11,697		18,285
Gain on redemption of equity method investment		(1,179)		—
Provision (recovery) for doubtful accounts		(22)		26
Loss (gain) on disposal of property and equipment		543		(403)
Impairment of investment		—		184
Foreign currency transaction (gains) losses, net		(3,983)		5,300
Amortization of discounts and premiums on investments		—		(6)
Impairment of operating lease right-of-use asset		1,413		—
Amortization of debt issuance cost		1,148		863
Deferred income taxes, net		39		(970)
Net changes in operating assets and liabilities
Accounts receivable and unbilled receivable		80,130		19,129
Prepaid expenses and other current assets		7,178		(1,258)
Other long-term assets		2,152		(11,239)
Accounts payable		(14,870)		(12,730)
Accrued employee compensation and benefits		8,861		4,611
Accrued expenses and other current liabilities		8,828		1,895
Operating lease liabilities		(715)		172
Income taxes payable		5,676		2,537
Other long-term liabilities		3,480		(1,720)
Net cash provided by operating activities		171,416		74,454
Cash flows from investing activities:
Proceeds from sale of property and equipment		11,902		825
Purchase of short-term investments		(42)		(34,969)
Proceeds from sale or maturity of short-term investments		7,217		47,716
Payment for asset acquisitions		(27)		(9,192)
Payment of contingent consideration of asset acquisitions		—		(942)
Payment of deferred consideration related to business acquisitions		(10,313)		(17,500)
Purchase of property and equipment		(5,865)		(10,865)
Net cash provided by (used in) investing activities		2,872		(24,927)
Cash flows from financing activities:
Proceeds from exercise of common stock options		821		427
Proceeds from exercise of subsidiary stock options		—		93
Payment of debt issuance costs		(813)		(808)
Proceeds from revolving credit facility		—		36,000
Payment of debt		(13,008)		(9,141)
Repurchase of common stock		—		(18,680)
Payments of withholding taxes related to net share settlements of restricted stock		(2,191)		(3,783)
Purchase of redeemable noncontrolling interest related to Polaris		—		(8,675)
Payment of noncontrolling interest		—		(12,534)
Principal payments on capital lease obligation		—		(36)
Payment of dividend on Series A Convertible Preferred Stock		(3,138)		(3,138)
Payment of debt issuance costs		—		—
Payment of revolving credit facility		(105,000)		—
Payment of contingent consideration related to acquisitions		(5,767)		—
Net cash used in financing activities		(129,096)		(20,275)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		16,269		(131)
Net increase in cash and cash equivalents and restricted cash		61,461		29,121
Cash, cash equivalents and restricted cash, beginning of year		291,601		190,113
Cash, cash equivalents and restricted cash, end of period	$	353,062	$	219,234

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Virtusa Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

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



	December 31, 2020		March 31, 2020
Balance sheet classification
Cash and cash equivalents	$	347,173	$	290,837

Restricted cash in current assets		5,786		659
Restricted cash in other long-term assets		103		105
Total restricted cash	$	5,889	$	764
Total cash, cash equivalents and restricted cash	$	353,062	$	291,601

See accompanying notes to unaudited consolidated financial statements

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Virtusa Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts)

(1) Nature of the Business

Virtusa Corporation (the “Company”, “Virtusa”, “we”, “us” or “our”) is a global provider of digital business strategy, digital engineering and information technology (“IT”) services and solutions that help clients change, disrupt, and unlock new value through innovation engineering. We support Global 2000 clients across key industries including banking, financial services, insurance, healthcare, communications, technology, and media and entertainment. We help improve business performance through accelerating revenue growth, delivering compelling consumer experiences, improving operational efficiencies, and lowering overall IT costs. We provide services across the entire spectrum of the IT services lifecycle, from consulting, to technology and user experience (“UX”) design, development of IT applications, systems integration, digital engineering, testing and business assurance, and maintenance and support services, including cloud, infrastructure and managed services. We help our clients solve critical business problems by leveraging a combination of our distinctive consulting approach, end-to-end digital engineering capabilities, unique platforming methodology, and deep domain and technology expertise.

Virtusa helps clients grow their business with innovative services that create operational efficiency using digital labor, future-proof operational and IT platforms, and rationalization and modernization of IT applications infrastructure. We help organizations realize the benefits of digital transformation and cloud transformation by bringing together digital infrastructure, analytics and intelligence and customer experience by engineering the digital enterprise of tomorrow on the cloud. We deliver cost effective solutions through a global delivery model, applying advanced methods such as Agile, an industry standard technique designed to accelerate application development. We use our Digital Transformation Studio (“DTS”) engineering tools to drive software development lifecycle automation to improve quality, enabling speed and increasing productivity. Our proprietary DTS was built by Virtusa’s engineering teams that have decades of industry knowledge and experience. These teams are certified and leverage Virtusa’s industry leading tools and assets, providing increased speed and transparency.

