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VIRTUSA CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[January 31, 2014]

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, 2013 (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, 2013. 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 enhanced global delivery model to provide end-to-end information technology ("IT") services to Global 2000 companies. These services, which include IT and business consulting, technology implementation, application support and maintenance, development, systems integration and managed services, leverage our unique platforming methodology that transforms our clients' businesses through IT rationalization.

Our services enable our clients to accelerate business outcomes by consolidating, rationalizing, and modernizing our clients' 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, and our consulting methodology, Accelerated Solution Design ("ASD"), which is a collaborative decision-making and design process that ensures our solutions meet the clients' specifications and requirements. We have targeted our solution offerings to help our clients improve the efficiency of running their business and to enable them to grow their business. 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, Sweden, Germany, Austria, and Singapore and global delivery centers in Hyderabad, Chennai, Bangalore and Pune, India, Colombo, Sri Lanka, Budapest, Hungary, Kuala Lumpur, Malaysia and Manila, Philippines. At December 31, 2013, we had 7,527 employees, or team members.

In the three months ended December 31, 2013, our revenue increased by 17% to $101.0 million, compared to $86.5 million in the three months ended December 31, 2012. In the nine months ended December 31, 2013, our revenue increased by 18% to $285.8 million, compared to $243.2 million in the nine months ended December 31, 2012.

In the three months ended December 31, 2013, net income increased by 26% to $9.3 million, as compared to $7.4 million in the three months ended December 31, 2012. Net income increased by 26% to $24.3 million in the nine months ended December 31, 2013, as compared to $19.3 million in the nine months ended December 31, 2012.

The increase in revenue for the three and nine months ended December 31, 2013, as compared to the three and nine months ended December 31, 2012, primarily resulted from: † Broad based revenue growth among our clients existing at December 31, 2012 19 -------------------------------------------------------------------------------- Table of Contents † Broad based revenue growth from our financial services and insurance and communication and technology industry groups † Increased revenue growth from our non-top ten clients † Broad based growth in all geographies, led by Europe The key drivers of the increase in our net income for the three and nine months ended December 31, 2013, as compared to the three and nine months ended December 31, 2012, were as follows: † Higher revenue contribution from existing clients † Increase in gross profit, which also reflects lower costs due to the depreciation of the Indian rupee, partially offset by higher operating costs including an increased investment in our sales and business development organization and facilities to support our growth, amortization and increased professional services related to acquisitions † Partially offset by increased income tax expense related to higher taxable profits High repeat business and client concentration are common in our industry. During the three months ended December 31, 2013 and 2012, 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, 2013 and 2012, 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, 2013, our application outsourcing and consulting revenue represented 55% and 45% respectively, of our total revenue as compared to 58% and 42%, respectively, for the three months ended December 31, 2012. For the nine months ended December 31, 2013, our application outsourcing and consulting revenue represented 56% and 44%, respectively, of our total revenue as compared to 58% and 42%, respectively, for the nine months ended December 31, 2012.

In the three months ended December 31, 2013, our European revenue increased by 48%, or $8.0 million, to $24.9 million, or 25% of total revenue, from $16.9 million, or 20% of total revenue in the three months ended December 31, 2012. In the nine months ended December 31, 2013, our European revenue increased by 47%, or $20.6 million, to $64.7 million, or 23% of total revenue, from $44.1 million, or 18% of total revenue, in the nine months ended December 31, 2012. The increase for the three and nine months ended December 31, 2013 is primarily due to broad based growth in our clients existing as of December 31, 2012, particularly in our communications industry group lead by our largest European client.

