VIRTUSA CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion of the financial condition and results of operations of Virtusa Corporation should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2012 (the "Annual Report"), which has been filed with the Securities and Exchange Commission, or SEC.

Forward looking statements The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended) that involve risks and uncertainties. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as "believes," "expects," "may," "will," "should" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. These forward-looking statements, such as statements regarding anticipated future revenue, contract percentage completions, capital expenditures, management's plans and objectives and other statements regarding matters that are not historical facts, involve predictions.

Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. There are a number of important factors that could cause our results to differ materially from those indicated by such forward-looking statements, including those factors set forth in Item 1A. "Risk Factors" in the Annual Report on Form 10-K for the fiscal year ended March 31, 2012. We urge you to consider those risks and uncertainties in evaluating our forward-looking statements. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Business overview Virtusa Corporation (the "Company", "Virtusa", "we", "us" or "our") is a global information technology services company. We use an offshore delivery model to provide a broad range of information technology ("IT") services, including IT consulting, technology implementation and application outsourcing. Using our enhanced global delivery model, innovative platforming approach and industry expertise, we provide cost-effective services that enable our clients to use IT to enhance business performance, accelerate time-to-market, increase productivity and improve customer experience. We manage to a targeted 25% to 75% onsite-to-offshore service delivery mix, although such delivery mix may be impacted by several factors, including our new and existing client delivery requirements as well as the impact of any acquisitions. Headquartered in Massachusetts, we have offices in the United States, the United Kingdom, the Netherlands, Germany and Singapore and global delivery centers in Hyderabad, Chennai and Bangalore, India, Colombo, Sri Lanka and Budapest, Hungary. At December 31, 2012, we had 6,524 employees, or team members.

In the three months ended December 31, 2012, our revenue increased by 20% to $86.5 million, compared to $72.2 million in the three months ended December 31, 2011. In the nine months ended December 31, 2012, our revenue increased by 19% to $243.2 million, compared to $203.5 million in the nine months ended December 31, 2011.

In the three months ended December 31, 2012, net income increased by 32% to $7.4 million, as compared to $5.6 million in the three months ended December 31, 2011. Net income increased by 36% to $19.3 million in the nine months ended December 31, 2012, as compared to $14.2 million in the nine months ended December 31, 2011.

The increase in revenue for the three and nine months ended December 31, 2012, as compared to the three and nine months ended December 31, 2011, primarily resulted from: † Higher revenue contribution from our clients existing as of December 31, 2011, including our top ten clients collectively and, for the nine months ended December 31, 2012, clients obtained in connection with the acquisition of ALaS Consulting LLC ("ALaS") in July 2011 † Broad based revenue growth from all of our industry groups, led by clients in our banking, financial services and insurance ("BFSI") industry group The key drivers of the increase in our net income for the three and nine months ended December 31, 2012, as compared to the three and nine months ended December 31, 2011, were as follows: 16 -------------------------------------------------------------------------------- Table of Contents † Higher revenue contribution from new and existing clients † Increase in operating profit due to increased operating efficiencies, partially offset by higher costs related to an increased percentage of onsite work, annual compensation increases and an increased use of subcontractors.

High repeat business and client concentration are common in our industry. During the three months ended December 31, 2012 and 2011, 89% of our revenue was derived from clients who had been using our services for more than one year.

During the nine months ended December 31, 2012 and 2011, 90% of our revenue was derived from clients who had been using our services for more than one year.

Accordingly, our global account management and service delivery teams focus on expanding client relationships and converting new engagements to long-term relationships to generate repeat revenue and expand revenue streams from existing clients.

We derive our revenue from two types of service offerings; application outsourcing, which is recurring in nature, and consulting, including technology implementation, which is non-recurring in nature. For the three months ended December 31, 2012, our application outsourcing and consulting revenue represented 58% and 42%, respectively, of our total revenue as compared to 52% and 48%, respectively, for the three months ended December 31, 2011. For the nine months ended December 31, 2012, our application outsourcing and consulting revenue represented 58% and 42%, respectively, of our total revenue as compared to 53% and 47%, respectively, for the nine months ended December 31, 2011.

