UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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| | | | |
ý☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBERJUNE 30, 20172021
OR
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| | | | |
¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROMTO
COMMISSION FILE NUMBER 001-33089
EXLSERVICE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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| | | | | | | | | | |
DELAWAREDelaware | | 82-0572194 |
(State or other jurisdiction of incorporation or organization)
| | (I.R.S. Employer Identification No.)
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| | | |
280 PARK AVENUE, 38 TH FLOOR,
NEW YORK, NEW YORK 320 Park Avenue, | 29th Floor, | 10017 | |
New York, | New York | | 10022 |
(Address of principal executive offices) | | (Zip code) |
(212) 277-7100
(Registrant’s telephone number, including area code)
| | | | | | | | |
Securities registered pursuant to Section 12(b) of the Act: |
Title of Each Class: | Trading symbol(s) | Name of Each Exchange on Which Registered: |
Common Stock, par value $0.001 per share | EXLS | NASDAQ |
Securities registered pursuant to Section 12(g) of the Act:
None
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 ý☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ý☒ 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,”filer”, “accelerated
filer,”filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | | | | | | | | | | | | | | | | | |
Large Accelerated Filer | | ☒ | | Accelerated filer | | ☐ |
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Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ |
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Large accelerated filer | | ý | | Accelerated filer | | ¨ |
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Non-accelerated filer | | ¨ (Do not check if a smaller reporting company)
| | 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 ý☒
As of October 24, 2017,July 27, 2021, there were 33,942,97433,174,613 shares of the registrant’s common stock outstanding, par value $0.001 per share.
TABLE OF CONTENTS
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXLSERVICE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts) |
| | | | | | | |
| As of |
| September 30, 2017 | | December 31, 2016 |
| (Unaudited) | | |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 87,665 |
| | $ | 213,155 |
|
Short-term investments | 161,702 |
| | 13,491 |
|
Restricted cash | 1,913 |
| | 3,846 |
|
Accounts receivable, net | 133,862 |
| | 113,067 |
|
Prepaid expenses | 6,958 |
| | 7,855 |
|
Advance income tax, net | 8,821 |
| | 6,242 |
|
Other current assets | 22,333 |
| | 21,168 |
|
Total current assets | 423,254 |
| | 378,824 |
|
Property, plant and equipment, net | 63,729 |
| | 49,029 |
|
Restricted cash | 3,710 |
| | 3,393 |
|
Deferred taxes, net | 16,118 |
| | 14,799 |
|
Intangible assets, net | 43,568 |
| | 53,770 |
|
Goodwill | 187,953 |
| | 186,770 |
|
Other assets | 30,672 |
| | 19,943 |
|
Total assets | $ | 769,004 |
| | $ | 706,528 |
|
Liabilities and Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 3,834 |
| | $ | 3,288 |
|
Short-term borrowings | — |
| | 10,000 |
|
Deferred revenue | 8,662 |
| | 16,615 |
|
Accrued employee cost | 49,385 |
| | 50,832 |
|
Accrued expenses and other current liabilities | 49,040 |
| | 43,264 |
|
Current portion of capital lease obligations | 168 |
| | 232 |
|
Total current liabilities | 111,089 |
| | 124,231 |
|
Long term borrowings | 45,000 |
| | 35,000 |
|
Capital lease obligations, less current portion | 315 |
| | 300 |
|
Non-current liabilities | 16,234 |
| | 14,819 |
|
Total liabilities | 172,638 |
| | 174,350 |
|
Commitments and contingencies (See Note 21) |
|
| |
|
|
Preferred stock, $0.001 par value; 15,000,000 shares authorized, none issued | — |
| | — |
|
Stockholders’ equity: | | | |
Common stock, $0.001 par value; 100,000,000 shares authorized, 36,525,692 shares issued and 33,804,962 shares outstanding as of September 30, 2017 and 35,699,819 shares issued and 33,628,109 shares outstanding as of December 31, 2016 | 37 |
| | 36 |
|
Additional paid-in capital | 311,691 |
| | 284,646 |
|
Retained earnings | 436,419 |
| | 382,722 |
|
Accumulated other comprehensive loss | (59,290 | ) | | (75,057 | ) |
Total including shares held in treasury | 688,857 |
| | 592,347 |
|
Less: 2,720,730 shares as of September 30, 2017 and 2,071,710 shares as of December 31, 2016, held in treasury, at cost | (92,698 | ) | | (60,362 | ) |
Stockholders’ equity | $ | 596,159 |
| | $ | 531,985 |
|
Non-controlling interest | 207 |
| | 193 |
|
Total equity | $ | 596,366 |
| | $ | 532,178 |
|
Total liabilities and equity | $ | 769,004 |
| | $ | 706,528 |
|
See accompanying notes to unaudited consolidated financial statements.
EXLSERVICE HOLDINGS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except share and per share amounts)
| | | | | | | | | | | | | | |
| | As of |
| | June 30, 2021 | | December 31, 2020 |
| | | | |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 150,211 | | | $ | 218,530 | |
Short-term investments | | 144,533 | | | 184,286 | |
Restricted cash | | 5,065 | | | 4,690 | |
Accounts receivable, net | | 182,111 | | | 147,635 | |
Prepaid expenses | | 12,060 | | | 11,344 | |
Advance income tax, net | | 13,567 | | | 5,684 | |
Other current assets | | 33,615 | | | 37,109 | |
Total current assets | | 541,162 | | | 609,278 | |
Property and equipment, net | | 86,511 | | | 92,875 | |
Operating lease right-of-use assets | | 83,280 | | | 91,918 | |
Restricted cash | | 2,260 | | | 2,299 | |
Deferred tax assets, net | | 24,132 | | | 7,749 | |
Intangible assets, net | | 52,853 | | | 59,594 | |
Goodwill | | 348,747 | | | 349,088 | |
Other assets | | 27,472 | | | 32,099 | |
Investment in equity affiliate | | 2,929 | | | 2,957 | |
Total assets | | $ | 1,169,346 | | | $ | 1,247,857 | |
Liabilities and stockholders’ equity | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 3,877 | | | $ | 6,992 | |
Current portion of long-term borrowings | | 15,000 | | | 25,000 | |
Deferred revenue | | 12,017 | | | 32,649 | |
Accrued employee costs | | 70,496 | | | 67,645 | |
Accrued expenses and other current liabilities | | 76,424 | | | 66,410 | |
Current portion of operating lease liabilities | | 18,039 | | | 18,894 | |
Income taxes payable, net | | 11,256 | | | 3,488 | |
Total current liabilities | | 207,109 | | | 221,078 | |
Long-term borrowings, less current portion | | 139,432 | | | 201,961 | |
Operating lease liabilities, less current portion | | 76,518 | | | 84,874 | |
Income taxes payable | | 1,790 | | | 1,790 | |
Deferred tax liabilities, net | | 902 | | | 847 | |
Other non-current liabilities | | 15,581 | | | 18,135 | |
Total liabilities | | 441,332 | | | 528,685 | |
Commitments and contingencies (Refer to Note 24) | | 0 | | 0 |
Preferred stock, $0.001 par value; 15,000,000 shares authorized, NaN issued | | 0 | | | 0 | |
ExlService Holdings, Inc. Stockholders’ equity: | | | | |
Common stock, $0.001 par value; 100,000,000 shares authorized, 39,283,853 shares issued and 33,249,709 shares outstanding as of June 30, 2021 and 38,968,052 shares issued and 33,559,434 shares outstanding as of December 31, 2020 | | 39 | | | 39 | |
Additional paid-in capital | | 439,051 | | | 420,976 | |
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenues, net | $ | 192,345 |
| | $ | 171,200 |
| | $ | 564,435 |
| | $ | 508,714 |
|
Cost of revenues (exclusive of depreciation and amortization) | 124,890 |
| | 111,767 |
| | 370,458 |
| | 332,172 |
|
Gross profit | 67,455 |
| | 59,433 |
| | 193,977 |
| | 176,542 |
|
Operating expenses: |
| |
| | | |
|
General and administrative expenses | 26,870 |
| | 21,854 |
| | 75,809 |
| | 63,620 |
|
Selling and marketing expenses | 12,222 |
| | 11,623 |
| | 38,711 |
| | 37,875 |
|
Depreciation and amortization | 9,708 |
| | 8,597 |
| | 28,771 |
| | 25,000 |
|
Total operating expenses | 48,800 |
| | 42,074 |
| | 143,291 |
| | 126,495 |
|
Income from operations | 18,655 |
| | 17,359 |
| | 50,686 |
| | 50,047 |
|
Foreign exchange gain, net | 2,801 |
| | 1,741 |
| | 7,267 |
| | 3,573 |
|
Interest expense | (482 | ) | | (295 | ) | | (1,379 | ) | | (1,023 | ) |
Other income, net | 2,922 |
| | 2,891 |
| | 8,871 |
| | 12,197 |
|
Income before income tax expense | 23,896 |
| | 21,696 |
| | 65,445 |
| | 64,794 |
|
Income tax expense | 2,819 |
| | 5,646 |
| | 7,202 |
| | 18,549 |
|
Net income | $ | 21,077 |
| | $ | 16,050 |
| | $ | 58,243 |
| | $ | 46,245 |
|
Earnings per share: | | | | | | | |
Basic | $ | 0.62 |
| | $ | 0.48 |
| | $ | 1.72 |
| | $ | 1.38 |
|
Diluted | $ | 0.60 |
| | $ | 0.46 |
| | $ | 1.66 |
| | $ | 1.34 |
|
Weighted-average number of shares used in computing earnings per share: | | | | | | | |
Basic | 33,838,374 |
| | 33,624,401 |
| | 33,834,392 |
| | 33,542,258 |
|
Diluted | 35,043,987 |
| | 34,675,485 |
| | 35,048,672 |
| | 34,512,815 |
|
| | | | | | | | | | | | | | |
Retained earnings | | 701,331 | | | 641,379 | |
Accumulated other comprehensive loss | | (86,745) | | | (74,984) | |
Total including shares held in treasury | | 1,053,676 | | | 987,410 | |
Less: 6,034,144 shares as of June 30, 2021 and 5,408,618 shares as of December 31, 2020, held in treasury, at cost | | (325,662) | | | (268,238) | |
Stockholders’ equity | | 728,014 | | | 719,172 | |
| | | | |
Total equity | | 728,014 | | | 719,172 | |
Total liabilities and stockholders’ equity | | $ | 1,169,346 | | | $ | 1,247,857 | |
See accompanying notes to unaudited consolidated financial statements.
EXLSERVICE HOLDINGS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)thousands, except share and per share amounts)
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 |
| 2016 | | 2017 | | 2016 |
Net income | $ | 21,077 |
| | $ | 16,050 |
| | $ | 58,243 |
| | $ | 46,245 |
|
Other comprehensive income: |
| |
| |
| |
|
Unrealized (loss)/gain on effective cash flow hedges, net of taxes ($162), $1,067, $2,874 and $1,094, respectively | (557 | ) | | 2,540 |
| | 5,900 |
| | 3,066 |
|
Foreign currency translation adjustment | (3,030 | ) | | 1,716 |
| | 10,813 |
| | (2,652 | ) |
Retirement benefits, net of taxes nil, $4, nil and $24, respectively | — |
| | 104 |
| | — |
| | 409 |
|
Reclassification adjustments |
| |
| |
| |
|
Realized gain on cash flow hedges, net of taxes ($129), ($205), ($476) and ($386), respectively(1) | (294 | ) | | (261 | ) | | (1,081 | ) | | (486 | ) |
Retirement benefits, net of taxes $30, $1, $77 and $3, respectively(2) | 42 |
| | 22 |
| | 135 |
| | 64 |
|
Total other comprehensive income/(loss) | $ | (3,839 | ) | | $ | 4,121 |
| | $ | 15,767 |
| | $ | 401 |
|
Total comprehensive income | $ | 17,238 |
| | $ | 20,171 |
| | $ | 74,010 |
| | $ | 46,646 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Revenues, net | | $ | 275,064 | | | $ | 222,473 | | | $ | 536,479 | | | $ | 468,463 | |
Cost of revenues(1) | | 170,701 | | | 158,401 | | | 329,522 | | | 321,057 | |
Gross profit(1) | | 104,363 | | | 64,072 | | | 206,957 | | | 147,406 | |
Operating expenses: | | | | | | | | |
General and administrative expenses | | 36,499 | | | 28,750 | | | 67,202 | | | 57,691 | |
Selling and marketing expenses | | 19,724 | | | 13,051 | | | 37,959 | | | 27,507 | |
Depreciation and amortization expense | | 12,310 | | | 12,405 | | | 24,411 | | | 24,855 | |
| | | | | | | | |
Total operating expenses | | 68,533 | | | 54,206 | | | 129,572 | | | 110,053 | |
Income from operations | | 35,830 | | | 9,866 | | | 77,385 | | | 37,353 | |
Foreign exchange gain, net | | 1,353 | | | 1,359 | | | 1,787 | | | 2,736 | |
Interest expense | | (2,520) | | | (2,883) | | | (4,994) | | | (5,955) | |
Other income, net | | 2,215 | | | 4,225 | | | 3,625 | | | 6,754 | |
Income before income tax expense and earnings from equity affiliates | | 36,878 | | | 12,567 | | | 77,803 | | | 40,888 | |
Income tax expense | | 8,865 | | | 4,072 | | | 17,823 | | | 9,927 | |
Income before earnings from equity affiliates | | 28,013 | | | 8,495 | | | 59,980 | | | 30,961 | |
Gain / (loss) from equity-method investment | | 8 | | | (66) | | | (28) | | | (121) | |
Net income attributable to ExlService Holdings, Inc. stockholders | | $ | 28,021 | | | $ | 8,429 | | | $ | 59,952 | | | $ | 30,840 | |
Earnings per share attributable to ExlService Holdings, Inc. stockholders: | | | | | | | | |
Basic | | $ | 0.83 | | | $ | 0.24 | | | $ | 1.78 | | | $ | 0.90 | |
Diluted | | $ | 0.81 | | | $ | 0.24 | | | $ | 1.75 | | | $ | 0.89 | |
Weighted-average number of shares used in computing earnings per share attributable to ExlService Holdings Inc. stockholders: | | | | | | | | |
Basic | | 33,571,074 | | | 34,486,202 | | 33,652,146 | | | 34,443,884 |
Diluted | | 34,389,768 | | | 34,597,688 | | 34,353,593 | | | 34,659,146 |
| |
(1) | These are reclassified to net income and are included in the foreign exchange gain in the unaudited consolidated statements of income. See Note 13 to the unaudited consolidated financial statements. |
| |
(2) | These are reclassified to net income and are included in the computation of net periodic pension costs in the unaudited consolidated statements of income. See Note 16 to the unaudited consolidated financial statements. |
(1) Exclusive of depreciation and amortization expense.