Our gross profit increased by $6.4 million to $37.2 million for the three months ended December 31, 2013, as compared to $30.8 million in the three months ended December 31, 2012. Our gross profit increased by $18.7 million to $103.7 million for the nine months ended December 31, 2013 as compared to $85.0 million in the nine months ended December 31, 2012. The increase in gross profit during the three and nine months ended December 31, 2013, as compared to the three and nine months ended December 31, 2012 was primarily due to higher revenue, partially offset by increased cost of revenue related to the growth in the number of IT professionals, which also reflects lower costs due to the depreciation of the Indian rupee. As a percentage of revenue, gross margin was 36.8% and 35.6% in the three months ended December 31, 2013 and 2012, respectively. During the nine months ended December 31, 2013 and 2012, gross margin, as a percentage of revenue, was 36.3% and 35.0%, respectively. The increase in gross margin for the three and nine months ended December 31, 2013 was primarily due to higher utilization and depreciation of the Indian rupee.

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

Revenue from fixed-price contracts represented 31% and 19% of total revenue and revenue from time-and-materials contracts represented 69% and 81% for the three months ended December 31, 2013 and 2012, respectively. Revenue from fixed-price contracts represented 27% and 17% of total revenue and revenue from time-and-materials contracts represented 73% and 83% for the nine months ended December 31, 2013 and 2012, respectively. The increase in revenue earned from fixed-price contracts in the three and nine months ended December 31, 2013 primarily reflects our client preferences as well as our strategic effort to perform large application outsourcing services on a fixed price basis.

From time to time, 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. For instance, we acquired the business and assets of OSB Consulting LLC, a New Jersey limited liability company ("OSB") on November 1, 2013 to extend our service offerings to include a broader set of finance transformation services in the financial services and insurance domains, to existing and new clients. On January 2, 2014, we acquired TradeTech Consulting Scandinavia AB and its subsidiaries ("TradeTech") to expand our position within the banking, financial services 20 -------------------------------------------------------------------------------- Table of Contents and insurance industries by increasing our asset management and treasury services domain and technology expertise, as well as expanding our global presence into the Nordics. 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. For instance, on December 31, 2013, we entered into an amended and restated credit agreement with JPM which provided for a $25.0 million secured credit facility. We borrowed $20.0 million from this facility to fund our acquisition of TradeTech which closed on January 2, 2014. Then, on January 14, 2014, we completed our underwritten public offering of 2,645,000 shares of our common stock for net proceeds of approximately $86.2 million, which included an additional 345,000 shares sold upon the exercise of a 30-day over-allotment option which we had granted to the underwriters. We used a portion of these proceeds to repay outstanding borrowings of $20.0 million under our secured credit facility with JPM. The remaining proceeds from our offering will be used for general corporate purposes, which may include, among other things, financing of possible acquisitions, working capital and/or capital expenditures, including facilities expansion.

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, 2013, our attrition rate for the trailing 12 months, which reflects voluntary and involuntary attrition, was approximately 19.4%. Our attrition rate at December 31, 2013 reflects a slightly higher rate of voluntary attrition as compared to the corresponding prior year period and is slightly above 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 fluctuations 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 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 or 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, 2013 compared to the three months ended December 31, 2012 The following table presents an overview of our results of operations for the three months ended December 31, 2013 and 2012: Three Months Ended December 31, $ % (dollars in thousands) 2013 2012 Change Change Revenue $ 101,043 $ 86,474 $ 14,569 16.8 % Costs of revenue 63,821 55,698 8,123 14.6 % Gross profit 37,222 30,776 6,446 20.9 % Operating expenses 26,026 21,634 4,392 20.3 % Income from operations 11,196 9,142 2,054 22.5 % Other income (expense) 1,155 574 581 101.2 % Income before income tax expense 12,351 9,716 2,635 27.1 % Income tax expense 3,023 2,312 711 30.8 % Net income $ 9,328 $ 7,404 $ 1,924 26.0 % 21 -------------------------------------------------------------------------------- Table of Contents Revenue Revenue increased by 16.8%, or $14.5 million, from $86.5 million during the three months ended December 31, 2012 to $101.0 million in the three months ended December 31, 2013. The increase in revenue was primarily driven by higher revenue contribution from our clients existing as of December 31, 2012 as well as the result of continued broad based revenue growth led by clients in our financial services and insurance, and communication and technology, industry groups. Revenue from North American clients in the three months ended December 31, 2013 increased by $5.5 million, or 8.4%, as compared to the three months ended December 31, 2012, due to expansion of our existing clients.