Headquartered in Massachusetts, we have offices throughout the Americas, Europe, Middle East and Asia, with significant global delivery centers in the United States, India, Sri Lanka, Hungary, Singapore and Malaysia. We also have many employees who work with our clients either onsite or virtually, which offers flexibility for both clients and employees.

(2) Unaudited Interim Financial Information

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with U.S. generally accepted accounting principles and Article 10 of Regulation S-X under the Securities and Exchange Act of 1934, as amended, and should be read in conjunction with the Company’s audited consolidated financial statements (and notes thereto) for the fiscal year ended March 31, 2020 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission, or SEC, on May 28, 2020. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such SEC rules and regulations. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation of the accompanying unaudited consolidated financial statements have been included, and all material adjustments are of a normal and recurring nature. Operating results for the interim periods are not necessarily indicative of results that may be expected to occur for the entire fiscal year.

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Principles of Consolidation

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

Use of Estimates

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

Fair Value of Financial Instruments

At December 31, 2020 and March 31, 2020, the carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, unbilled accounts receivable, restricted cash, accounts payable, accrued employee compensation and benefits, other accrued expenses and long-term debt, approximate their fair values due to the nature of the items. See Note 7 for a discussion of the fair value of the Company’s other financial instruments.

Recent accounting pronouncements

Recently Adopted Accounting Pronouncements

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

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Measurement of Credit Losses on Financial Instruments, which modifies the measurement of expected credit losses of certain financial instruments. The FASB subsequently issued guidance which provide clarifications and improvements to this new standard. The amendments in this update changed how companies measure and recognize credit impairment for many financial assets. The new credit loss model requires companies to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets (including accounts receivables) that are in the scope of the update. The standard update also made amendments to the current impairment model for available-for-sale debt securities. This update requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. This update is effective for public entities from fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

The Company adopted this standard (“ASC Topic 326”) effective April 1, 2020 using a modified retrospective approach. Prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting policies. The adoption of this guidance did not have a material impact on the consolidated financial statements, therefore, the Company did not record any cumulative adjustments to the opening retained earnings in the consolidated financial statements.

See Note 9, “Revenues and Accounts Receivable” for additional information regarding credit losses.

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New Accounting Pronouncements

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

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction, ownership changes in investments, and interim-period accounting for enacted changes in tax law. The standard will be effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on the consolidated financial statements.

(3) Earnings per Share

Basic earnings per share available to Virtusa common stockholders (“EPS”) is computed by dividing net income, less any dividends and accretion of issuance cost on the Series A Convertible Preferred Stock by the weighted average 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 per share are as follows:


	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2020		2019		2020		2019
Numerators:
Net income available to Virtusa stockholders	$	25,447	$	12,720	$	35,110	$	25,656
Less: Series A Convertible Preferred Stock dividends and accretion		(1,087)		(1,087)		(3,262)		(3,262)
Net income available to Virtusa common stockholders	$	24,360	$	11,633	$	31,848	$	22,394
Denominators:
Basic weighted average common shares outstanding		30,319,615		29,849,368		30,252,264		30,041,740
Basic earnings per share available to Virtusa common stockholders	$	0.80	$	0.39	$	1.05	$	0.75

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The components of diluted earnings per share are as follows:


	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2020		2019		2020		2019
Numerators:
Net income available to Virtusa common stockholders	$	24,360	$	11,633	$	31,848	$	22,394
Add : Series A Convertible Preferred Stock dividends and accretion		1,087		1,087		—		—
Net income available to Virtusa common stockholders and assumed conversion	$	25,447	$	12,720	$	31,848	$	22,394
Denominators:
Basic weighted average common shares outstanding		30,319,615		29,849,368		30,252,264		30,041,740
Dilutive effect of Series A Convertible Preferred Stock if converted		3,000,000		3,000,000		—		—
Dilutive effect of employee stock options and unvested restricted stock awards and restricted stock units		577,981		608,863		412,878		658,529
Weighted average shares—diluted		33,897,596		33,458,231		30,665,142		30,700,269
Diluted earnings per share available to Virtusa common stockholders	$	0.75	$	0.38	$	1.04	$	0.73

During the three months ended December 31, 2020 and 2019, unvested restricted stock awards and unvested restricted stock units issuable for, and options to purchase 823 and 24,037 shares of common stock, respectively, were excluded from the calculations of diluted earnings per share as their effect would have been anti-dilutive. For the three months ended December 31, 2020 and 2019 all of the 3,000,000 shares of Series A Convertible Preferred Stock were included in the calculations of diluted earnings per share as their effect would have been anti-dilutive.