See accompanying notes to unaudited consolidated financial statements.
EXLSERVICE HOLDINGS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWSCOMPREHENSIVE INCOME/(LOSS) (UNAUDITED)
|
| | | | | | | |
| Nine months ended September 30, |
| 2017 | | 2016 |
Cash flows from operating activities: |
| |
|
Net income | $ | 58,243 |
| | $ | 46,245 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
| |
|
Depreciation and amortization | 28,771 |
| | 25,000 |
|
Stock-based compensation expense | 16,771 |
| | 14,743 |
|
Unrealized gain on short term investments | (4,437 | ) | | (4,955 | ) |
Change in fair value of earn-out consideration | — |
| | (4,060 | ) |
Unrealized foreign exchange loss/(gain) | 446 |
| | (147 | ) |
Deferred income tax (benefit)/expense | (5,417 | ) | | 4,424 |
|
Allowances for doubtful accounts | 2,706 |
| | 37 |
|
Others, net | 12 |
| | (84 | ) |
Change in operating assets and liabilities: |
| |
|
Restricted cash | 1,757 |
| | (464 | ) |
Accounts receivable | (22,064 | ) | | (16,559 | ) |
Prepaid expenses and other current assets | 5,194 |
| | (587 | ) |
Accounts payable | 371 |
| | (2,518 | ) |
Deferred revenue | (8,155 | ) | | (1,485 | ) |
Accrued employee costs | (915 | ) | | (3,812 | ) |
Accrued expenses and other liabilities | 267 |
| | 5,688 |
|
Advance income tax, net | (2,607 | ) | | (4,748 | ) |
Other assets | 1,241 |
| | (676 | ) |
Net cash provided by operating activities | 72,184 |
| | 56,042 |
|
|
| |
|
Cash flows from investing activities: |
| |
|
Purchase of property, plant and equipment | (26,759 | ) | | (20,335 | ) |
Business acquisition (net of cash acquired) | (724 | ) | | (9,427 | ) |
Purchase of investments | (197,897 | ) | | (155,709 | ) |
Proceeds from redemption of investments | 54,238 |
| | 59,229 |
|
Net cash used for investing activities | (171,142 | ) | | (126,242 | ) |
|
|
| |
|
|
Cash flows from financing activities: |
|
| |
|
|
Principal payments on capital lease obligations | (133 | ) | | (292 | ) |
Repayments of borrowings | — |
| | (25,000 | ) |
Acquisition of treasury stock | (32,336 | ) | | (15,169 | ) |
Proceeds from exercise of stock options | 4,275 |
| | 6,226 |
|
Net cash used for financing activities | (28,194 | ) | | (34,235 | ) |
Effect of exchange rate changes on cash and cash equivalents | 1,662 |
| | (2,514 | ) |
Net decrease in cash and cash equivalents | (125,490 | ) | | (106,949 | ) |
Cash and cash equivalents, beginning of period | 213,155 |
| | 205,323 |
|
Cash and cash equivalents, end of period | $ | 87,665 |
| | $ | 98,374 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Net income | | $ | 28,021 | | | $ | 8,429 | | | $ | 59,952 | | | $ | 30,840 | |
Other comprehensive income/(loss): | | | | | | | | |
Unrealized gain/(loss) on cash flow hedges | | (871) | | | 7,721 | | | (303) | | | (7,125) | |
Loss on net investment hedges | | (1,134) | | | 0 | | | (1,134) | | | 0 | |
Foreign currency translation gain/(loss) | | (4,775) | | | 2,273 | | | (6,686) | | | (19,298) | |
Reclassification adjustments | | | | | | | | |
(Gain)/loss on cash flow hedges(1) | | (2,866) | | | 1,127 | | | (5,695) | | | 198 | |
Retirement benefits(2) | | 176 | | | 97 | | | 355 | | | 198 | |
Income tax effects relating to above(3) | | 1,478 | | | (2,388) | | | 1,702 | | | 6,645 | |
Total other comprehensive income/(loss) | | $ | (7,992) | | | $ | 8,830 | | | $ | (11,761) | | | $ | (19,382) | |
Total comprehensive income/(loss) | | $ | 20,029 | | | $ | 17,259 | | | $ | 48,191 | | | $ | 11,458 | |
(1)These are reclassified to net income and are included either in cost of revenues or operating expenses, as applicable in the unaudited consolidated statements of income. Refer to Note 16 - Derivatives and Hedge Accounting to the unaudited consolidated financial statements.
(2)These are reclassified to net income and are included in other income, net in the unaudited consolidated statements of income. Refer to Note 19 - Employee Benefit Plans to the unaudited consolidated financial statements.
(3)These are income tax effects recognized on cash flow hedges, retirement benefits and foreign currency translation gains/(losses). Refer to Note 21 - Income Taxes to the unaudited consolidated financial statements.
See accompanying notes to unaudited consolidated financial statements.
EXLSERVICE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
For the three months ended June 30, 2021 and 2020
(In thousands, except share and per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Equity |
| | | | | |
| Shares | | Amount | | | | | Shares | | Amount | |
Balance as of March 31, 2021 | 39,273,989 | | | $ | 39 | | | $ | 428,882 | | | $ | 673,310 | | | $ | (78,753) | | | (5,747,100) | | | $ | (297,253) | | | $ | 726,225 | |
Stock issued against stock-based compensation plans | 9,864 | | | — | | | 99 | | | — | | | — | | | — | | | — | | | 99 | |
Stock-based compensation | — | | | — | | | 10,070 | | | — | | | — | | | — | | | — | | | 10,070 | |
Acquisition of treasury stock | — | | | — | | | — | | | — | | | — | | | (287,044) | | | (28,409) | | | (28,409) | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (7,992) | | | — | | | — | | | (7,992) | |
Net income | — | | | — | | | — | | | 28,021 | | | — | | | — | | | — | | | 28,021 | |
Balance as of June 30, 2021 | 39,283,853 | | | $ | 39 | | | $ | 439,051 | | | $ | 701,331 | | | $ | (86,745) | | | (6,034,144) | | | $ | (325,662) | | | $ | 728,014 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Equity |
| | | | | |
| Shares | | Amount | | | | | Shares | | Amount | |
Balance as of March 31, 2020 | 38,813,775 | | | $ | 39 | | | $ | 396,939 | | | $ | 574,314 | | | $ | (113,104) | | | (4,497,779) | | | $ | (202,284) | | | $ | 655,904 | |
Stock issued against stock-based compensation plans | 4,590 | | | — | | | 39 | | | — | | | — | | | — | | | — | | | 39 | |
Stock-based compensation | — | | | — | | | 7,726 | | | — | | | — | | | — | | | — | | | 7,726 | |
| | | | | | | | | | | | | | | |
Other comprehensive income | — | | | — | | | — | | | — | | | 8,830 | | | — | | | — | | | 8,830 | |
Net income | — | | | — | | | — | | | 8,429 | | | — | | | — | | | — | | | 8,429 | |
Balance as of June 30, 2020 | 38,818,365 | | | $ | 39 | | | $ | 404,704 | | | $ | 582,743 | | | $ | (104,274) | | | (4,497,779) | | | $ | (202,284) | | | $ | 680,928 | |
EXLSERVICE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
For the six months ended June 30, 2021 and 2020
(In thousands, except share and per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | | | Total Equity |
| | | | | | |
| Shares | | Amount | | | | | Shares | | Amount | | |
Balance as of January 1, 2021 | 38,968,052 | | | $ | 39 | | | $ | 420,976 | | | $ | 641,379 | | | $ | (74,984) | | | (5,408,618) | | | $ | (268,238) | | | | | $ | 719,172 | |
Stock issued against stock-based compensation plans | 315,801 | | | — | | | 173 | | | — | | | — | | | — | | | — | | | | | 173 | |
Stock-based compensation | — | | | — | | | 17,902 | | | — | | | — | | | — | | | — | | | | | 17,902 | |
Acquisition of treasury stock | — | | | — | | | — | | | — | | | — | | | (625,526) | | | (57,424) | | | | | (57,424) | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (11,761) | | | — | | | — | | | | | (11,761) | |
Net income | — | | | — | | | — | | | 59,952 | | | — | | | — | | | — | | | | | 59,952 | |
Balance as of June 30, 2021 | 39,283,853 | | | $ | 39 | | | $ | 439,051 | | | $ | 701,331 | | | $ | (86,745) | | | (6,034,144) | | | $ | (325,662) | | | | | $ | 728,014 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Equity |
| | | | | |
| Shares | | Amount | | | | | Shares | | Amount | |
Balance as of January 1, 2020 | 38,480,654 | | | $ | 39 | | | $ | 391,240 | | | $ | 551,903 | | | $ | (84,892) | | | (4,295,413) | | | $ | (188,289) | | | $ | 670,001 | |
Stock issued against stock-based compensation plans | 337,711 | | | — | | | 960 | | | — | | | — | | | — | | | — | | | 960 | |
Stock-based compensation | — | | | — | | | 12,504 | | | — | | | — | | | — | | | — | | | 12,504 | |
Acquisition of treasury stock | — | | | — | | | — | | | — | | | — | | | (202,366) | | | (13,995) | | | (13,995) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (19,382) | | | — | | | — | | | (19,382) | |
Net income | — | | | — | | | — | | | 30,840 | | | — | | | — | | | — | | | 30,840 | |
Balance as of June 30, 2020 | 38,818,365 | | | $ | 39 | | | $ | 404,704 | | | $ | 582,743 | | | $ | (104,274) | | | (4,497,779) | | | $ | (202,284) | | | $ | 680,928 | |
See accompanying notes to unaudited consolidated financial statements.
EXLSERVICE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands) | | | | | | | | | | | |
| Six months ended June 30, |
| 2021 | | 2020 |
Cash flows from operating activities: | | | |
Net income | $ | 59,952 | | | $ | 30,840 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization expense | 24,734 | | | 24,806 | |
Stock-based compensation expense | 17,902 | | | 12,504 | |
Amortization of operating lease right-of-use assets | 13,632 | | | 13,703 | |
Unrealized loss / (gain) on short term investments | 6,777 | | | (2,842) | |
Unrealized foreign exchange gain, net | (2,634) | | | (3,378) | |
Deferred income tax benefit | (14,737) | | | (663) | |
Allowance for expected credit losses | (390) | | | 389 | |
Loss from equity-method investment | 28 | | | 121 | |
Amortization of non-cash interest expense related to convertible senior notes | 1,364 | | | 1,289 | |
| | | |
Others, net | 144 | | | (1,204) | |
Change in operating assets and liabilities: | | | |
Accounts receivable | (34,152) | | | 12,380 | |
Prepaid expenses and other current assets | 189 | | | (906) | |
Advance income tax, net | 39 | | | 4,446 | |
Other assets | 1,589 | | | 3,046 | |
Accounts payable | (2,458) | | | 1,943 | |
Deferred revenue | (20,832) | | | 3,066 | |
Accrued employee costs | 3,833 | | | (23,497) | |
Accrued expenses and other liabilities | 12,290 | | | (4,305) | |
Operating lease liabilities | (13,327) | | | (12,831) | |
Net cash provided by operating activities | 53,943 | | | 58,907 | |
| | | |
Cash flows from investing activities: | | | |
Purchases of property and equipment | (19,903) | | | (22,351) | |
Proceeds from sale of property and equipment | 527 | | | 300 | |
Investment in equity affiliate | 0 | | | (700) | |
| | | |
Purchase of investments | (32,987) | | | (49,027) | |
Proceeds from redemption of investments | 64,031 | | | 72,844 | |
Net cash provided by investing activities | 11,668 | | | 1,066 | |
| | | |
Cash flows from financing activities: | | | |
Principal payments of finance lease liabilities | (107) | | | (124) | |
Proceeds from borrowings | 25,000 | | | 110,000 | |
Repayments of borrowings | (99,000) | | | (110,210) | |
| | | |
Acquisition of treasury stock | (57,424) | | | (13,995) | |
Proceeds from exercise of stock options | 174 | | | 960 | |
Net cash used for financing activities | (131,357) | | | (13,369) | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (2,237) | | | (2,873) | |
Net (decrease)/increase in cash, cash equivalents and restricted cash | (67,983) | | | 43,731 | |
Cash, cash equivalents and restricted cash at the beginning of the period | 225,519 | | | 127,044 | |
Cash, cash equivalents and restricted cash at the end of the period | $ | 157,536 | | | $ | 170,775 | |
| | | |
Supplemental disclosure of cash flow information: | | | |
Cash paid during the period for: | | | |
Interest | $ | 3,599 | | | $ | 4,224 | |
Income taxes, net of refunds | $ | 18,710 | | | $ | 4,861 | |
Supplemental disclosure of non-cash investing and financing activities: | | | |
Assets acquired under finance lease | $ | 50 | | | $ | 75 | |
See accompanying notes to unaudited consolidated financial statements.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20172021
(In thousands, except share and per share amounts)
1. Organization
ExlService Holdings, Inc. (“ExlService Holdings”) is organized as a corporation under the laws of the state of Delaware. ExlService Holdings, together with its subsidiaries and affiliates (collectively, the “Company”), operates in the Business Process Management (“BPM”) industry providing operations management services and analytics services that help businesses enhance growthhelps its clients build and profitability. Usinggrow sustainable businesses. By orchestrating its proprietary platforms, methodologiesdomain expertise, data, analytics and tools,digital technology, the Company looks deeper to help its clientsdesign and manage agile, customer-centric operating models to improve global operations, drive profitability, enhance customer satisfaction, increase data-driven insights, increase customer satisfaction, and manage risk and compliance. The Company’s clients are located principally in the United States of America (“U.S.”) and the United Kingdom (“U.K.”).