Revenue from European clients increased by $8.0 million, or 47.6%, as compared to the three months ended December 31, 2012, led by growth in our largest European client. We had 95 active clients at December 31, 2013, as compared to 92 active clients at December 31, 2012.

Costs of revenue Costs of revenue increased from $55.7 million in the three months ended December 31, 2012 to $63.8 million in the three months ended December 31, 2013, an increase of $8.1 million, or 14.6%, which reflects a benefit of $2.4 million due to the depreciation of the Indian rupee. The increase in costs of revenue was primarily driven by an increase of $8.1 million in compensation costs for our IT professionals, which reflects in part annual compensation increases and an increase in travel expense of $0.5 million. This was partially offset by a decrease in sub-contractor costs of $1.2 million. At December 31, 2013, we had 6,817 IT professionals as compared to 5,999 at December 31, 2012.

As a percentage of revenue, costs of revenue decreased from 64.4% for the three months ended December 31, 2012 to 63.2% for three months ended December 31, 2013. This was due primarily to a higher utilization rate for our IT professionals for the three months ended December 31, 2013 as compared to the three months ended December 31, 2012.

Gross profit Our gross profit increased by $6.4 million, or 20.9%, to $37.2 million for the three months ended December 31, 2013 as compared to $30.8 million for the three months ended December 31, 2012 due to higher revenue, partially offset by increased cost of revenue related to the growth in the number of IT professionals, which also reflects lower costs due to the depreciation of the Indian rupee. As a percentage of revenue, our gross profit was 36.8% and 35.6% in the three months ended December 31, 2013 and 2012, respectively.

Operating expenses Operating expenses increased from $21.6 million in the three months ended December 31, 2012 to $26.0 million in the three months ended December 31, 2013, an increase of $4.4 million, or 20.3%, which also reflects a foreign currency benefit of $1.3 million due to the depreciation of the Indian rupee. The increase in our operating expenses in the three months ended December 31, 2013 was primarily due to an increase of $2.4 million in compensation expense related to an increase in the number of our team members, including an increased number of sales and business development personnel, a $0.7 million increase in facility expenses and a $0.7 million increase in professional fees. As a percentage of revenue, our operating expenses increased to 25.8% in the three months ended December 31, 2013 as compared to 25.0% in the three months ended December 31, 2012.

Income from operations Income from operations increased by 22.5%, from $9.1 million in the three months ended December 31, 2012 to $11.2 million in the three months ended December 31, 2013. As a percentage of revenue, income from operations increased from 10.6% in the three months ended December 31, 2012 to 11.1% in the three months ended December 31, 2013.

22 -------------------------------------------------------------------------------- Table of Contents Other income (expense) Other income (expense) increased from $0.6 million in the three months ended December 31, 2012 to $1.2 million in the three months ended December 31, 2013.

This increase is primarily attributed $0.2 million of interest income reflecting an increase in cash collections and reduction in days sales outstanding and an increase of foreign currency transaction gains of $0.3 million during the three months ended December 31, 2013 compared to the three months ended December 31, 2012.

Income tax expense Income tax expense increased by $0.7 million, from $2.3 million in the three months ended December 31, 2012 to $3.0 million in the three months ended December 31, 2013. Our effective tax rate increased from 23.8% for the three months ended December 31, 2012 to 24.5% for the three months ended December 31, 2013. The increase in the effective tax rate was primarily driven by partial expiration of certain special economic zone ("SEZ") benefits in India partly offset by a discrete tax benefit in the United Kingdom recognized in the three month period ended December 31, 2013. The increase in income tax expense of $0.7 million reflects increased taxable income and changes in geographical mix of income in the three months ended December 31, 2013.

Net income Net income increased by 26.0%, from $7.4 million in the three months ended December 31, 2012 to $9.3 million in the three months ended December 31, 2013 due primarily to increased revenue and operating efficiencies.