In the three months ended December 31, 2012, our European revenue increased by 38%, or $4.6 million, to $16.9 million, or 20% of total revenue, from $12.2 million, or 17% of total revenue in the three months ended December 31, 2011. In the nine months ended December 31, 2012, our European revenue increased by 25%, or $8.8 million, to $44.0 million, or 18% of total revenue, from $35.2 million, or 17% of total revenue, in the nine months ended December 31, 2011. The increase for the three and nine months ended December 31, 2012 is primarily due to the strength of new European clients engaged by our German subsidiary.

Our gross profit increased by $4.9 million to $30.8 million for the three months ended December 31, 2012, as compared to $25.9 million in the three months ended December 31, 2011. Our gross profit increased by $11.1 million to $85.0 million for the nine months ended December 31, 2012 as compared to $73.9 million in the nine months ended December 31, 2011. The increase in gross profit during the three and nine months ended December 31, 2012, as compared to the three and nine months ended December 31, 2011, was primarily due to higher revenue, partially offset by increased cost of revenue, which includes increases in the number of IT professionals, annual compensation increases, higher costs related to an increased percentage of onsite work and an increased use of subcontractors. As a percentage of revenue, gross margin was 35.6% and 35.9% in the three months ended December 31, 2012 and 2011, respectively. During the nine months ended December 31, 2012 and 2011, gross margin, as a percentage of revenue, was 35.0% and 36.3%, respectively. The decrease in gross margin for the three and nine months ended December 31, 2012 was primarily due to higher costs related to an increased percentage of onsite work and increased use of subcontractors.

We perform our services under both time-and-materials and fixed-price contracts.

Revenue from fixed-price contracts represented 19% and 17% respectively of total revenue in the three and nine months ended December 31, 2012, respectively, as compared to 16% and 18% of total revenue for the three and nine months ended December 31, 2011, respectively. The revenue earned from fixed-price contracts in the three and nine months ended December 31, 2012 primarily reflects our client preferences.

Over the last few fiscal years, we have also supplemented organic revenue growth with acquisitions. These acquisitions have focused on adding domain expertise, expanding our professional services teams and expanding our client base. We expect that for our long-term growth, we will continue to seek evolving market opportunities through a combination of organic growth and acquisitions. We believe we can fund future acquisitions with our internally available cash, cash equivalents and marketable securities, cash generated from operations, or through debt or equity financings, although we cannot assure you that any such additional financing will be available at terms favorable to us, or at all.

As an IT services company, our revenue growth is highly dependent on our ability to attract, develop, motivate and retain skilled IT professionals. We monitor our overall attrition rates and patterns to align our people management strategy with our growth objectives. At December 31, 2012, our attrition rate for the trailing 12 months, which reflects voluntary and involuntary attrition, was 16.5%. Our attrition rate at December 31, 2012 reflects a lower rate of voluntary attrition as compared to the corresponding prior year period and is approaching our long-term goal. Although we remain committed to continuing to improve our attrition levels, there is intense competition for IT professionals with the specific domain skills necessary to provide the type of services we offer. If our attrition rate increases or is sustained at higher levels, our growth may slow and our cost of attracting and retaining IT professionals could increase.

We engage in a foreign currency hedging strategy using foreign currency forward contracts designed to hedge fluctuation in the Indian rupee and Sri Lankan rupee against the U.S. dollar and U.K. pound sterling, as well as the U.K. pound sterling against the 17 -------------------------------------------------------------------------------- Table of Contents U.S. dollar, to reduce the effect of change in these foreign currency exchange rate changes on our foreign operations and intercompany balances. There is no assurance that these hedging programs or hedging contracts will be effective.

Because these foreign currency forward contracts are designed to reduce volatility in the Indian rupee and U.K. pound sterling exchange rates, they not only reduce the negative impact of a stronger Indian rupee and weaker U.K. pound sterling but also could reduce the positive impact of a weaker Indian rupee and stronger U.K. pound sterling on our Indian rupee expenses and U.K. pound sterling denominated revenue. In addition, to the extent that these hedges do not qualify for hedge accounting, we may have to recognize gains or losses on the aggregate amount of hedges placed earlier and in larger amounts than expected.

Application of critical accounting estimates and risks The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including the recoverability of tangible assets, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, in particular those related to the recognition of revenue and profits based on the percentage of completion method of accounting for fixed-price contracts, share-based compensation, income taxes, including reserves for uncertain tax positions, deferred taxes and liabilities and valuation of financial instruments including derivative contracts and investments. Actual amounts could differ significantly from these estimates. Our management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of revenue and expenses that are not readily apparent from other sources. Additional information about these critical accounting policies may be found in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section included in the Annual Report.