2. Summary of Significant Accounting Policies
(a) Basis of Preparation and Principles of Consolidation
The unaudited interim consolidated financial statements have been prepared in accordanceconformity with United States generally accepted accounting principles (“USU.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by USU.S. GAAP for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2020.
The unaudited interim consolidated financial statements reflect all adjustments (of a normal and recurring nature) that management considers necessary for a fair presentation of such statements for the interim periods presented. The unaudited consolidated statements of income for the interim periods presented are not necessarily indicative of the results for the full year or for any subsequent period.
The accompanying unaudited consolidated financial statements include the financial statements of ExlService Holdings and all of its subsidiaries. All intercompanyThe standalone financial statements of subsidiaries are fully consolidated on a line-by-line basis. Intra-group balances and transactions, have beenand gains and losses arising from intra-group transactions, are eliminated in consolidation.while preparing consolidated financial statements.
Non-controlling interest is the equity in a subsidiary not attributable, directly or indirectly, to the parent and it represents the minority partner’s interest in the operations of ExlService Colombia S.A.S. Non-controlling interest consists
Accounting policies of the amountrespective individual subsidiary and associate are aligned wherever necessary, so as to ensure consistency with the accounting policies that are adopted by the Company under U.S. GAAP.
The Company’s investments in equity affiliates are initially recorded at cost and any excess purchase consideration paid over proportionate share of such interestthe fair value of the net assets of the investee at the acquisition date of obtaining control over the subsidiary, and the non-controlling interest'sis recognized as goodwill. The proportionate share of changes in equity since that date. The non-controlling interest innet income or loss of the operations for all the periods presented were insignificant and are included under general and administrative expensesinvestee after its acquisition is recognized in the unaudited consolidated statements of income.
(b) Use of Estimates
The preparation of the unaudited consolidated financial statements in conformity with USU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the unaudited consolidated statements of income during the reporting period. Although these estimates are based on management’s best assessment of the current business environment, actual results may be different from those estimates. The significant estimates and assumptions that affect the unaudited consolidated financial statements include, but are not limited to, allowance for doubtful receivables,expected credit losses, the nature and timing of the satisfaction of performance obligations, the standalone selling price of performance obligations, and variable consideration in a customer contract, expected recoverability from customers with contingent fee arrangements,
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2021
(In thousands, except share and per share amounts)
estimated costs to complete fixed price contracts, recoverability of service tax receivables,dues from statutory authorities, assets and obligations related to employee benefit plans, deferred tax valuation allowances, income-tax uncertainties and other contingencies, valuation of derivative financial instruments, assumptions used to calculate stock-based compensation expense, assumptions used to determine the incremental borrowing rate to calculate lease liabilities and right-of-use (“ROU”) assets, lease term to calculate amortization of ROU, depreciation and amortization periods, purchase price allocation and recoverability of long-termlong-lived assets, including goodwill and intangibles,intangibles.
As of June 30, 2021, the extent to which the global Coronavirus Disease 2019 pandemic (“COVID-19”) will ultimately impact the Company's business depends on numerous dynamic factors, which the Company still cannot reliably predict. As a result, many of the Company's estimates and assumptions herein required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve with respect to COVID-19, the Company’s estimates to complete fixed price contracts.may materially change in future periods. Any changes in estimates are adjusted prospectively in the Company’s consolidated financial statements.
(c) Share-Based CompensationRecent Accounting Pronouncements
In March 2016, the2020, FASB issued ASU No. 2016-09, Compensation - Stock Compensation2020-04, Reference Rate Reform (Topic 718). ASU No. 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the Statement of Cash Flows. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company adopted this ASU effective January 1, 2017. The following summarizes the effects848): Facilitation of the adoptionEffects of Reference Rate Reform on the Company's unaudited consolidated financial statements:
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2017
(In thousands, except share and per share amounts)
Income taxes - Upon adoptionFinancial Reporting. This ASU provides optional guidance for a limited period of this standard, all excess tax benefits and tax deficiencies are recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur. The Company also recognizes excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. As a result, the Company recognized discrete adjustmentstime to income tax expense for the three months ended September 30, 2017 in the amount of $3,488 and for the nine months ended September 30, 2017 in the amount of $7,169 related to excess tax benefits. No adjustment is recorded for any windfall benefits previously recorded in Additional Paid-In Capital.
Forfeitures - Prior to adoption, share-based compensation expense was recognized on a straight line basis, net of estimated forfeitures, such that expense was recognized only for share-based awardsease potential accounting impacts associated with transitioning away from reference rates that are expected to vest. A forfeiture rate was estimated annuallybe discontinued, such as interbank offered rates and revised, if necessary, in subsequent periods if actual forfeitures differed from initial estimates. Upon adoption, the Company will no longer apply a forfeiture rate and instead will account for forfeitures as they occur.London Inter-Bank Offered Rate (“LIBOR”). The Company has applied the modified retrospective adoption approach as of January 1, 2017 and has recognized a cumulative-effect adjustment to reduce additional paid-in-capital of $5,999 and retained earnings of $4,546 (net of deferred tax effect of $1,453).
Statements of Cash Flows - The Company historically accounted for excess tax benefits on the Statement of Cash Flows as a financing activity. Upon adoption of this standard, excess tax benefits are classified along with other income tax cash flows as an operating activity. The Company has elected to adopt this portion of the standard on a prospective basis beginning in 2017 and accordingly prior periods have not been adjusted.
Earnings Per Share - The Company uses the treasury stock method to compute diluted earnings per share, unless the effect would be anti-dilutive. The Company excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of diluted earnings per share.
(d) Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, “Revenue from Contracts with Customers”. This standard update along with subsequently issued updates, clarifies the principles for recognizing revenue and develops a common revenue standard for United States generally accepted accounting principles (GAAP) and is effective for reporting periods beginning after December 15, 2017. The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when promised goods or services ("performance obligations") are transferred to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services ("transaction price"). Adoption of the new rules could impact the timing of revenue recognition for certain contracts. ASU 2014-09 is effective for the Company in the first quarter of fiscal 2018 using either one of two methods: (i) retrospectively to each prior reporting period presented with the option to elect certainprovides practical expedients as defined within ASU 2014-09; or (ii) retrospectively with the cumulative effect of initiallyand exceptions for applying ASU 2014-09 recognized at the date of initial applicationU.S. GAAP to contracts, hedging relationships, and providingother transactions affected by reference rate reform if certain additional disclosures as defined per ASU 2014-09 (modified retrospective method).
The Company is evaluating the impact of the new standard. The ultimate impact on revenue resulting from the application of the new standard will be subject to assessments thatcriteria are dependent on many variables, including, but not limited to, the terms of the contractual arrangements and the mix of business. Upon adoption, the Company expect that variable consideration when present in a revenue arrangements will need to be estimated based on its achievability and recognized over the contractual period as compared to recognizing such revenue as the services are performed. The Company also expects a change in the manner that it recognizes certain incremental and fulfillment costs from expensing them as incurred to deferring and recognizing them over the contractual period.
The Company intends to adopt the new standard, effective January 1, 2018, using the modified retrospective method. The Company's considerations include, but are not limited to, the comparability of its financial statements and the comparability within its industry from application of the new standard to its contractual arrangements. The Company has established an implementation team to implement the standard update related to the recognition of revenue from contracts with customers and continues to evaluate the changes to accounting system and processes, and additional disclosure requirements that may be necessary.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2017
(In thousands, except share and per share amounts)
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net). ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers.met. The amendments are elective and are effective upon issuance for all entities for fiscal years, and interim periods within those fiscal years, beginning afterthrough December 15, 2017.31, 2022. The Company is currently evaluating the impact that the adoption of this guidance will haveASU on its consolidated financial statements.
In February 2016, theAugust 2020, FASB issued ASU 2016-02, Leases (Topic 842)No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU 2016-02 requiressimplifies the identificationaccounting for certain financial instruments with characteristics of arrangements that shouldliabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU removes separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature and hence most of the instruments will be accounted for as leases by lessees. In general,a single model (either debt or equity). The ASU also states that entities must apply the if-converted method to all convertible instruments for lease arrangements exceedingcalculation of diluted EPS and the treasury stock method is no longer available. An entity can use either a twelve month term, these arrangements must now be recognized as assets and liabilities on the balance sheet of the lessee. Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all leases, whether operatingfull or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption of ASU 2016-02 must be calculated using the applicable incremental borrowing rate at the date of adoption. In addition, ASU 2016-02 requires the use of the modified retrospective method, which will require adjustmentapproach to all comparative periods presented inadopt the consolidated financial statements.ASU’s guidance. The new guidanceASU is effective for fiscal years beginning after December 15, 2018, including2021 and may be early adopted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the impact that theof adoption of this guidance will haveASU on its consolidated financial statements and the implementation approach to be used.statements.
(d) Recently Adopted Accounting Pronouncements
In June 2016,December 2019, FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which require a financial asset (or a groupNo. 2019-12, Income TaxesSimplifying the Accounting for Income Taxes. This ASU eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of financial assets) measured at amortized costdeferred tax liabilities for outside basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is to be deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The amendment should be applied through a modified retrospective approach. Early adoption as of the fiscal years beginning after December 15, 2018 is permitted. The adoption of ASU 2016-13 is not expected to have a material effect on the Company's consolidated financial statements.
In August 2016, FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. The amendments apply to all entities that are required to present a Statement of Cash Flows under Topic 230. The amendments are an improvement to GAAP because they provide guidance for each of eight issues identified therein, thereby reducing the current and potential future diversity in practice. The amendments are effective for fiscal years beginning after December 15, 2017 and interim periods within those annual periods and should be applied using a retrospective transition method to each period presented.differences. The Company does not expect theadopted this ASU on January 1, 2021. The adoption of this ASU to havehas a material effectminimal impact on itsthe Company’s unaudited consolidated financial position or results of operations.statements.
In November 2016,October 2020, FASB issued ASU 2016-18, StatementNo. 2020-10, Codification Improvements, to provide guidance for technical corrections such as conforming amendments, clarifications to guidance, simplifications to wording or structure of Cash Flows - Restricted cash. The amendments apply to all entities that have restricted cash or restricted cash equivalentsguidance, and are required to present a Statement of Cash Flows under Topic 230.other minor improvements. The amendments in this update requireASU improve the consistency of the ASC by ensuring that a Statement of Cash Flows should explain the change during the periodall guidance that requires or provides an option for an entity to provide information in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The amendments are effective for fiscal years beginning after December 15, 2017 and interim periods within those annual periods. Early adoptionnotes to financial statements is permitted with an adjustment reflected ascodified in the disclosure section of the beginning of the fiscal year in which the amendment is adoption.ASC. The Company does not expect theadopted this ASU on January 1, 2021. The adoption of this ASU todid not have a material effectimpact on its financial position or results of operations.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), which eliminates Step 2 from the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017 and should be applied prospectively. The Company is currently evaluating the impact that the adoption of this standard will have on itsCompany’s unaudited consolidated financial statements.