Nine months ended December 31, 2013 compared to the nine months ended December 31, 2012 The following table presents an overview of our results of operations for the nine months ended December 31, 2013 and 2012: Nine Months Ended December 31, $ % (dollars in thousands) 2013 2012 Change Change Revenue $ 285,833 $ 243,226 $ 42,607 17.5 % Costs of revenue 182,126 158,194 23,932 15.1 % Gross profit 103,707 85,032 18,675 22.0 % Operating expenses 73,806 61,593 12,213 19.8 % Income from operations 29,901 23,439 6,462 27.6 % Other income (expense) 2,396 2,057 339 16.5 % Income before income tax expense 32,297 25,496 6,801 26.7 % Income tax expense 7,969 6,189 1,780 28.8 % Net income $ 24,328 $ 19,307 $ 5,021 26.0 % Revenue Revenue increased by 17.5%, or $42.6 million, from $243.2 million during the nine months ended December 31, 2012 to $285.8 million in the nine months ended December 31, 2013. The increase in revenue was primarily driven by higher revenue contribution from our clients existing as of December 31, 2012 as well as the result of continued broad based revenue growth led by clients in our financial services and insurance and communication and technology industry groups. Revenue from North American clients in the nine months ended December 31, 2013 increased by $17.4 million, or 9.2%, as compared to the nine months ended December 31, 2012, due to expansion of our existing clients.

Revenue from European clients increased by $20.6 million, or 46.8%, as compared to the nine months ended December 31, 2012, led by growth in our largest European client. We had 95 active clients at December 31, 2013, as compared to 92 active clients at December 31, 2012.

Costs of revenue Costs of revenue increased from $158.2 million in the nine months ended December 31, 2012 to $182.1 million in the nine months ended December 31, 2013, an increase of $23.9 million, or 15.1%, which also reflects a foreign currency benefit of $5.4 million due to the depreciation of the Indian rupee. The increase in costs of revenue was primarily driven by an increase of $23.4 million in compensation costs for our IT professional which reflects in part annual compensation increases, an increase in recruiting costs of $0.9 million, an increase in travel costs of $0.6 million, and an increase in client related infrastructure costs of $0.5 million. This was partially offset by a decrease in the costs of subcontractors of $1.9 million. At December 31, 2012, we had 5,999 IT professionals as compared to 6,817 at December 31, 2013.

23 -------------------------------------------------------------------------------- Table of Contents As a percentage of revenue, costs of revenue decreased from 65.0% for the nine months ended December 31, 2012 to 63.7% for the nine months ended December 31, 2013. This was due primarily to a higher utilization of our IT professionals and depreciation of the Indian rupee for the nine months ended December 31, 2013 as compared to the nine months ended December 31, 2012.

Gross profit Our gross profit increased by $18.7 million, or 22.0 %, to $103.7 million for the nine months ended December 31, 2013 as compared to $85.0 million for the nine months ended December 31, 2012 due to higher revenue, partially offset by increased cost of revenue related to the growth in the number of IT professionals, which also reflects lower costs due to the depreciation of the Indian rupee. As a percentage of revenue, our gross profit was 36.3% and 35.0% in the nine months ended December 31, 2013 and 2012, respectively.

Operating expenses Operating expenses increased from $61.6 million in the nine months ended December 31, 2012 to $73.8 million in the nine months ended December 31, 2013, an increase of $12.2 million, or 19.8%, which also reflects a foreign currency benefit of $3.1 million due to the depreciation of the Indian rupee. The increase in our operating expenses in the nine months ended December 31, 2013 was primarily due to an increase of $5.9 million in compensation expense related in part to annual compensation increases and an increase in our team members, including an increased number of sales and business development personnel, a $3.4 million increase in facility expenses and a $1.5 million increase in professional services. As a percentage of revenue, our operating expenses increased to 25.8% in the nine months ended December 31, 2013 as compared to 25.3% in the nine months ended December 31, 2012.