Results of operations Three months ended December 31, 2012 compared to the three months ended December 31, 2011 The following table presents an overview of our results of operations for the three months ended December 31, 2012 and 2011: Three Months Ended December 31, $ % (dollars in thousands) 2012 2011 Change Change Revenue $ 86,474 $ 72,184 14,290 19.8 % Costs of revenue 55,698 46,271 9,427 20.4 % Gross profit 30,776 25,913 4,863 18.8 % Operating expenses 21,634 19,335 2,299 11.9 % Income from operations 9,142 6,578 2,564 39.0 % Other income (expense) 574 780 (206 ) (26.4 )% Income before income tax expense 9,716 7,358 2,358 32.0 % Income tax expense 2,312 1,764 548 31.1 % Net income $ 7,404 $ 5,594 1,810 32.4 % Revenue Revenue increased by 19.8%, or $14.3 million, from $72.2 million during the three months ended December 31, 2011 to $86.5 million in the three months ended December 31, 2012. The increase in revenue was primarily driven by higher revenue contribution from our clients existing as of December 31, 2011 and also the result of continued broad based revenue growth from all of our industry groups, led by growth in our BFSI industry group. Revenue from North American clients in the three months ended December 31, 2012 increased by $8.2 million, or 14.5%, as compared to the three months ended December 31, 2011, due to expansion of our existing clients including our top ten clients. Revenue from European clients increased by $4.6 million, or 37.9%, as compared to the three months ended December 31, 2011. We had 92 active clients at December 31, 2012, as compared to 88 active clients at December 31, 2011.

18 -------------------------------------------------------------------------------- Table of Contents Costs of revenue Costs of revenue increased from $46.3 million in the three months ended December 31, 2011 to $55.7 million in the three months ended December 31, 2012, an increase of $9.4 million, or 20.4%. The increase in cost of revenue was primarily driven by an increase of $5.4 million in compensation costs for our IT professionals, including annual compensation increases. At December 31, 2012, we had 5,999 IT professionals as compared to 5,086 at December 31, 2011. In addition, we incurred increased subcontractor costs of $3.4 million in the three months ended December 31, 2012, as compared to the three months ended December 31, 2011, primarily due to an increase in onsite work. We also incurred hedging losses of $1.1 million during the three months ended December 31, 2012 compared to $0.7 million in hedging losses during the three months ended December 31, 2011.

As a percentage of revenue, cost of revenue increased from 64.1% for the three months ended December 31, 2011 to 64.4% for three months ended December 31, 2012. This was due primarily to a higher percentage of our services performed onsite, offset by a higher utilization rate for our IT professionals of 78% for the three months ended December 31, 2012 compared to a utilization rate of 77% for the three months ended December 31, 2011.

Gross profit Our gross profit increased by $4.9 million, or 18.8%, to $30.8 million for the three months ended December 31, 2012 as compared to $25.9 million for the three months ended December 31, 2011 due to a higher revenue base, partially offset by increased costs related to a higher percentage of our services being performed onsite and increased subcontractor costs. As a percentage of revenue, our gross profit was 35.6% and 35.9% in the three months ended December 31, 2012 and 2011, respectively.

Operating expenses Operating expenses increased from $19.3 million in the three months ended December 31, 2011 to $21.6 million in the three months ended December 31, 2012, an increase of $2.3 million, or 11.9%. The increase in our operating expenses in the three months ended December 31, 2012 was primarily due to an increase of $0.8 million in compensation expense, a $0.4 million increase in travel expenses, and a $0.6 million increase in facility expenses . As a percentage of revenue, our operating expenses decreased to 25.0% in the three months ended December 31, 2012 as compared to 26.8% in the three months ended December 31, 2011. This decrease was primarily due to increased operating efficiencies leveraged over a larger revenue base.

Income from operations Income from operations increased by 39.0%, from $6.6 million in the three months ended December 31, 2011 to $9.1 million in the three months ended December 31, 2012. As a percentage of revenue, income from operations increased from 9.1% in the three months ended December 31, 2011 to 10.6% in the three months ended December 31, 2012, primarily due to increased operating efficiencies leveraged over a larger revenue base.

Other income (expense) Other income (expense) decreased from an income of $0.8 million in the three months ended December 31, 2011 to $0.6 million in the three months ended December 31, 2012. This decrease is primarily attributed to an increase of foreign currency transaction losses in the three months ended December 31, 2012 of $0.2 million, as compared to $0.2 million in foreign currency transaction gains in the three months ended December 31, 2011.