In March, 2017, FASBJanuary 2021, Financial Accounting Standard Board (“FASB”) issued ASU 2017-07, ImprovingAccounting Standard Update (“ASU”) No. 2021-01, Reference Rate Reform (Topic 848): Scope, to expand the Presentationscope of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost. The ASU amends ASC 715, Compensation — Retirement Benefits, to require employers that present a measure of operating income in their statement of incomeTopic 848 to include onlyderivative instruments affected by changes to the service cost componentinterest rates used for discounting, margining or contract price alignment (commonly referred to as the discounting transition). This ASU extends some of net periodic pension costTopic 848’s optional expedients and net periodic post-retirement benefit cost in operating expenses (togetherexceptions for contract modifications and hedge accounting to derivative instruments impacted by discounting transition as a result of the discontinuation of the use of LIBOR as a benchmark interest rate due to reference rate reform. This ASU is effective immediately for all entities with other employee compensation costs). Thethe option to be applied retrospectively as of any date from the beginning of an interim period
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
SeptemberJune 30, 20172021
(In thousands, except share and per share amounts)
other components of net benefit cost, including amortization of prior service cost/credit,that includes or is subsequent to March 12, 2020, and settlement and curtailment effects, areprospectively to be included in non-operating expenses.any new contract modifications made on or after January 7, 2021 through December 31, 2022. The update also stipulates that only the service cost component of net benefit cost is eligible for capitalization. The amendments are effective for fiscal years beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period. The Company is currently evaluating the impact that the adoption of this guidance willASU did not have a material impact on itsthe Company’s unaudited consolidated financial statements.
In May 2017, FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. Modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change in terms or conditions. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.
In August 2017, FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in their financial statements. The amendments are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption being permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.
3. Segment and Geographical Information
The Company operates in the BPM industry and is a provider of operations management and analytics services.
The Company has eight operating segments, which aremanages and reports financial information through its 4 strategic business units that align its products and services with how it manages its business, approaches its key markets and interacts with its clients. Six of those operating segments provide BPM or “operations management” services, which the Company organizes into industry-focused operating segments (Insurance, Healthcare, Travel, Transportation and Logistics, Banking and Financial Services, and Utilities) and one “capability” operating segment (Finance and Accounting) that provides services to clients in industry-focused segments as well as clients across other industries. In each of these six operating segments, the Company provides operations management services, which typically involve transfer to the Company of select business operations of a client, after which it administers and manages those operations for its client on an ongoing basis. The remaining two operating segments are Consulting, which provides industry-specific transformational services related to operations management services, and the Analytics operating segment, which provides services that focus on driving improved business outcomes for clients by generating data-driven insights across all parts of their business.
In prior periods the Company presented two reportable segments: Operations Management (which included itsunits: Insurance, Healthcare, Travel, TransportationAnalytics and Logistics, FinanceEmerging Business. These business units develop client-specific solutions, build capabilities, maintain a unified go-to-market approach and Accounting, Bankingare integrally responsible for service delivery, customer satisfaction, growth and Financial services, Utilities and Consulting operating segments) and Analytics. Effective for the quarter and year ended December 31, 2016, the Company presents information for the following reportable segments:profitability.
• Insurance
• Healthcare
• Travel, Transportation and Logistics (“TT&L”)
• Finance and Accounting (“F&A”), and
• Analytics
The remaining operating segments, which includes the banking and financial services, utilities and consulting operating segments have been included in a category called “All Other”. Segment information for all prior periods presented herein has been changed to conform to the current presentation. This change in segment presentation does not affect the Company's unaudited consolidated statements of income and comprehensive income, balance sheets or statements of cash flows.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2017
(In thousands, except share and per share amounts)
The chief operating decision maker (“CODM”) generally reviews financial information such as revenues, cost of revenues and gross profit, disaggregated by the operating segments to allocate an overall budget among the operating segments.
The Company does not allocate and therefore the CODM does not evaluate, othercertain operating expenses, interest expense or income taxes by segment. Many of the Company’s assets are shared by multiple operating segments. The Company manages these assets on a total Company basis, not by operating segment, and therefore asset information and capital expenditures by operating segment are not presented.
Revenues and cost of revenues for the three months ended SeptemberJune 30, 20172021 and 2016,2020, respectively, for each of the reportable segments, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2021 |
Insurance | | Healthcare | | Emerging Business | | Analytics | | Total |
|
Revenues, net | $ | 94,719 | | | $ | 28,250 | | | $ | 40,690 | | | $ | 111,405 | | | $ | 275,064 | |
Cost of revenues(1) | 59,359 | | | 17,685 | | | 22,346 | | | 71,311 | | | 170,701 | |
Gross profit(1) | $ | 35,360 | | | $ | 10,565 | | | $ | 18,344 | | | $ | 40,094 | | | $ | 104,363 | |
Operating expenses | | | | | | | | | 68,533 | |
Foreign exchange gain, interest expense and other income, net | | | | | | | | | 1,048 | |
Income tax expense | | | | | | | | | 8,865 | |
Gain from equity-method investment | | | | | | | | | 8 | |
Net income | | | | | | | | | $ | 28,021 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2017 |
| Insurance | | Healthcare | | TT&L | | F&A | | All Other | | Analytics | | Total |
|
Revenues, net | $ | 59,608 |
| | $ | 18,871 |
| | $ | 18,496 |
| | $ | 21,642 |
| | $ | 19,984 |
| | $ | 53,744 |
| | $ | 192,345 |
|
Cost of revenues (exclusive of depreciation and amortization) | 39,699 |
| | 11,966 |
| | 10,135 |
| | 13,310 |
| | 13,629 |
| | 36,151 |
| | 124,890 |
|
Gross profit | $ | 19,909 |
| | $ | 6,905 |
| | $ | 8,361 |
| | $ | 8,332 |
| | $ | 6,355 |
| | $ | 17,593 |
| | $ | 67,455 |
|
Operating expenses | | | | | | | | | | | | | 48,800 |
|
Foreign exchange gain, interest expense and other income, net | | | | | | | | | | | | | 5,241 |
|
Income tax expense | | | | | | | | | | | | | 2,819 |
|
Net income | | | | | | | | | | | | | $ | 21,077 |
|
(1) Exclusive of depreciation and amortization expense.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2020 |
Insurance | | Healthcare | | Emerging Business | | Analytics | | Total |
|
Revenues, net | $ | 81,281 | | | $ | 24,978 | | | $ | 34,535 | | | $ | 81,679 | | | $ | 222,473 | |
Cost of revenues(1) | 59,113 | | | 19,640 | | | 22,416 | | | 57,232 | | | 158,401 | |
Gross profit(1) | $ | 22,168 | | | $ | 5,338 | | | $ | 12,119 | | | $ | 24,447 | | | $ | 64,072 | |
Operating expenses | | | | | | | | | 54,206 | |
Foreign exchange gain, interest expense and other income, net | | | | | | | | | 2,701 | |
Income tax expense | | | | | | | | | 4,072 | |
Loss from equity-method investment | | | | | | | | | 66 | |
Net income | | | | | | | | | $ | 8,429 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2016 |
| | Insurance | | Healthcare | | TT&L | | F&A | | All Other | | Analytics | | Total |
|
| Revenues, net | $ | 52,801 |
| | $ | 15,959 |
| | $ | 17,519 |
| | $ | 19,858 |
| | $ | 23,426 |
| | $ | 41,637 |
| | $ | 171,200 |
|
| Cost of revenues (exclusive of depreciation and amortization) | 37,797 |
| | 10,887 |
| | 10,637 |
| | 12,012 |
| | 14,655 |
| | 25,779 |
| | 111,767 |
|
| Gross profit | $ | 15,004 |
| | $ | 5,072 |
| | $ | 6,882 |
| | $ | 7,846 |
| | $ | 8,771 |
| | $ | 15,858 |
| | $ | 59,433 |
|
| Operating expenses | | | | | | �� | | | | | | | 42,074 |
|
| Foreign exchange gain, interest expense and other income, net | | | | | | | | | | | | | 4,337 |
|
| Income tax expense | | | | | | | | | | | | | 5,646 |
|
| Net income | | | | | | | | | | | | | $ | 16,050 |
|
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
SeptemberJune 30, 20172021
(In thousands, except share and per share amounts)
(1) Exclusive of depreciation and amortization expense.
Revenues and cost of revenues for the ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, respectively, for each of the reportable
segments, are as follows:
| | | Nine months ended September 30, 2017 | | Six months ended June 30, 2021 |
| Insurance | | Healthcare | | TT&L | | F&A | | All Other | | Analytics | | Total | Insurance | | Healthcare | | Emerging Business | | Analytics | | Total |
| |
Revenues, net | $ | 173,784 |
| | $ | 56,726 |
| | $ | 53,374 |
| | $ | 63,694 |
| | $ | 62,547 |
| | $ | 154,310 |
| | $ | 564,435 |
| Revenues, net | $ | 185,879 | | | $ | 58,515 | | | $ | 78,358 | | | $ | 213,727 | | | $ | 536,479 | |
Cost of revenues (exclusive of depreciation and amortization) | 119,004 |
| | 36,402 |
| | 30,832 |
| | 39,163 |
| | 42,770 |
| | 102,287 |
| | 370,458 |
| |
Gross profit | $ | 54,780 |
| | $ | 20,324 |
| | $ | 22,542 |
| | $ | 24,531 |
| | $ | 19,777 |
| | $ | 52,023 |
| | $ | 193,977 |
| |
Cost of revenues(1) | | Cost of revenues(1) | 115,452 | | | 35,076 | | | 43,190 | | | 135,804 | | | 329,522 | |
Gross profit(1) | | Gross profit(1) | $ | 70,427 | | | $ | 23,439 | | | $ | 35,168 | | | $ | 77,923 | | | $ | 206,957 | |
Operating expenses | | | | | | | | | | | | | 143,291 |
| Operating expenses | | | | | | | | | 129,572 | |
Foreign exchange gain, interest expense and other income, net | | | | | | | | | | | | | 14,759 |
| Foreign exchange gain, interest expense and other income, net | | 418 | |
Income tax expense | | | | | | | | | | | | | 7,202 |
| Income tax expense | | 17,823 | |
Loss from equity-method investment | | Loss from equity-method investment | | 28 | |
Net income | | | | | | | | | | | | | $ | 58,243 |
| Net income | | $ | 59,952 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2016 |
| | Insurance | | Healthcare | | TT&L | | F&A | | All Other | | Analytics |
| Total |
|
| Revenues, net | $ | 151,696 |
| | $ | 49,788 |
| | $ | 52,623 |
| | $ | 58,961 |
| | $ | 75,434 |
| | $ | 120,212 |
| | $ | 508,714 |
|
| Cost of revenues (exclusive of depreciation and amortization) | 108,516 |
| | 32,440 |
| | 31,901 |
| | 35,385 |
| | 47,836 |
| | 76,094 |
| | 332,172 |
|
| Gross profit | $ | 43,180 |
| | $ | 17,348 |
| | $ | 20,722 |
| | $ | 23,576 |
| | $ | 27,598 |
| | $ | 44,118 |
| | $ | 176,542 |
|
| Operating expenses | | | | | | | | | | | | | 126,495 |
|
| Foreign exchange gain, interest expense and other income, net | | | | | | | | | | | | | 14,747 |
|
| Income tax expense | | | | | | | | | | | | | 18,549 |
|
| Net income | | | | | | | | | | | | | $ | 46,245 |
|
(1) Exclusive of depreciation and amortization expense.Net revenues
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2020 |
Insurance | | Healthcare | | Emerging Business | | Analytics | | Total |
|
Revenues, net | $ | 165,020 | | | $ | 52,007 | | | $ | 77,326 | | | $ | 174,110 | | | $ | 468,463 | |
Cost of revenues(1) | 118,078 | | | 39,233 | | | 47,898 | | | 115,848 | | | 321,057 | |
Gross profit(1) | $ | 46,942 | | | $ | 12,774 | | | $ | 29,428 | | | $ | 58,262 | | | $ | 147,406 | |
Operating expenses | | | | | | | | | 110,053 | |
Foreign exchange gain, interest expense and other income, net | | | | | | | | | 3,535 | |
Income tax expense | | | | | | | | | 9,927 | |
Loss from equity-method investment | | | | | | | | | 121 | |
Net income | | | | | | | | | $ | 30,840 | |
(1) Exclusive of the Companydepreciation and amortization expense.