Income from operations Income from operations increased by 27.6%, from $23.4 million in the nine months ended December 31, 2012 to $29.9 million in the nine months ended December 31, 2013. As a percentage of revenue, income from operations increased from 9.6% in the nine months ended December 31, 2012 to 10.5% in the nine months ended December 31, 2013.

Other income (expense) Other income (expense) increased from $2.1 million in the nine months ended December 31, 2012 to $2.4 million in the nine months ended December 31, 2013.

This increase is primarily attributed to an increase in interest income of $0.4 million in the nine months ended December 31, 2013 compared to the nine months ended December 31, 2012. This was primarily due to the increase in cash collections and reduction in days sales outstanding.

Income tax expense Income tax expense increased by $1.8 million, from $6.2 million in the nine months ended December 31, 2012 to $8.0 million in the nine months ended December 31, 2013. Our effective tax rate increased from 24.3% for the nine months ended December 31, 2012 to 24.7% for the nine months ended December 31, 2013. The increase in the effective tax rate was primarily driven by the partial expiration of certain SEZ tax holidays in India, partly offset by new SEZ holiday benefits in India and a discrete tax benefit in the United Kingdom recognized in the nine months period ended December 31, 2013. The increase in income tax expense of $1.8 million reflects increased taxable income and changes in the geographical mix of income in the nine months ended December 31, 2013.

Net income Net income increased by 26.0%, from $19.3 million in the nine months ended December 31, 2012 to $24.3 million in the nine months ended December 31, 2013 due primarily to increased revenue and increased operating efficiencies.

Liquidity and capital resources We have financed our operations from sales of shares of equity securities, including common stock, and from cash from operations.

On January 14, 2014, we completed an underwritten public offering of 2,645,000 shares of our common stock for net proceeds of approximately $86.2 million after deducting commissions and transaction expenses and after giving effect to the reimbursement of certain transactional expenses for which the underwriters have agreed to reimburse us. The approximate net proceeds also includes the exercise of a 30-day over-allotment option which we granted to the underwriters to purchase an additional 345,000 shares from us. We used these proceeds from the offering in part to repay all of the outstanding borrowings of $20.0 million under our new revolving 24 -------------------------------------------------------------------------------- Table of Contents credit facility, which we entered into with JPMorgan Chase Bank, N.A ("JPM") on December 31, 2013 and used to complete the acquisition of TradeTech on January 2, 2014. The remaining proceeds will be used for general corporate purposes, which may include, among other things, financing of possible acquisitions, working capital and/or capital expenditures, including facilities expansion.

On January 2, 2014, we acquired all of the outstanding shares of TradeTech for the purchase price of approximately $20.0 million in cash, 12.5% of which is being held back by us for a period of 12 months as security for the indemnification obligations of the stockholders of TradeTech. In addition, the purchase price is subject to an adjustment up to approximately $4.0 million in earn-out consideration subject to the TradeTech's achievement of certain revenue and EBITDA targets for the 12-month period ending December 31, 2014.

On December 31, 2013, we entered into an amended and restated credit agreement with JPM expiring December 31, 2018. The credit agreement amends and restates our $3.0 million secured revolving credit agreement with JPM and provides for a $25 million secured revolving credit facility, which shall be available to fund working capital and other corporate purposes, as well as to serve as security in support of our foreign currency hedging programs. The credit agreement contains financial and reporting covenants and limitations. At December 31, 2013, we had drawn down $20.0 million under this credit agreement, the proceeds of which we used to complete the acquisition of TradeTech on January 2, 2014. We are in compliance with all covenants under this credit agreement. On January 14, 2014, we repaid the $20.0 million in outstanding borrowings from the proceeds of our public offering.

At December 31, 2013, 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.

On November 1, 2013, we acquired the business and assets of OSB for the purchase price of approximately $7.0 million in cash, 10% of which is being held back by us for a period of 12 months as security for the sellers' indemnification obligations under the asset purchase agreement entered into between us and OSB.

The purchase price is subject to adjustment after the closing of up to an additional $6.0 million in earn-out consideration, in the aggregate, upon the achievement of certain revenue and operating margin targets for the five months ending March 31, 2014, the nine months ending December 31, 2014 and the twelve months ending December 31, 2015.