During the nine months ended December 31, 2020 and 2019, unvested restricted stock awards and unvested restricted stock units issuable for, and options to purchase 127,504 and 100,434 shares of common stock, respectively, were excluded from the calculations of diluted earnings per share as their effect would have been anti-dilutive. For the nine months ended December 31, 2020 and 2019, all of the 3,000,000 shares of Series A Convertible Preferred Stock were excluded in the calculations of diluted earnings per share as their effect would have been anti-dilutive.

(4) Proposed Merger with Austin HoldCo Inc., an entity wholly-owned by funds affiliated with Baring Private Equity Asia

On September 9, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Austin HoldCo Inc., an entity wholly-owned by funds affiliated with Baring Private Equity Asia (“Parent”), and Austin BidCo Inc., a wholly-owned subsidiary of Parent (“Sub”), with respect to the acquisition of the Company by Parent for $51.35 in cash for each share of Virtusa common stock.

Pursuant to the Merger Agreement, Sub will be merged with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Parent. Consummation of the Merger is subject to various conditions, including, among others, customary conditions relating to the approval of the Merger Agreement by the requisite vote of the Company’s stockholders, the receipt of certain foreign regulatory approvals and the approval or other clearance of the Committee on Foreign Investments in the United States (“CFIUS”). The applicable waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”), with respect to the transactions contemplated by the Merger Agreement expired on October 23, 2020 without any review. Consummation of the Merger is not subject to any financing condition, and is expected to occur in the first half of calendar year 2021. On December 21, 2020, the Company received written notice from the Committee on Foreign Investment in the United States (“CFIUS”) that it had concluded its review under Section 721 of the Defense Production Act of 1950, as amended, of the Merger. CFIUS determined that there are no unresolved national security concerns with respect to the Merger. Receipt of the CFIUS clearance satisfies a certain condition to the closing of the Merger. On November 20, 2020, via a special meeting

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of stockholders, the stockholders of the Company approved and adopted the Merger Agreement. On January 11, 2021, the Competition Commission of India (“CCI”) approved the Merger. The closing of the Merger remains subject to the satisfaction or waiver of the remaining conditions to the Merger set forth in the Merger Agreement.

The Company expects to incur significant costs, expenses and fees for professional services and other transaction costs in connection with the Merger. During the nine months ended December 31, 2020, the Company incurred approximately $6,367 as transaction costs in connection with the Merger. If the Merger Agreement is terminated under specified circumstances, the Company may be required to pay a termination fee of $54,330 to Austin HoldCo Inc.

(5) Business Combinations

During the fiscal year ended March 31, 2020, the Company acquired three individually immaterial businesses with an aggregate purchase price of $29,624 being paid at closing and a deferred consideration of $10,313 payable within a one-year period. The purchase price is also subject to adjustment after the closing of up to an additional $28,853 in contingent consideration, in the aggregate, upon the achievement of certain revenue and operating margin targets. The performance period for these targets are ranging from 12 months to 24 months from the respective acquisition date. These acquisitions enhanced the breadth and depth of digital offerings and expanded the Company’s relationship with certain existing customers.

Under the purchase method of accounting, assets acquired are recorded at their estimated fair values. During the nine months ended December 31, 2020, the Company completed its purchase price allocation for all of the three acquired businesses. During the nine months ended December 31, 2020, the Company paid $10,313 in deferred consideration and $4,051 in contingent consideration related to these acquisitions. During the nine months ended December 31, 2020, the Company recorded $5,942 as a reduction of goodwill related to updating the fair value assessment of contingent consideration of $4,178, customer relationships of $1,513 and other adjustments of $251.

The following table shows the aggregate purchase price allocation for these acquisitions:


	Amount		Useful Life
Consideration Transferred:
Cash paid at closing	$	29,624
Deferred consideration payable		10,313
Fair value of contingent consideration		20,786
Fair value of consideration		60,723
Less: Cash acquired		(477)
Total purchase price, net of cash acquired	$	60,246
Assets and Liabilities:
Cash and cash equivalents		477
Goodwill		21,374
Customer relationships		39,319	5 -7 years
Other net		(447)
Total purchase price	$	60,723

The primary items that generated goodwill for these acquisitions are the value of the acquired assembled workforce and other benefits expected to result from combining the acquired operations with those of the Company, neither of which qualify as a separate intangible asset.