Revenues, net by service type, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
BPM and related services(1) | $ | 163,659 | | | $ | 140,794 | | | $ | 322,752 | | | $ | 294,353 | |
Analytics services | 111,405 | | | 81,679 | | | 213,727 | | | 174,110 | |
Revenues, net | $ | 275,064 | | | $ | 222,473 | | | $ | 536,479 | | | $ | 468,463 | |
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
BPM and related services (1) | $ | 138,601 |
| | $ | 129,563 |
| | $ | 410,125 |
| | $ | 388,502 |
|
Analytics services | 53,744 |
| | 41,637 |
| | 154,310 |
| | 120,212 |
|
Total | $ | 192,345 |
| | $ | 171,200 |
| | $ | 564,435 |
| | $ | 508,714 |
|
(1) BPM and related services include revenues of the Company's five industry-focused operating segments, one capability operating segmentInsurance, Healthcare and consulting operating segment, which provides services relatedEmerging Business reportable segments. Refer to operations management services. Seethe reportable segment disclosure above.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
SeptemberJune 30, 20172021
(In thousands, except share and per share amounts)
The Company attributes the revenues to regions based upon the location of its customers.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Revenues, net | | | | | | | |
United States | $ | 235,288 | | | $ | 189,032 | | | $ | 459,656 | | | $ | 396,912 | |
Non-United States | | | | | | | |
United Kingdom | 26,175 | | | 18,830 | | | 50,926 | | | 42,108 | |
Rest of World | 13,601 | | | 14,611 | | | 25,897 | | | 29,443 | |
Total Non-United States | 39,776 | | | 33,441 | | | 76,823 | | | 71,551 | |
Revenues, net | $ | 275,064 | | | $ | 222,473 | | | $ | 536,479 | | | $ | 468,463 | |
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenues, net | | | | | | | |
United States | $ | 158,501 |
| | $ | 137,047 |
| | $ | 462,676 |
| | $ | 407,272 |
|
Non-United States | | | | | | | |
United Kingdom | 26,824 |
| | 27,993 |
| | 81,857 |
| | 84,284 |
|
Rest of World | 7,020 |
| | 6,160 |
| | 19,902 |
| | 17,158 |
|
Total Non-United States | 33,844 |
| | 34,153 |
| | 101,759 |
| | 101,442 |
|
| $ | 192,345 |
| | $ | 171,200 |
| | $ | 564,435 |
| | $ | 508,714 |
|
Property, plant and equipmentLong-lived assets by geographic area, which consist of property and equipment, net and operating lease right-of-use assets were as follows:
| | | | | | | | | | | |
| As of |
| June 30, 2021 | | December 31, 2020 |
Long-lived assets | | | |
India | $ | 87,234 | | | $ | 97,261 | |
United States | 46,965 | | | 46,659 | |
Philippines | 25,635 | | | 29,434 | |
Rest of World | 9,957 | | | 11,439 | |
Long-lived assets | $ | 169,791 | | | $ | 184,793 | |
4. Revenues, net
Refer to Note 3 - Segment and Geographical Information to the unaudited consolidated financial statements for revenues disaggregated by reportable segments and geography.
Contract balances
The following table provides information about accounts receivable, contract assets and contract liabilities from contracts with customers:
| | | | | | | | | | | |
| As of |
| June 30, 2021 | | December 31, 2020 |
| | | |
Accounts receivable, net | $ | 182,111 | | | $ | 147,635 | |
Contract assets | $ | 3,547 | | | $ | 4,437 | |
Contract liabilities | | | |
Deferred revenue (consideration received in advance) | $ | 10,503 | | | $ | 30,450 | |
Consideration received for process transition activities | $ | 1,966 | | | $ | 2,774 | |
Accounts receivable includes $89,237 and $63,995 as of June 30, 2021 and December 31, 2020, respectively, representing unbilled receivables. The Company has accrued the unbilled receivables for work performed in accordance with the terms of contracts with customers and considers no significant performance risk associated with its unbilled receivables.
Contract assets represent upfront payments such as deal signing discounts or deal signing bonuses made to customers. These costs are amortized over the expected period of the benefit and are recorded as an adjustment to transaction price and
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2021
(In thousands, except share and per share amounts)
|
| | | | | | | |
| As of |
| September 30, 2017 | | December 31, 2016 |
Property, plant and equipment, net | | | |
India | $ | 37,139 |
| | $ | 23,362 |
|
United States | 14,829 |
| | 10,809 |
|
Philippines | 9,031 |
| | 11,900 |
|
Rest of World | 2,730 |
| | 2,958 |
|
| $ | 63,729 |
| | $ | 49,029 |
|
reduced from revenues. The Company’s assessment did not indicate any impairment losses on its contract assets for the periods presented.4.Contract liabilities represent that portion of deferred revenue for which payments have been received in advance from customers. The Company also defers revenues attributable to certain process transition activities for which costs have been capitalized by the Company as contract fulfillment costs. Consideration received from customers, if any, relating to such transition activities are classified under contract liabilities and are included within “Deferred revenues” and “Other non-current liabilities” in the unaudited consolidated balance sheets. The revenues are recognized as (or when) the performance obligation is fulfilled under the contract with customer.
Revenue recognized during the three and six months ended June 30, 2021 and 2020, which was included in the contract liabilities balance at the beginning of the respective periods:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Deferred revenue (consideration received in advance) | $ | 3,332 | | | $ | 2,226 | | | $ | 26,953 | | | $ | 8,194 | |
Consideration received for process transition activities | $ | 508 | | | $ | 287 | | | $ | 1,187 | | | $ | 561 | |
Contract acquisition and fulfillment costs
The following table provides details of the Company’s contract acquisition and fulfillment costs:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Contract Acquisition Costs |
| Three months ended | | Six months ended | | Year ended |
| June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 | | December 31, 2020 |
| | | | | | | | | |
Opening Balance | $ | 785 | | | $ | 1,215 | | | $ | 1,027 | | | $ | 1,307 | | | $ | 1,307 | |
Additions | 374 | | | 187 | | | 374 | | | 187 | | | 310 | |
Amortization | (292) | | | (132) | | | (534) | | | (224) | | | (590) | |
Closing Balance | $ | 867 | | | $ | 1,270 | | | $ | 867 | | | $ | 1,270 | | | $ | 1,027 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Contract Fulfillment Costs |
| Three months ended | | Six months ended | | Year ended |
| June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 | | December 31, 2020 |
| | | | | | | | | |
Opening Balance | $ | 4,419 | | | $ | 6,916 | | | $ | 5,631 | | | $ | 7,255 | | | $ | 7,255 | |
Additions | 158 | | | 363 | | | 164 | | | 647 | | | 779 | |
Amortization | (883) | | | (499) | | | (2,101) | | | (1,122) | | | (2,403) | |
Closing Balance | $ | 3,694 | | | $ | 6,780 | | | $ | 3,694 | | | $ | 6,780 | | | $ | 5,631 | |
There was 0 impairment for contract acquisition and contract fulfillment costs as of June 30, 2021 and December 31, 2020. The capitalized costs are amortized over the expected period of benefit of the contract.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2021
(In thousands, except share and per share amounts)
Allowance for expected credit losses
The Company evaluates the credit risk of its customers based on a combination of various financial and qualitative factors that may affect the ability of each customer to pay. The Company considered current and anticipated future economic conditions relating to the industries of the Company’s customers and the countries where it operates. In calculating expected credit loss, the Company also considered past payment trends, credit rating and other related credit information for its significant customers to estimate the probability of default in the future and estimates relating to the possible effects resulting from COVID-19.
The duration and severity of COVID-19 and continued market volatility is highly uncertain and, as such, the impact on expected losses is subject to significant judgment, including but not limited to changes in customers’ credit rating, and may cause variability in the Company’s allowance for credit losses in future periods.
| | | | | | | | | | | |
| As of |
| June 30, 2021 | | December 31, 2020 |
Accounts receivable, including unbilled receivables | $ | 182,841 | | | $ | 148,824 | |
Less: Allowance for expected credit loss | (730) | | | (1,189) | |
Accounts receivable, net | $ | 182,111 | | | $ | 147,635 | |
The movement in allowance for expected credit loss on customer balances for the three and six months ended June 30, 2021 and 2020 and year ended December 31, 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended | | Year ended |
| June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 | | December 31, 2020 |
Balance at the beginning of the period | $ | 1,183 | | | $ | 1,346 | | | $ | 1,189 | | | $ | 1,163 | | | $ | 1,163 | |
Additions / (Reductions) during the period | (445) | | | 186 | | | (395) | | | 381 | | | 300 | |
Charged against allowance | (13) | | | (100) | | | (73) | | | (100) | | | (269) | |
Translation adjustment | 5 | | | 2 | | | 9 | | | (10) | | | (5) | |
Balance at the end of the period | $ | 730 | | | $ | 1,434 | | | $ | 730 | | | $ | 1,434 | | | $ | 1,189 | |
5. Earnings Per Share
Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding, adjusted for outstanding shares that are subject to repurchase during each period. Diluted earnings per share is computed using the weighted average number of common shares plus the potentially dilutive effect of common stock equivalents (outstanding stock options, restricted stock and restricted stock units) issued and outstanding at the reporting date, and assumed conversion premium of outstanding convertible notes, using the treasury stock method. Stock options, restrictedCommon stock equivalents and restricted stock unitsthe conversion premium of outstanding convertible notes that are anti-dilutive are excluded from the computation of weighted average shares outstanding. The Company includes performance stock unit awards in dilutive potential common shares when they become contingently issuable and have a dilutive impact per authoritative guidance and excludes such awards when they are not contingently issuable.
Diluted weighted-average shares outstanding is affected by the treatment of our 3.5% per annum Convertible Senior Notes due October 1, 2024 (the “Notes”). The Company has a choice to settle the Notes in cash, shares or any combination of the two. The Company presently intends and has the ability to settle the principal balance of the Notes in cash, and as such, the Company has applied the treasury stock method. The dilution related to the conversion premium, if any, of the Notes is included in the calculation of diluted weighted-average shares outstanding to the extent the issuance is dilutive based on the average stock price during the reporting period being greater than the conversion price of $75. Refer to Note 17 - Borrowings to the unaudited consolidated financial statements for further details.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2021
(In thousands, except share and per share amounts)
The following table sets forth the computation of basic and diluted earnings per share:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Numerators: | | | | | | | |
Net income | $ | 28,021 | | | $ | 8,429 | | | $ | 59,952 | | | $ | 30,840 | |
Denominators: | | | | | | | |
Basic weighted average common shares outstanding | 33,571,074 | | | 34,486,202 | | | 33,652,146 | | | 34,443,884 | |
Dilutive effect of share-based awards | 330,063 | | | 111,486 | | | 336,528 | | | 215,262 | |
Dilutive effect of conversion premium on convertible notes | 488,631 | | | 0 | | | 364,919 | | | 0 | |
Diluted weighted average common shares outstanding | 34,389,768 | | | 34,597,688 | | | 34,353,593 | | | 34,659,146 | |
Earnings per share attributable to ExlService Holdings Inc. stockholders: | | | | | | | |
Basic | $ | 0.83 | | | $ | 0.24 | | | $ | 1.78 | | | $ | 0.90 | |
Diluted | $ | 0.81 | | | $ | 0.24 | | | $ | 1.75 | | | $ | 0.89 | |
Weighted average potentially dilutive shares considered anti-dilutive and not included in computing diluted earnings per share | 1,748 | | | 638,318 | | | 874 | | | 404,315 | |
6. Cash, Cash Equivalents and Restricted Cash
For the purpose of unaudited statements of cash flows, cash, cash equivalents and restricted cash comprise of the following:
| | | | | | | | | | | | | | | | | |
| As of |
| June 30, 2021 | | June 30, 2020 | | December 31, 2020 |
Cash and cash equivalents | $ | 150,211 | | | $ | 163,619 | | | $ | 218,530 | |
Restricted cash (current) | 5,065 | | | 4,858 | | | 4,690 | |
Restricted cash (non-current) | 2,260 | | | 2,298 | | | 2,299 | |
Cash, cash equivalents and restricted cash | $ | 157,536 | | | $ | 170,775 | | | $ | 225,519 | |
7. Other Income, net
Other income, net consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Gain on sale and mark-to-market of mutual funds | $ | 1,655 | | | $ | 3,109 | | | $ | 2,758 | | | $ | 5,166 | |
Interest and dividend income | 689 | | | 632 | | | 1,291 | | | 1,164 | |
Others, net | (129) | | | 484 | | | (424) | | | 424 | |
Other income, net | $ | 2,215 | | | $ | 4,225 | | | $ | 3,625 | | | $ | 6,754 | |
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Numerators: | | | | | | | |
Net income | $ | 21,077 |
| | $ | 16,050 |
| | $ | 58,243 |
| | $ | 46,245 |
|
Denominators: | | | | | | | |
Basic weighted average common shares outstanding | 33,838,374 |
| | 33,624,401 |
| | 33,834,392 |
| | 33,542,258 |
|
Dilutive effect of share based awards | 1,205,613 |
| | 1,051,084 |
| | 1,214,280 |
| | 970,557 |
|
Diluted weighted average common shares outstanding | 35,043,987 |
| | 34,675,485 |
| | 35,048,672 |
| | 34,512,815 |
|
Earnings per share: | | | | | | | |
Basic | $ | 0.62 |
| | $ | 0.48 |
| | $ | 1.72 |
| | $ | 1.38 |
|
Diluted | $ | 0.60 |
| | $ | 0.46 |
| | $ | 1.66 |
| | $ | 1.34 |
|
Weighted average common shares considered anti-dilutive in computing diluted earnings per share | — |
| | 32,516 |
| | 151,961 |
| | 97,574 |
|
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
SeptemberJune 30, 20172021
(In thousands, except share and per share amounts)
5. Other Income,8. Property and Equipment, net
Other income,Property and equipment, net consists of the following:
| | | | | | | | | | | | | | | | | |
| Estimated useful lives | | As of |
| (Years) | | June 30, 2021 | | December 31, 2020 |
Owned Assets: | | | | | |
Network equipment and computers | 3-5 | | $ | 110,321 | | | $ | 107,016 | |
Software | 3-5 | | 99,187 | | | 99,708 | |
Leasehold improvements | 3-8 | | 42,547 | | | 48,052 | |
Office furniture and equipment | 3-8 | | 20,276 | | | 22,210 | |
Motor vehicles | 2-5 | | 619 | | | 599 | |
Buildings | 30 | | 1,070 | | | 1,089 | |
Land | — | | 700 | | | 712 | |
Capital work in progress | — | | 5,766 | | | 4,647 | |
| | | 280,486 | | | 284,033 | |
Less: Accumulated depreciation and amortization | | | (194,377) | | | (191,629) | |
| | | $ | 86,109 | | | $ | 92,404 | |
Right-of-use assets under finance leases: | | | | | |
Network equipment and computers | | | $ | 91 | | | $ | 93 | |
Leasehold improvements | | | 1,126 | | | 817 | |
Office furniture and equipment | | | 725 | | | 255 | |
Motor vehicles | | | 656 | | | 688 | |
| | | 2,598 | | | 1,853 | |
Less: Accumulated depreciation and amortization | | | (2,196) | | | (1,382) | |
| | | $ | 402 | | | $ | 471 | |
Property and equipment, net | | | $ | 86,511 | | | $ | 92,875 | |
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Interest and dividend income | $ | 322 |
| | $ | 354 |
| | $ | 1,317 |
| | $ | 1,208 |
|
Gain on mutual fund investments | 2,556 |
| | 2,562 |
| | 6,777 |
| | 6,191 |
|
Change in fair value of earn-out consideration | — |
| | — |
| | — |
| | 4,060 |
|
Other, net | 44 |
| | (25 | ) | | 777 |
| | 738 |
|
Other income, net | $ | 2,922 |
| | $ | 2,891 |
| | $ | 8,871 |
| | $ | 12,197 |
|
6. Property, Plant and Equipment
Property, Plant and Equipment consist of the following:
|
| | | | | | | | | |
| Estimated useful lives | | As of |
| (Years) | | September 30, 2017 | | December 31, 2016 |
Owned Assets: |
| |
| |
|
Network equipment and computers | 3-5 | | $ | 73,728 |
| | $ | 65,381 |
|
Software | 3-5 | | 56,369 |
| | 44,617 |
|
Leasehold improvements | 3-8 | | 36,741 |
| | 31,192 |
|
Office furniture and equipment | 3-8 | | 18,397 |
| | 15,426 |
|
Motor vehicles | 2-5 | | 645 |
| | 580 |
|
Buildings | 30 | | 1,218 |
| | 1,171 |
|
Land | — | | 797 |
| | 766 |
|
Capital work in progress | — | | 9,624 |
| | 4,964 |
|
|
| | 197,519 |
| | 164,097 |
|
Less: Accumulated depreciation and amortization |
| | (134,245 | ) | | (115,568 | ) |
|
| | $ | 63,274 |
| | $ | 48,529 |
|
Assets under capital leases: |
| |
| |
|
Leasehold improvements |
| | $ | 889 |
| | $ | 854 |
|
Office furniture and equipment |
| | 138 |
| | 133 |
|
Motor vehicles |
| | 644 |
| | 810 |
|
|
| | 1,671 |
| | 1,797 |
|
Less: Accumulated depreciation and amortization |
| | (1,216 | ) | | (1,297 | ) |
|
| | $ | 455 |
| | $ | 500 |
|
Property, Plant and Equipment, net |
| | $ | 63,729 |
| | $ | 49,029 |
|
Capital work in progress represents advances paid towards acquisition of property plant and equipment and cost of property, plant and equipment andcosts incurred on internally generateddeveloped software costs not yet ready to be placed in service.