Income tax expense Income tax expense increased by $0.5 million, from $1.8 million in the three months ended December 31, 2011 to $2.3 million in the three months ended December 31, 2012. Our effective tax rate decreased from 24.0% for the three months ended December 31, 2011 to 23.8% for the three months ended December 31, 2012. The decrease in the effective tax rate was primarily driven by income tax expense related to discrete tax items in the three month period ended December 31, 2011 as compared to the three months ended December 31, 2012. The increase in income tax expense of $0.5 million reflects increased taxable income in the three months ended December 31, 2012.

Net income Net income increased by 32.4%, from $5.6 million in the three months ended December 31, 2011 to $7.4 million in the three months ended December 31, 2012 due primarily to higher operating profits.

19 -------------------------------------------------------------------------------- Table of Contents Nine months ended December 31, 2012 compared to the nine months ended December 31, 2011 The following table presents an overview of our results of operations for the nine months ended December 31, 2012 and 2011: Nine Months Ended December 31, $ % (dollars in thousands) 2012 2011 Change Change Revenue $ 243,226 $ 203,540 39,686 19.5 % Costs of revenue 158,194 129,648 28,546 22.0 % Gross profit 85,032 73,892 11,140 15.1 % Operating expenses 61,593 57,060 4,533 7.9 % Income from operations 23,439 16,832 6,607 39.3 % Other income 2,057 1,625 432 26.6 % Income before income tax expense 25,496 18,457 7,039 38.1 % Income tax expense 6,189 4,220 1,969 46.7 % Net income $ 19,307 $ 14,237 5,070 35.6 % Revenue Revenue increased by 19.5%, or $39.7 million, from $203.5 million during the nine months ended December 31, 2011 to $243.2 million in the nine months ended December 31, 2012. The increase in revenue was primarily driven by higher revenue contribution from our clients existing as of December 31, 2011. The increase in revenue was also the result of continued broad based revenue growth from all of our industry groups, led by growth in our BFSI industry group.

Revenue from North American clients increased 18.1%, or $28.9 million, in the nine months ended December 31, 2012, as compared to the nine months ended December 31, 2011 due to higher revenue contribution from our clients existing at December 31, 2011, including our top ten clients collectively and clients obtained in connection with the acquisition of ALaS in July 2011. Revenue from European clients increased 25.0%, or $8.8 million, in the nine months ended December 31, 2012, as compared to the nine months ended December 31, 2011, due to revenue contribution from clients added in the twelve months ended December 31, 2012 as well as additional revenue contributions from existing clients. We had 92 active clients at December 31, 2012 as compared to 88 active clients at December 31, 2011.

Costs of revenue Costs of revenue increased from $129.6 million in the nine months ended December 31, 2011 to $158.2 million in the nine months ended December 31, 2012, an increase of $28.6 million, or 22.0%. The increase in costs of revenue was primarily driven by an increase of $13.3 million in compensation costs for our IT professionals, including annual compensation increases, as compared to the nine months ended December 31, 2011. At December 31, 2012, we had 5,999 IT professionals as compared to 5,086 IT professionals at December 31, 2011. In addition, there were increased travel costs of $2.1 million, professional services costs of $0.4 million and subcontractor costs of $9.0 million in the nine months ended December 31, 2012 as compared to the nine months ended December 31, 2011 primarily due to an increase in onsite work. We also incurred hedging losses of $3.9 million during the nine months ended December 31, 2012 compared to $0.2 million in hedging losses during the nine months ended December 31, 2011. As a percentage of revenue, cost of revenue increased from 63.7% for the nine months ended December 31, 2011 to 65.0% for nine months ended December 31, 2012.

Gross profit Our gross profit increased by $11.1 million, or 15.1%, to $85.0 million for the nine months ended December 31, 2012, as compared to $73.9 million in the nine months ended December 31, 2011, due to a higher revenue base, partially offset by an increased number of IT professionals, annual compensation increases, increased subcontractor costs and higher costs related to increased onsite work.

As a percentage of revenue, gross profit was 35.0% and 36.3% in the nine months ended December 31, 2012 and 2011, respectively.