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During the nine months ended December 31, 2020, the Company recorded $453 in the Company’s consolidated statements income as fair value changes to the contingent consideration related to events that occurred in the current period. As of December 31, 2020, the fair value of contingent consideration for these acquisitions is $16,405.

(6) Investment Securities

At December 31, 2020 and March 31, 2020, all of the Company’s investment securities were classified as time deposits, available-for-sale debt securities and equity securities. These were carried on its balance sheet at their fair market value. A fair market value hierarchy based on three levels of inputs was used to measure each security (See Note 7 to our consolidated financial statements for a discussion of the fair value of the Company’s other financial instruments).

The following is a summary of investment securities at December 31, 2020:


			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
Time Deposits:
Current	$	1,851	$	—	$	—	$	1,851
Equity securities:
Mutual funds:
Current		652		130		—		782
Equity Shares/ Options:
Non-current		1		21		—		22
Total investment securities	$	2,504	$	151	$	—	$	2,655

The following is a summary of investment securities at March 31, 2020:


			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
Time deposits:
Current	$	3,927	$	—	$	—	$	3,927
Equity securities:
Mutual funds:
Current		5,623		235		—		5,858
Equity Shares/ Options:
Non-current		1		3		—		4
Total investment securities	$	9,551	$	238	$	—	$	9,789

The Company evaluates available-for-sale debt securities with unrealized losses to determine whether a credit loss exists. The estimate of credit loss is determined by considering available information relevant to the collectability of the security and information about past events, current conditions, and reasonable and supportable forecasts. The allowance for credit loss is recorded as a charge to other income (expense), not to exceed the amount of the unrealized loss. Any excess unrealized loss greater than the credit loss is recognized in accumulated other comprehensive income ("AOCI"). We assess expected credit losses at the end of each reporting period and adjust the allowance through other income (expense). The Company does not hold any available-for-sale debt securities as of December 31, 2020 and March 31, 2020.

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


	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2020		2019		2020		2019
Proceeds from sales or maturities of available-for-sale debt securities and equity securities	$	649	$	9,476	$	7,217	$	47,716
Gross gains	$	—	$	123	$	176	$	563
Gross losses		—		—		—		—
Net realized gains on sales of available-for-sale debt securities and equity securities	$	—	$	123	$	176	$	563

(7) Fair Value of Financial Instruments

The Company carries certain assets and liabilities at fair value on a recurring basis on its consolidated balance sheets. The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis at December 31, 2020


	Level 1		Level 2		Level 3		Total
Assets:
Investments:
Time deposits—current	$	—	$	1,851		—	$	1,851
Equity securities—current		—		782		—		782
Equity securities—non-current		—		22		—		22
Derivative financial instruments:
Foreign currency derivative contracts—current		—		1,759		—		1,759
Foreign currency derivative contracts—non-current		—		—		—		—
Interest rate swap contracts		—		—		—		—
Total assets	$	—	$	4,414	$	—	$	4,414
Liabilities:
Foreign currency derivative contracts—current		—		1,186		—		1,186
Foreign currency derivative contracts—non-current		—		—		—		—
Interest rate swap contracts—non-current		—		8,884		—		8,884
Contingent consideration		—		—		16,405		16,405
Total liabilities	$	—	$	10,070	$	16,405	$	26,475

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The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis at March 31, 2020:


	Level 1		Level 2		Level 3		Total
Assets:
Investments:
Time deposits—current	$	—	$	3,927		—	$	3,927
Equity securities—current		—		5,858		—		5,858
Equity securities—non-current		—		4		—		4
Derivative financial instruments:
Foreign currency derivative contracts—current		—		103		—		103
Foreign currency derivative contracts—non-current		—		56		—		56
Interest rate swap contracts		—		—		—		—
Total assets	$	—	$	9,948	$	—	$	9,948
Liabilities:
Foreign currency derivative contracts—current	$	—		3,689	$	—		3,689
Foreign currency derivative contracts—non-current		—		364	$	—		364
Interest rate swap contracts—non-current		—		11,128		—		11,128
Contingent consideration		—		—		25,012		25,012
Total liabilities	$	—	$	15,181	$	25,012	$	40,193

The Company estimates the fair value of our contingent consideration associated with our business combinations utilizing one or more significant inputs that are unobservable. The Company calculates the fair value of the contingent consideration based on the probability-weighted expected performance of the acquired business against the target performance metric, discounted to present value when appropriate.