During the three and six months ended June 30, 2021, there were no changes in estimated useful lives of property and equipment.
The depreciation and amortization expense, excluding amortization of acquisition-related intangibles, recognized in the unaudited consolidated statements of income was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Depreciation and amortization expense | $ | 8,913 | | | $ | 8,975 | | | $ | 17,653 | | | $ | 17,271 | |
The effect of foreign exchange gain/(loss) upon settlement of cash flow hedges recorded under depreciation and amortization, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Effect of foreign exchange gain/(loss) | | $ | 158 | | | $ | (71) | | | $ | 323 | | | $ | (49) | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
SeptemberJune 30, 20172021
(In thousands, except share and per share amounts)
The depreciation and amortization expense excluding amortization of acquisition-related intangiblesInternally developed software costs, included under Software, was as follows:
| | | | | | | | | | | |
| As of |
| June 30, 2021 | | December 31, 2020 |
Cost | $ | 18,827 | | | $ | 18,371 | |
Less : Accumulated amortization | (8,070) | | | (5,998) | |
Internally developed software, net | $ | 10,757 | | | $ | 12,373 | |
The amortization expense on internally developed software recognized in the unaudited consolidated statements of income was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Amortization expense | $ | 1,055 | | | $ | 1,846 | | | $ | 2,079 | | | $ | 2,677 | |
As of June 30, 2021 and December 31, 2020, the Company believes 0 impairment exists because the long-lived asset's future undiscounted net cash flows expected to be generated exceeds its carrying value; however, there can be no assurances that long-lived assets will not be impaired in future periods. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which undiscounted cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount, and the asset’s residual value, if any. It is reasonably possible that the judgments and estimates described above could change in future periods. The duration and severity of COVID-19 and continued market volatility is highly uncertain and, as such, the impact on undiscounted cash flows is subject to significant judgment and may cause variability in the Company’s assessment of the existence of any impairment.
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Depreciation and amortization expense | $ | 6,221 |
| | $ | 5,749 |
| | $ | 18,279 |
| | $ | 16,719 |
|
|
| | | | | | | |
Software - Internally developed: | | | |
| As of |
| September 30, 2017 | | December 31, 2016 |
Cost | $ | 2,364 |
| | $ | 2,242 |
|
Less : Accumulated amortization expense | 791 |
| | 336 |
|
| $ | 1,573 |
| | $ | 1,906 |
|
7.9. Goodwill and Intangible Assets
Goodwill
The following table sets forth detailsCompany transitioned to new segment reporting structure effective January 1, 2020, which resulted in certain changes to its operating segments and reporting units. The Company reallocated goodwill to its reporting units using a relative fair value approach. In addition, the Company completed an assessment of any potential goodwill impairment for all its reporting units immediately prior to the Company’s goodwill balance as of September 30, 2017:reallocation and determined that no impairment existed.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Insurance | | Healthcare | | TT&L | | F&A | | All Other | | Analytics | | Total |
Balance as at January 1, 2016 | $ | 35,824 |
| | $ | 19,276 |
| | $ | 13,278 |
| | $ | 47,891 |
| | $ | 5,326 |
| | $ | 49,940 |
| | $ | 171,535 |
|
Acquisitions | 2,510 |
| | — |
| | — |
| | — |
| | — |
| | 13,598 |
| | 16,108 |
|
Currency translation adjustments | (224 | ) | | — |
| | (295 | ) | | (354 | ) | | — |
| | — |
| | (873 | ) |
Balance as at December 31, 2016 | $ | 38,110 |
| | $ | 19,276 |
| | $ | 12,983 |
| | $ | 47,537 |
| | $ | 5,326 |
| | $ | 63,538 |
| | $ | 186,770 |
|
Currency translation adjustments | 204 |
| | — |
| | 445 |
| | 534 |
| | — |
| | — |
| | 1,183 |
|
Balance as at September 30, 2017 | $ | 38,314 |
| | $ | 19,276 |
| | $ | 13,428 |
| | $ | 48,071 |
| | $ | 5,326 |
| | $ | 63,538 |
| | $ | 187,953 |
|
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
SeptemberJune 30, 20172021
(In thousands, except share and per share amounts)
The following table sets forth details of changes in goodwill by reportable segment of the Company:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Insurance | | Healthcare | | Emerging Business | | Analytics | | Total |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Balance at January 1, 2021 | $ | 50,499 | | | $ | 21,953 | | | $ | 49,348 | | | $ | 227,288 | | | $ | 349,088 | |
| | | | | | | | | |
Currency translation adjustments | 37 | | | 0 | | | (377) | | | (1) | | | (341) | |
Balance at June 30, 2021 | $ | 50,536 | | | $ | 21,953 | | | $ | 48,971 | | | $ | 227,287 | | | $ | 348,747 | |
During the fourth quarter of 2020, the Company performed its annual impairment test of goodwill for those reporting units that had goodwill recorded. Based on the results, the fair values of each of the Company’s reporting units exceeded their carrying value and the goodwill was not impaired.
As of June 30, 2021, the Company evaluated the continuing effects of COVID-19 and its impact on the global economy on each of the Company’s reporting units to assess whether there was a triggering event during the quarter requiring the Company to perform a goodwill impairment test. The Company considered continued improvements in current and forecasted economic and market conditions and qualitative factors, such as the Company’s performance in the first and second quarters, business forecasts for the remainder of the year, stock price movements and the Company’s expansion plans. The Company did not identify any triggers or indications of potential impairment for its reporting units as of June 30, 2021.
There can be no assurances that goodwill will not be impaired in future periods. Estimating the fair value of reporting units requires the use of estimates and significant judgments that are based on a number of factors including actual operating results. These estimates and judgements may not be within the control of the Company and accordingly it is reasonably possible that the judgments and estimates described above could change in future periods. The duration and severity of COVID-19 and continued market volatility is highly uncertain and, as such, the impact on cash flows, long-term debt-free net cash flow growth rate in the terminal year and discount rates are subject to significant judgments and may cause variability in the Company’s assessment of existence of any impairment. The Company will continue to monitor the impacts of COVID-19 on the Company and significant changes in key assumptions that could result in future period impairment charges.
The recoverability of goodwill is dependent upon the continued growth of cash flows from the Company’s business activities. This growth is based on business forecasts and improvement in profitability of its reporting units. The Company continues to maintain its focus on cultivating long-term client relationships as well as attracting new clients.