Operating expenses Operating expenses increased from $57.1 million in the nine months ended December 31, 2011 to $61.6 million in the nine months ended December 31, 2012, an increase of $4.5 million, or 7.9%. The increase in our operating expenses in the nine months ended December 31, 2012 resulted primarily from an increase of $1.8 million in compensation expenses and an $0.8 million increase in travel expenses. We also incurred hedging losses of $2.1 million during the nine months ended December 31, 2012 compared to a 20 -------------------------------------------------------------------------------- Table of Contents $0.1 million in hedging losses during the nine months ended December 31, 2011.

As a percentage of revenue, our operating expenses decreased from 28.0% in the nine months ended December 31, 2011 to 25.3% in the nine months ended December 31, 2012, due to leveraging operating efficiencies over a higher revenue base.

Income from operations Income from operations increased by 39.3%, from $16.8 million in the nine months ended December 31, 2011 to $23.4 million in the nine months ended December 31, 2012. As a percentage of revenue, income from operations increased from 8.3% in the nine months ended December 31, 2011 to 9.6% in the nine months ended December 31, 2012, primarily due to growth in revenue and increased operating efficiencies.

Other income (expense) Other income (expense) increased from an income of $1.6 million in the nine months ended December 31, 2011 to an income of $2.1 million in the nine months ended December 31, 2012. The increase is primarily attributed to an increase in interest income of $0.5 million.

Income tax expense Income tax expense increased by $2.0 million from $4.2 million in the nine months ended December 31, 2011 to $6.2 million in the nine months ended December 31, 2012. Our effective tax rate increased from 22.9% for the nine months ended December 31, 2011 to 24.3% for the nine months ended December 31, 2012. The increase in income tax expense of $2.0 million reflects increased taxable income in the nine months ended December 31, 2012 and a higher effective tax rate driven by our geographical mix of profits.

Net income Net income increased by 35.6%, or $5.1 million, from $14.2 million in the nine months ended December 31, 2011 to $19.3 million in the nine months ended December 31, 2012 due primarily to higher operating profits and increases in other income.

Liquidity and capital resources We have financed our operations from sales of shares of equity securities, including common stock, and from cash from operations. We have not borrowed against our existing or preceding credit facilities.

In May 2012, our board of directors authorized a share repurchase program of up to $15.0 million of our common stock over a 12 month period from the approval date, subject to certain price and other trading restrictions. During the three months ended December 31, 2012, we did not purchase any shares of our common stock. During the nine months ended December 31, 2012, we purchased 97,315 shares of our common stock for an aggregate purchase price of approximately $1,406 (excluding commissions). (See Part II, Item 2 of this Quarterly Report on Form 10-Q). As of October 15, 2012, our board of directors suspended the share repurchase program.

On July 1, 2011, we acquired substantially all of the assets of ALaS for the purchase price of approximately $27.8 million in cash, 10% of which was held back by us for a period of 12 months as security for the indemnification obligations of ALaS and its members. In July 2012, we released $2.8 million to ALaS and its members with respect to the holdback plus interest and retained $16,000 to satisfy certain indemnification obligations. This resulted in a decrease to short-term restricted cash of $2.8 million.

On July 30, 2010, we entered into a $3.0 million credit agreement with J.P.

Morgan Chase Bank, N.A. ("JPMC") which expires on July 31, 2013. The primary purpose of this credit agreement is to support our foreign currency hedging programs. The credit agreement is secured by a grant of a security interest in our U.S. assets in favor of JPMC as well as other collateral. The agreement contains financial and reporting covenants and limitations. At December 31, 2012, there were no amounts outstanding under this credit agreement and we are in compliance with all covenants.

At December 31, 2012, a significant portion of our cash and short-term investments was held by our foreign subsidiaries. We continually monitor our cash needs and employ tax planning and financing strategies to ensure cash is available in the appropriate jurisdictions to meet operating needs. The cash held by our foreign subsidiaries is considered indefinitely reinvested in local operations. If required, it could be repatriated to the United States. However, under current law, any repatriation would be subject to United States federal income tax less applicable foreign tax credits.

Beginning in fiscal 2009, our U.K. subsidiary entered into an agreement with an unrelated financial institution to sell, without recourse, certain of its Europe-based accounts receivable balances from one client to the financial institution. During the nine months ended December 31, 2012, we sold $7.6 million of receivables under the terms of the financing agreement. Fees paid pursuant to this 21 -------------------------------------------------------------------------------- Table of Contents agreement were not material during the three and nine months ended December 31, 2012. No amounts were due under the financing agreement at December 31, 2012, but we may elect to use this program again in future periods. However, we cannot provide any assurances that this or any other financing facilities will be available or utilized in the future.