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, 2013, we sold $19.4 million of receivables under the terms of the financing agreement. Fees paid pursuant to this agreement were not material during the three and nine months ended December 31, 2013. No amounts were due under the financing agreement at December 31, 2013, 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.

Cash flows The following table summarizes our cash flows for the periods presented: Nine Months Ended December 31, (in thousands) 2013 2012 Net cash provided by operating activities $ 39,527 $ 23,680 Net cash used for investing activities (25,824 ) (16.508 ) Net cash provided by (used in) financing activities 25,292 (1,719 ) Effect of exchange rate changes on cash (2,788 ) (935 ) Net increase in cash and cash equivalents 36,207 4,518 Cash and cash equivalents, beginning of period 57,199 58,105 Cash and cash equivalents, end of period $ 93,406 $ 62,623 Operating activities Net cash provided by operating activities was $39.5 million during the nine months ended December 31, 2013 as compared to $23.7 million during the nine months ended December 31, 2012. This increase was primarily attributable to an increase in net income of $5.0 million, an increase in working capital of $10.5 million, primarily driven by a decrease in days sales outstanding from 78 days at December 31, 2012 to 70 days at December 31, 2013 or $15.6 million, an increased change in accrued employee 25 -------------------------------------------------------------------------------- Table of Contents compensation and benefits of $1.5 million, an increased change in income tax payable of $1.6 million and an increased change in non-cash adjustments including depreciation and share based compensation of $3.3 million. These were partially offset by a decreased change in accrued expense and others of $4.4 million, excess tax benefits from stock option exercises of $3.0 million, a decreased change in prepaid and other current assets of $2.0 million and a decreased change in accounts payable of $1.7 million.

Investing activities Net cash used in investing activities was $25.8 million during the nine months ended December 31, 2013 as compared to $16.5 million during the nine months ended December 31, 2012. The change was primarily due to the net decreases in the proceeds of investments of $5.8 million, a decrease in restricted cash of $2.8 million and the cash payment of $6.2 million related to the OSB acquisition, partially offset by an increased change in the purchase of property and equipment of $2.7 million.

Financing activities Net cash provided by financing activities was $25.3 million during the nine months ended December 31, 2013 as compared to cash used in financing activities of $1.7 million during the nine months ended December 31, 2012. The increase in cash provided is primarily due to the borrowing of $20.0 million from the JPM revolving credit facility to fund the TradeTech acquisition, an increase in excess tax benefits from the stock options exercises of $3.0 million, an increase in proceeds from the exercise of common stock options of $1.6 million, a decrease in principal payments on capital lease obligations of $1.0 million and a decrease in the purchase of common stock of $1.4 million.

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

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 twelve-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 February 2013, the Financial Accounting Standards Board, or FASB, issued additional guidance related to accumulated other comprehensive income, requiring the presentation of significant amounts reclassified out of accumulated other comprehensive income to the respective line items in the statement of operations. For those amounts required by U.S. GAAP to be reclassified to earnings in their entirety in the same reporting period, this presentation is required either on the statement of operations or in a single footnote. For items that are not required to be reclassified in their entirety to earnings, the presentation requirement can be met by cross-referencing disclosures elsewhere in the footnotes. We adopted this standard on April 1, 2013. The adoption of this standard affects financial statement presentation only and has no effect on our financial condition or consolidated results of operations.

In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11 "Income Taxes-Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" which is part of Accounting Standards Codification ("ASC") 740: Income Taxes. The new guidance requires an entity to present an unrecognized tax benefit and an NOL carryforward, a similar tax loss, or a tax credit carryforward on a net basis as part of a deferred tax asset, unless the unrecognized tax benefit is not available to reduce the deferred tax asset component or would not be utilized for that purpose, then a liability would be recognized. The updated accounting guidance is effective for fiscal years beginning after December 15, 2013. We do not expect the adoption of this guidance to have a material impact on the Company's consolidated financial position.

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