Intangible Assets
Information regarding the Company’s intangible assets is set forth below:
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2021
(In thousands, except share and per share amounts)
| |
| As of September 30, 2017 | | As of June 30, 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Finite-lived intangible assets: |
|
| |
|
| |
|
| Finite-lived intangible assets: | | | | | |
Customer relationships | $ | 75,372 |
| | $ | (40,975 | ) | | $ | 34,397 |
| Customer relationships | $ | 71,416 | | | $ | (29,341) | | | $ | 42,075 | |
Leasehold benefits | 2,826 |
| | (2,490 | ) | | 336 |
| |
Developed technology | 14,314 |
| | (8,177 | ) | | 6,137 |
| Developed technology | 23,533 | | | (14,123) | | | 9,410 | |
Non-compete agreements | 2,045 |
| | (1,739 | ) | | 306 |
| |
Trade names and trademarks | 5,379 |
| | (3,887 | ) | | 1,492 |
| Trade names and trademarks | 5,100 | | | (4,632) | | | 468 | |
| $ | 99,936 |
| | $ | (57,268 | ) | | $ | 42,668 |
| | $ | 100,049 | | | $ | (48,096) | | | $ | 51,953 | |
Indefinite-lived intangible assets: | | | | | | Indefinite-lived intangible assets: | |
Trade names and trademarks | $ | 900 |
| | $ | — |
| | $ | 900 |
| Trade names and trademarks | $ | 900 | | | $ | — | | | $ | 900 | |
Total intangible assets | $ | 100,836 |
| | $ | (57,268 | ) | | $ | 43,568 |
| Total intangible assets | $ | 100,949 | | | $ | (48,096) | | | $ | 52,853 | |
| | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Finite-lived intangible assets: | | | | | |
Customer relationships | $ | 73,357 | | | $ | (27,464) | | | $ | 45,893 | |
Developed technology | 23,510 | | | (11,858) | | | 11,652 | |
Trade names and trademarks | 5,100 | | | (3,951) | | | 1,149 | |
| $ | 101,967 | | | $ | (43,273) | | | $ | 58,694 | |
Indefinite-lived intangible assets: | | | | | |
Trade names and trademarks | $ | 900 | | | $ | — | | | $ | 900 | |
Total intangible assets | $ | 102,867 | | | $ | (43,273) | | | $ | 59,594 | |
|
| | | | | | | | | | | |
| As of December 31, 2016 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Finite-lived intangible assets: | | | | | |
Customer relationships | $ | 75,181 |
| | $ | (32,968 | ) | | $ | 42,213 |
|
Leasehold benefits | 2,715 |
| | (2,247 | ) | | 468 |
|
Developed technology | 14,186 |
| | (6,468 | ) | | 7,718 |
|
Non-compete agreements | 2,045 |
| | (1,612 | ) | | 433 |
|
Trade names and trademarks | 5,360 |
| | (3,322 | ) | | 2,038 |
|
| $ | 99,487 |
| | $ | (46,617 | ) | | $ | 52,870 |
|
Indefinite-lived intangible assets: | | | | | |
Trade names and trademarks | $ | 900 |
| | $ | — |
| | $ | 900 |
|
Total intangible assets | $ | 100,387 |
| | $ | (46,617 | ) | | $ | 53,770 |
|
The amortization expenses isexpense recognized in the unaudited consolidated statements of income was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Amortization expense | $ | 3,397 | | | $ | 3,430 | | | $ | 6,758 | | | $ | 7,584 | |
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Amortization expense | $ | 3,487 |
| | $ | 2,848 |
| | $ | 10,492 |
| | $ | 8,281 |
|
The remaining weighted average life of intangible assets is as follows:
| | | | | |
| (in years) |
Customer relationships | (in years)6.5 |
Customer relationshipsDeveloped technology | 5.152.3 |
Leasehold benefits | 1.67 |
Developed technologies | 3.77 |
Non-compete agreements | 1.93 |
Trade names and trademarks (Finite lived) | 5.233.3 |
| | | | | |
Estimated future amortization expense related to finite-lived intangible assets as of June 30, 2021 was as follows: |
2021 (July 1 - December 31) | $ | 6,018 | |
2022 | 11,347 | |
2023 | 9,054 | |
2024 | 6,712 | |
2025 | 5,960 | |
2026 and thereafter | 12,862 | |
Total | $ | 51,953 | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
SeptemberJune 30, 20172021
(In thousands, except share and per share amounts)
|
| | | |
Estimated amortization of intangible assets during the next twelve months ending September 30, |
2018 | $ | 12,667 |
|
2019 | 11,947 |
|
2020 | 5,705 |
|
2021 | 3,207 |
|
2022 | 2,461 |
|
2023 and thereafter | 6,681 |
|
Total | $ | 42,668 |
|
8.10. Other current assetsCurrent Assets
Other current assets consistsconsist of the following:
| | | | | | | | | | | |
| As of |
| June 30, 2021 | | December 31, 2020 |
Derivative instruments | $ | 7,560 | | | $ | 9,755 | |
Advances to suppliers | 2,672 | | | 3,906 | |
Receivables from statutory authorities | 16,040 | | | 15,658 | |
Contract assets | 1,742 | | | 1,814 | |
Deferred contract fulfillment costs | 1,935 | | | 2,888 | |
Interest accrued on term deposits | 453 | | | 169 | |
Others | 3,213 | | | 2,919 | |
Other current assets | $ | 33,615 | | | $ | 37,109 | |
11. Other Assets
|
| | | | | | | |
| As of |
| September 30, 2017 | | December 31, 2016 |
Derivative instruments | $ | 8,236 |
| | $ | 3,324 |
|
Advances to suppliers | 3,681 |
| | 1,091 |
|
Receivables from statutory authorities | 5,784 |
| | 11,870 |
|
Others | 4,632 |
| | 4,883 |
|
Other current assets | $ | 22,333 |
| | $ | 21,168 |
|
9. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consistsOther assets consist of the following:
| | | | | | | | | | | |
| As of |
| June 30, 2021 | | December 31, 2020 |
Lease deposits | $ | 9,721 | | | $ | 9,788 | |
Derivative instruments | 4,631 | | | 6,933 | |
Deposits with statutory authorities | 6,255 | | | 6,341 | |
Term deposits | 180 | | | 216 | |
Contract assets | 1,805 | | | 2,623 | |
Deferred contract fulfillment costs | 1,759 | | | 2,743 | |
Others | 3,121 | | | 3,455 | |
Other assets | $ | 27,472 | | | $ | 32,099 | |
|
| | | | | | | |
| As of |
| September 30, 2017 | | December 31, 2016 |
Accrued expenses | $ | 39,250 |
| | $ | 30,690 |
|
Derivative instruments | 1,330 |
| | 1,430 |
|
Client liability account | 2,090 |
| | 4,005 |
|
Others | 6,370 |
| | 7,139 |
|
Accrued expenses and other current liabilities | $ | 49,040 |
| | $ | 43,264 |
|
10. Non-current liabilities
Non-current liabilities consists of the following:
|
| | | | | | | |
| As of |
| September 30, 2017 | | December 31, 2016 |
Derivative instruments | $ | 1,553 |
| | $ | 828 |
|
Unrecognized tax benefits | 692 |
| | 3,640 |
|
Deferred rent | 7,890 |
| | 7,237 |
|
Retirement benefits | 2,917 |
| | 1,977 |
|
Others | 3,182 |
| | 1,137 |
|
Non-current liabilities | $ | 16,234 |
| | $ | 14,819 |
|
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
SeptemberJune 30, 20172021
(In thousands, except share and per share amounts)
12. Accrued Expenses and Other Current Liabilities
11.Accrued expenses and other current liabilities consist of the following:
| | | | | | | | | | | |
| As of |
| June 30, 2021 | | December 31, 2020 |
Accrued expenses | $ | 42,169 | | | $ | 39,951 | |
Payable to statutory authorities | 17,850 | | | 10,594 | |
Accrued capital expenditures | 4,921 | | | 7,857 | |
Derivative instruments | 681 | | | 435 | |
Client liabilities | 5,131 | | | 4,740 | |
Interest payable | 1,398 | | | 1,399 | |
Other current liabilities | 4,080 | | | 1,205 | |
Finance lease liabilities | 194 | | | 229 | |
Accrued expenses and other current liabilities | $ | 76,424 | | | $ | 66,410 | |
13. Other Non-Current Liabilities
Other non-current liabilities consist of the following:
| | | | | | | | | | | |
| As of |
| June 30, 2021 | | December 31, 2020 |
Derivative instruments | $ | 1,052 | | | $ | 29 | |
Unrecognized tax benefits | 907 | | | 907 | |
Retirement benefits | 9,332 | | | 8,940 | |
Deferred transition revenue | 724 | | | 924 | |
Accrued capital expenditures | 0 | | | 3,486 | |
Other liabilities | 3,311 | | | 3,568 | |
Finance lease liabilities | 255 | | | 281 | |
Other non-current liabilities | $ | 15,581 | | | $ | 18,135 | |
14. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss (“AOCL”) consists of amortization of actuarial gain / gain/(loss) on retirement benefits and changes in the cumulative foreign currency translation adjustments. In addition, the Company enters into foreign currency exchange contracts, which are designated as cash flow hedges and net investment hedges in accordance with ASC topic 815 “Derivatives and Hedging” (“ASC No. 815”). Changes815. Cumulative changes in the fair values of these foreign currency exchange contracts that are deemed effective are recorded as a component of accumulated other comprehensive loss untilrecognized in AOCL on the Company's unaudited consolidated balance sheets. Upon settlement of those contracts.foreign exchange contracts designated as cash flow hedges, fair value changes are reclassified from AOCL to net income, whereas such fair value changes related to net investment hedges are included in net income when a foreign operation is disposed or partially disposed. The balances as of SeptemberJune 30, 20172021 and December 31, 2016June 30, 2020 are as follows:
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2021
(In thousands, except share and per share amounts)
|
| | | | | | | |
| As of |
| September 30, 2017 | | December 31, 2016 |
Cumulative currency translation adjustments | $ | (66,486 | ) | | $ | (77,299 | ) |
Unrealized gain on cash flow hedges, net of taxes of $3,605 and $1,207 | 7,559 |
| | 2,740 |
|
Retirement benefits, net of taxes of ($265) and ($342) | (363 | ) | | (498 | ) |
Accumulated other comprehensive loss | $ | (59,290 | ) | | $ | (75,057 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency translation (loss)/gain | | Unrealized gain/(loss) on cash flow hedges | | Retirement benefits | | Total |
Balance as of January 1, 2021 | $ | (86,185) | | | $ | 13,799 | | | $ | (2,598) | | | $ | (74,984) | |
Losses recognized during the period | (6,686) | | | (303) | | | 0 | | | (6,989) | |
Losses on net investment hedges | (1,134) | | | 0 | | | 0 | | | (1,134) | |
Reclassification to net income (1) | 0 | | | (5,695) | | | 355 | | | (5,340) | |
Income tax effects (2) | 1,229 | | | 595 | | | (122) | | | 1,702 | |
Accumulated other comprehensive loss as of June 30, 2021 | $ | (92,776) | | | $ | 8,396 | | | $ | (2,365) | | | $ | (86,745) | |
| | | | | | | |
Balance as of January 1, 2020 | $ | (87,591) | | | $ | 4,098 | | | $ | (1,399) | | | $ | (84,892) | |
Losses recognized during the period | (19,298) | | | (7,125) | | | 0 | | | (26,423) | |
Reclassification to net income (1) | 0 | | | 198 | | | 198 | | | 396 | |
Income tax effects (2) | 4,291 | | | 2,106 | | | 248 | | | 6,645 | |
Accumulated other comprehensive loss as of June 30, 2020 | $ | (102,598) | | | $ | (723) | | | $ | (953) | | | $ | (104,274) | |
12.(1) Refer to Note 16 - Derivatives and Hedge Accounting and Note 19 - Employee Benefit Plans to the unaudited consolidated financial statements for reclassification to net income.
(2) These are income tax effects recognized on cash flow hedges, retirement benefits and foreign currency translation gains / (losses). Refer to Note 21 - Income Taxes to the unaudited consolidated financial statements.
15. Fair Value Measurements
Assets and Liabilities Measured at Fair Value
The following table sets forth the Company’s assets and liabilities that were accounted for at fair value as of SeptemberJune 30, 20172021 and December 31, 2016. The table excludes accounts receivable, accounts payable and accrued expenses for which fair values approximate their carrying amounts.2020.
|
| | | | | | | | | | | | | | | |
As of September 30, 2017 | Level 1 | | Level 2 | | Level 3 | | Total |
Assets |
| |
| |
| |
|
Money market and mutual funds* | $ | 146,477 |
| | $ | — |
| | $ | — |
| | $ | 146,477 |
|
Derivative financial instruments | — |
| | 14,395 |
| | — |
| | 14,395 |
|
Total | $ | 146,477 |
| | $ | 14,395 |
| | $ | — |
| | $ | 160,872 |
|
Liabilities |
| |
| |
| |
|
Derivative financial instruments | $ | — |
| | $ | 2,883 |
| | $ | — |
| | $ | 2,883 |
|
Total | $ | — |
| | $ | 2,883 |
| | $ | — |
| | $ | 2,883 |
|
|
| |
| |
| |
|
As of December 31, 2016 | Level 1 | | Level 2 | | Level 3 | | Total |
Assets |
| |
| |
| |
|
Money market and mutual funds | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Derivative financial instruments | — |
| | 6,318 |
| | — |
| | 6,318 |
|
Total | $ | — |
| | $ | 6,318 |
| | $ | — |
| | $ | 6,318 |
|
Liabilities |
| |
| |
| |
|
Derivative financial instruments | $ | — |
| | $ | 2,258 |
| | $ | — |
| | $ | 2,258 |
|
Total | $ | — |
| | $ | 2,258 |
| | $ | — |
| | $ | 2,258 |
|
* Represents short-term investments carried on fair value option under ASC 825 “Financial Instruments” asEXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
SeptemberJune 30, 20172021
(In thousands, except share and per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Other Unobservable Inputs | | |
As of June 30, 2021 | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Mutual funds* | $ | 96,481 | | | $ | 0 | | | $ | 0 | | | $ | 96,481 | |
Derivative financial instruments | 0 | | | 12,191 | | | 0 | | | 12,191 | |
Total | $ | 96,481 | | | $ | 12,191 | | | $ | 0 | | | $ | 108,672 | |
Liabilities | | | | | | | |
Derivative financial instruments | $ | 0 | | | $ | 1,733 | | | $ | 0 | | | $ | 1,733 | |
Total | $ | 0 | | | $ | 1,733 | | | $ | 0 | | | $ | 1,733 | |
| | | | | | | |
| Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Other Unobservable Inputs | | |
As of December 31, 2020 | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Mutual funds* | $ | 160,441 | | | $ | 0 | | | $ | 0 | | | $ | 160,441 | |
Derivative financial instruments | 0 | | | 16,688 | | | 0 | | | 16,688 | |
Total | $ | 160,441 | | | $ | 16,688 | | | $ | 0 | | | $ | 177,129 | |
Liabilities | | | | | | | |
Derivative financial instruments | $ | 0 | | | $ | 464 | | | $ | 0 | | | $ | 464 | |
Total | $ | 0 | | | $ | 464 | | | $ | 0 | | | $ | 464 | |
*Represents those short-term investments, which are carried at the fair value option under ASC 825 "Financial Instruments”.
Derivative Financial Instruments:The Company’s derivative financial instruments consist of foreign currency forward exchange contracts. Fair values for derivative financial instruments are based on independent sources including highly rated financial institutions and are classified as Level 2. SeeRefer to Note 1316 - Derivatives and Hedge Accounting to the unaudited consolidated financial statements contained herein for further detailsdetails.
Financial instruments not carried at fair value:
The Company’s other financial instruments not carried at fair value consist primarily of cash and cash equivalents, short-term investments (except investments in mutual funds, as disclosed above), restricted cash, accrued interest on term deposits, accrued capital expenditures, accrued expenses and interest payable on borrowings for which fair values approximate their carrying amounts due to their short-term nature. The carrying value of the Company’s outstanding revolving credit facility approximates its fair value because the Company’s interest rate yield is near current market rates for comparable debt instruments.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2021
(In thousands, except share and per share amounts)
Convertible Senior Notes:
The total estimated fair value of the convertible senior notes as of June 30, 2021 and December 31, 2020 was $156,121 and $152,384, respectively. The fair value was determined based on the market yields for similar convertible notes as of the June 30, 2021 and December 31, 2020, respectively. The Company considers the fair value of the convertible senior notes to be a Level 2 measurement due to the limited inputs available for its fair valuation.