Anticipated capital expenditures We are constructing a facility as part of a planned campus on a 6.3 acre site in Hyderabad, India. We intend to continue the construction and build out of this facility, which, when completed over the next two fiscal years ending March 31, 2014, will be approximately 325,000 square feet, at a total estimated cost of $27.5 million. Of this amount, we have spent $24.6 million as of December 31, 2012 towards the completion of this facility, with approximately $0.2 million spent during the nine months ended December 31, 2012. We do not anticipate making additional expenditures during the remainder of the fiscal year ending March 31, 2013. Other capital expenditures during the nine months ended December 31, 2012 were approximately $8.3 million. We expect other capital expenditures in the normal course of business during the remainder of the fiscal year ending March 31, 2013 to be approximately $3.2 million, primarily for leasehold improvements, capital equipment and purchased software.

Cash flows The following table summarizes our cash flows for the periods presented: Nine Months Ended December 31, (in thousands) 2012 2011 Net cash provided by operating activities $ 23,680 $ 9,765 Net cash used for investing activities (16,508 ) (8,297 ) Net cash used for financing activities (1,719 ) (812 ) Effect of exchange rate changes on cash (935 ) (1,939 ) Net increase (decrease) in cash and cash equivalents 4,518 (1,283 ) Cash and cash equivalents, beginning of period 58,105 50,218 Cash and cash equivalents, end of period $ 62,623 $ 48,935 Net cash provided by operating activities Net cash provided by operating activities was $23.7 million during the nine months ended December 31, 2012 as compared to $9.8 million during the nine months ended December 31, 2011. This increase was primarily attributable to an increase in net income of $5.1 million, an increased change in accounts receivable, net of $6.4 million, an increased change in other long-term assets and liabilities of $4.1 million and an increased change in accounts payable of $3.1 million. These were partially offset by a decreased change due to payments in accrued employee compensation by $4.1 million and a decreased change in prepaid expenses and other current assets of $1.1 million.

Net cash used for investing activities Net cash used for investing activities was $16.5 million during the nine months ended December 31, 2012 as compared to $8.3 million during the nine months ended December 31, 2011. The change was primarily due to the net decreases in the proceeds of investments of $37.3 million. These decreases were partially offset by a reduction in cash used for the business acquisition of ALaS of $22.3 million, a decrease in the change in restricted cash of $5.1 million, which includes the $2.8 million holdback related to the ALaS acquisition and a decrease in purchase of property and equipment of $1.7 million.

Net cash used for financing activities Net cash used for financing activities was $1.7 million during the nine months ended December 31, 2012, as compared to $0.8 million during the nine months ended December 31, 2011. The increase in cash used is primarily due to the repurchase of shares of our common stock of $1.4 million under our stock repurchase program, a decrease in proceeds from the exercise of common stock options of $1.1 million, partially offset by reduction in payment of contingent consideration of $1.6 million in connection with the ConVista acquisition.

Off-balance sheet arrangements We do not have investments in special purpose entities or undisclosed borrowings or debt.

22 -------------------------------------------------------------------------------- Table of Contents We have a foreign currency cash flow hedging program designed to mitigate the risks of volatility in the Indian rupee against the U.S. dollar and U.K. pound sterling as described below in "Qualitative and Quantitative Disclosures About Market Risk." The program contemplates a partially hedged position of the Indian rupee for a rolling eight-quarter period. From time to time, we may also purchase multiple foreign currency forward contracts designed to hedge fluctuation in foreign currencies, such as the U.K. pound sterling against the U.S. dollar, and multiple foreign currency hedges designed to hedge foreign currency transaction gains and losses on our intercompany balances. Other than these foreign currency derivative contracts, we have not entered into off-balance sheet transactions, arrangements or other relationships with unconsolidated entities or other persons that are likely to affect liquidity or the availability of or requirements for capital resources.

Recent accounting pronouncements In July 2012, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2012-02, "Testing Indefinite-Lived Intangible Assets for Impairment" in order to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance. The new guidance allows an entity the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should then perform a quantitative impairment test. ASU No. 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 and earlier adoption is permitted. We do not expect the adoption of this guidance to have a material impact on the consolidated financial statements of the Company.

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