The following table shows a reconciliation of the beginning and ending balances of Level 3 contingent consideration liabilities associated with our business combinations:


	December 31, 2020
Beginning balance	$	25,012
Purchase price adjustments		(4,178)
Payments made during the period		(4,051)
Contingent consideration recognized in earnings		(453)
Foreign currency translation adjustments		75
Ending balance	$	16,405

(8) Derivative Financial Instruments

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

The U.S. dollar notional value of all outstanding foreign currency derivative contracts was $87,693 and $128,728, respectively, at December 31, 2020 and March 31, 2020. Unrealized net gains related to these contracts which are expected to be reclassified from AOCI to earnings during the next 12 months are $573 at December 31, 2020. At December 31, 2020, the maximum outstanding term of any derivative instrument was 12 months.

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The Company also uses interest rate swaps to mitigate the Company’s interest rate risk on the Company’s variable rate debt. The Company’s objective is to limit the variability of cash flows associated with changes in LIBOR interest rate payments due on the Credit Agreement (See Note 14 to the consolidated financial statements), by using pay-fixed, receive-variable interest rate swaps to offset the future variable rate interest payments. The Company will recognize these transactions in accordance with ASC 815 "Derivatives and Hedging," and have designated the interest rate swaps as cash flow hedges.

The Company purchased interest rate swaps in July 2016 with an effective date of July 2017 and in November 2018. The interest rate swaps purchased in July 2016 matured in July 2020. The November 2018 interest rate swap was entered into to mitigate the interest rate risk associated with the Credit Agreement executed in February 2018 and subsequent additional borrowings. The November 2018 interest rate swap is at a fixed rate of 2.85% and is designed to maintain a 50% coverage of our LIBOR debt, therefore the notional amount changes over the life of the interest rate swap to retain the 50% coverage target. During the three months ended September 30, 2020 and operating as designed, the 2018 interest rate swap increased to cover the notional amount of debt that the expired interest rate swaps had been covering. In addition, the Company conducted a simultaneous de-designation and a re-designation of the hedge for this interest rate swap to align with the May 2020 debt amendment and maintain a highly effective hedge relationship given the increase of the notional amount of the interest rate swap and in consideration of the increase in interest rate floor to 1%. At December 31, 2020, the total notional amounts of the interest rate swap was $170,200 with remaining maturity of approximately 2.2 years. As of the date of de-designation and re-designation, the unrealized losses associated with the interest rate swap of $10,864 will be amortized to interest expense over the remaining interest rate swap period. The unrealized losses associated with the interest rate swap agreement was $8,884 and $11,128 at December 31, 2020 and March 31, 2020, respectively, which represents the estimated amount that the Company would pay to the counterparties in the event of an early termination.

The following table sets forth the fair value of derivative instruments included in the consolidated balance sheets as of:

Derivatives designated as hedging instruments


	December 31, 2020		March 31, 2020
Foreign currency exchange contracts:
Other current assets	$	1,759	$	103
Other long-term assets	$	—	$	56
Accrued expenses and other	$	1,186	$	3,689
Long-term liabilities	$	—	$	364


	December 31, 2020		March 31, 2020
Interest rate swap contracts:
Other long-term assets	$	—	$	—
Long-term liabilities	$	8,884	$	11,128

The following tables set forth the effect of the Company’s foreign currency exchange contracts and interest rate swap contracts on the consolidated financial statements of the Company:


	Amount of Gain or (Loss) Recognized in AOCI on Derivatives
Derivatives Designated as	Three Months Ended December 31,				Nine Months Ended December 31,
Cash Flow Hedging Relationships	2020		2019		2020		2019
Foreign currency exchange contracts	$	(338)	$	(3,158)	$	2,707	$	148
Interest rate swaps	$	(11)	$	782	$	(747)	$	(3,054)

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Location of Gain or (Loss) Reclassified	Amount of Gain or (Loss) Reclassified from AOCI into Income
from AOCI into Income (loss) (Effective	Three Months Ended December 31,				Nine Months Ended December 31,
Portion)	2020		2019		2020		2019
Revenue	$	—	$	—	$	—	$	(18)
Costs of revenue	$	(199)	$	827	$	(1,276)	$	2,351
Operating expenses	$	(72)

VIRTUSA CORP 10-Q