16. Derivatives and Hedge Accounting.Accounting
13. Derivatives and Hedge Accounting
The Company uses derivative instruments and hedging transactions to mitigate exposure to foreign currency fluctuation risks associated with forecasted transactions denominated in certain foreign currencies andso as to minimize earnings and cash flow volatility associated with changes in foreign currency exchange rates. The Company’s derivative financial instruments are largely forward foreign exchange forward contracts that are designated as effective hedges and that qualify as cash flow hedges under ASC 815. The Company had outstanding cash flow hedges totaling $297,643 (including $1,500 of range forward contracts)$520,560 as of SeptemberJune 30, 20172021 and $218,545$451,935 as of December 31, 2016. The2020.
Changes in the fair value of these cash flow hedges are recorded as a component of accumulated other comprehensive income/(loss), net of tax, until the hedged transactions occurs. The resultant foreign exchange gain/(loss) upon settlement of these cash flow hedges is recorded along with the underlying hedged item in the same line of unaudited consolidated statements of income as either a part of “Cost of revenues,” “General and administrative expenses,” “Selling and marketing expenses”, “Depreciation and amortization expense,” as applicable.
The Company evaluates hedge effectiveness at the time a contract is entered into as well as on an ongoing basis. For hedging positions that are discontinued because the forecasted transaction is not expected to occur by the end of the originally specified period, any related amounts recorded in equity are reclassified to earnings.
The Company estimates that approximately $6,891 of derivative gains, net, excluding tax effects, included in AOCL, representing changes in the other comprehensive lossvalue of cash flow hedges, could be reclassified into earnings within the next twelve months based on exchange rates prevailing as of June 30, 2021. At June 30, 2021, the Company's unaudited consolidated balance sheet.maximum outstanding term of the cash flow hedges was 45 months.
The Company also enters into foreign currency forward contracts to economically hedge its intercompany balances and other monetary assets and liabilities denominated in currencies other than functional currencies.currencies, against the risk of foreign currency fluctuations associated with remeasurement of such assets and liabilities to functional currency. These derivatives do not qualify as fair value hedges under ASC 815. Changes in the fair value of these derivatives are recognized in the unaudited consolidated statements of income and are included in the foreign exchange gain/loss.(loss) line item. The Company’s primary exchange rate exposure is with the Indian Rupee,rupee, the U.K. Poundpound sterling (GBP) and the Philippine peso. The Company also has exposure to Colombian pesos (COP), Czech Koruna,koruna, the Euro (EUR), South African RandZAR, the Australian dollar (AUD) and other local currencies in which it operates. Outstanding foreign currency forward contracts amounted to $91,523USD 124,195, GBP 6,928, EUR 1,425 and GBP 17,244COP 8,172,868 as of SeptemberJune 30, 20172021 and amounted to $63,980USD 143,394, GBP 6,753, EUR 2,447 and GBP 17,974COP 8,287,950 as of December 31, 2016.2020.
The Company estimates that approximately $6,839uses forward contracts designated as net investment hedges to hedge the foreign currency risks related to our investments in foreign subsidiaries. Gains and losses on these net investment hedges are recognized in AOCL as part of net derivative gains included in accumulated other comprehensive loss (“AOCL”) could be reclassified into earnings within the next twelve months based on exchange rates prevailing as of September 30, 2017. At September 30, 2017, the maximum outstanding termforeign currency translation adjustments.
All of the cash flow hedges was forty-five months.
The Company evaluates hedge effectiveness atassets and liabilities related to our foreign exchange forward contracts are subject to master netting arrangements with each individual counterparty. These master netting arrangements generally provide for net settlement of all outstanding contracts with the time a contract is entered into as well as on an ongoing basis. If during this time, a contract is deemed ineffective, the changecounterparty in the fair value is recordedcase of an event of default or a termination event. We have presented all of the assets and liabilities related to our foreign exchange forward contracts on a gross basis, with no offsets, in theour unaudited consolidated statements of income andfinancial position. There is included inno financial collateral (including cash collateral) provided or received by us related to our foreign exchange gain/(loss). For hedging positions that are discontinued because the forecasted transaction is not expected to occur by the end of the originally specified period, any related derivative amounts recorded in equity are reclassified to earnings. There were no such significant amounts of gains or losses that were reclassified from AOCL into earnings during the three and nine months ended September 30, 2017 and 2016.forward contracts.
The following tables set forth the fair value of the foreign currency exchange contracts and their location on the unaudited consolidated financial statements:
Derivatives designated as hedging instruments:
|
| | | | | | | |
| As of |
| September 30, 2017 | | December 31, 2016 |
Other current assets: | | | |
Foreign currency exchange contracts | $ | 8,122 |
| | $ | 3,211 |
|
Other assets: | | | |
Foreign currency exchange contracts | $ | 6,159 |
| | $ | 2,994 |
|
Accrued expenses and other current liabilities: | | | |
Foreign currency exchange contracts | $ | 1,283 |
| | $ | 1,430 |
|
Non-current liabilities: | | | |
Foreign currency exchange contracts | $ | 1,553 |
| | $ | 828 |
|
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
SeptemberJune 30, 20172021
(In thousands, except share and per share amounts)
| | | | | | | | | | | | | | |
Derivatives designated as hedging instruments: | | As of |
Foreign currency exchange contracts | | June 30, 2021 | | December 31, 2020 |
Other current assets | | $ | 7,472 | | | $ | 9,740 | |
Other assets | | $ | 4,631 | | | $ | 6,933 | |
Accrued expenses and other current liabilities | | $ | 581 | | | $ | 176 | |
Other non-current liabilities | | $ | 1,052 | | | $ | 29 | |
| | | | |
Derivatives not designated as hedging instruments: | | As of |
Foreign currency exchange contracts | | June 30, 2021 | | December 31, 2020 |
Other current assets | | $ | 88 | | | $ | 15 | |
Accrued expenses and other current liabilities | | $ | 100 | | | $ | 259 | |
Derivatives not designated as hedging instruments:
|
| | | | | | | |
| As of |
| September 30, 2017 | | December 31, 2016 |
Other current assets: | | | |
Foreign currency exchange contracts | $ | 114 |
| | $ | 113 |
|
Accrued expenses and other current liabilities: | | | |
Foreign currency exchange contracts | $ | 47 |
| | $ | — |
|
The following tables set forth the effect of foreign currency exchange contracts on the unaudited consolidated statements of income and accumulated other comprehensive loss for the three and ninesix months ended SeptemberJune 30, 20172021 and 2016:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
Forward Exchange Contracts: | | 2021 | | 2020 | | 2021 | | 2020 |
Unrealized gain/(loss) recognized in AOCL | | | | | | | | |
Derivatives in cash flow hedging relationships | | $ | (871) | | | $ | 7,721 | | | $ | (303) | | | $ | (7,125) | |
| | | | | | | | |
Gain/(loss) recognized in consolidated statements of income | | | | | | | | |
Derivatives not designated as hedging instruments | | $ | (805) | | | $ | 1,897 | | | $ | (589) | | | $ | (943) | |
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Derivatives in Cash flow hedging relationship | | | | | | | |
Gain/(loss) recognized in AOCL on derivative - Effective portion | $ | (719 | ) | | $ | 3,607 |
| | $ | 8,774 |
| | $ | 4,160 |
|
Gain/(loss) reclassified from AOCL to foreign exchange gain/(loss) - Effective portion | $ | 423 |
| | $ | 466 |
| | $ | 1,557 |
| | $ | 872 |
|
Gain/(loss) recognized in foreign exchange gain/(loss) - Ineffective portion | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | |
Gain/(loss) recognized in foreign exchange gain/(loss) | $ | (678 | ) | | $ | 1,382 |
| | $ | 2,095 |
| | $ | 4,110 |
|
14. Borrowings
The Company has a revolving credit facility (the “Credit Facility”), including a letterTable of credit sub-facility, in the amount of $100,000. The Credit Facility has a maturity date of October 24, 2019 and is voluntarily pre-payable from time to time without premium or penalty.
Borrowings under the Credit Facility may be used for working capital, general corporate purposes and for acquisitions. The amount outstanding as of September 30, 2017 is $45,000 which is included under “long-term borrowings” in the unaudited consolidated balance sheets. The Credit Facility carried an effective interest rate of 2.9% per annum and 2.2% per annum, during the three months ended September 30, 2017 and 2016, respectively, and for the nine months ended September 30, 2017 and 2016 it was 2.7% per annum and 2.0% per annum, respectively.
In connection with the financing, the Company incurred certain debt issuance costs, which are deferred and amortized as an adjustment to interest expense over the term of the Credit Facility. The unamortized debt issuance costs as of September 30, 2017 and December 31, 2016 was $200 and $272, respectively, and is included under “other current assets” and “other assets” in the unaudited consolidated balance sheets.
The Credit Facility is guaranteed by the Company's domestic subsidiaries and material foreign subsidiaries and is secured by all or substantially all of the assets of the Company and its material domestic subsidiaries. The Credit Agreement governing the Credit Facility contains certain covenants including a restriction on our indebtedness, and a covenant to not permit the interest coverage ratio (the ratio of EBIT to cash interest expense) to be less than 3.5 to 1.0 or the leverage ratio (total funded indebtedness to EBITDA) to be greater than 2.5 to 1.0, for the four consecutive quarter period ending on the last day of each fiscal quarter. As of September 30, 2017, the Company was in compliance with the financial covenants listed above.Contents
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
SeptemberJune 30, 20172021
(In thousands, except share and per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Location and amount of gain/(loss) recognized in unaudited consolidated statements of income for cash flow hedging relationships and derivatives not designated as hedging instruments |
| | Three months ended June 30, |
| | 2021 | | 2020 |
| | As per unaudited consolidated statements of income | | Gain/(loss) on foreign currency exchange contracts | | As per unaudited consolidated statements of income | | Gain/(loss) on foreign currency exchange contracts |
Cash flow hedging relationships | | | | | | | | |
Location in unaudited consolidated statements of income where gain/(loss) was reclassed from AOCL | | | | | | | | |
| | | | | | | | |
Cost of revenues | | $ | 170,701 | | | $ | 2,418 | | | $ | 158,401 | | | $ | (851) | |
General and administrative expenses | | $ | 36,499 | | | 294 | | | $ | 28,750 | | | (187) | |
Selling and marketing expenses | | $ | 19,724 | | | 15 | | | $ | 13,051 | | | (9) | |
Depreciation and amortization expense | | $ | 12,310 | | | 139 | | | $ | 12,405 | | | (80) | |
Total before tax | | | | 2,866 | | | | | (1,127) | |
Income tax benefit/(expense) relating to above | | | | (427) | | | | | 124 | |
Net of tax | | | | $ | 2,439 | | | | | $ | (1,003) | |
| | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | |
Location in unaudited consolidated statements of income where gain/(loss) was recognized | | | | | | | | |
| | | | | | | | |
Foreign exchange gain/(loss), net | | $ | 1,353 | | | $ | (805) | | | $ | 1,359 | | | $ | 1,897 | |
| | $ | 1,353 | | | $ | (805) | | | $ | 1,359 | | | $ | 1,897 | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2021
(In thousands, except share and per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Location and amount of gain/(loss) recognized in unaudited consolidated statements of income for cash flow hedging relationships and derivatives not designated as hedging instruments |
| | Six months ended June 30, |
| | 2021 | | 2020 |
| | As per unaudited consolidated statements of income | | Gain/(loss) on foreign currency exchange contracts | | As per unaudited consolidated statements of income | | Gain/(loss) on foreign currency exchange contracts |
Cash flow hedging relationships | | | | | | | | |
Location in unaudited consolidated statements of income where gain/(loss) was reclassed from AOCL | | | | | | | | |
| | | | | | | | |
Cost of revenues | | $ | 329,522 | | | $ | 4,842 | | | $ | 321,057 | | | $ | (39) | |
General and administrative expenses | | $ | 67,202 | | | 546 | | | $ | 57,691 | | | (114) | |
Selling and marketing expenses | | $ | 37,959 | | | 28 | | | $ | 27,507 | | | (5) | |
Depreciation and amortization expense | | $ | 24,411 | | | 279 | | | $ | 24,855 | | | (40) | |
Total before tax | | | | 5,695 | | | | | (198) | |
Income tax benefit/(expense) relating to above | | | | (816) | | | | | 22 | |
Net of tax | | | | $ | 4,879 | | | | | $ | (176) | |
| | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | |
Location in unaudited consolidated statements of income where gain/(loss) was recognized | | | | | | | | |
| | | | | | | | |
Foreign exchange gain /(loss), net | | $ | 1,787 | | | $ | (589) | | | $ | 2,736 | | | $ | (943) | |
| | $ | 1,787 | | | $ | (589) | | | $ | 2,736 | | | $ | (943) | |
Effect of net investment hedges on accumulated other comprehensive loss:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | Amount of loss recognized in AOCL | | Amount of loss recognized in AOCL |
Net investment hedging relationships | | 2021 | | 2020 | | 2021 | | 2020 |
Foreign exchange contracts | | $ | 1,134 | | | $ | 0 | | | $ | 1,134 | | | $ | 0 | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2021
(In thousands, except share and per share amounts)
17. Borrowings
The following tables summarizes the Company’s debt position as of June 30, 2021 and December 31, 2020.
| | | | | | | | | | | | | | | | | | | |
| As of June 30, 2021 |
| Revolving Credit Facility | | | | Notes | | Total |
Current portion of long-term borrowings | $ | 15,000 | | | | | $ | 0 | | | $ | 15,000 | |
| | | | | | | |
Long-term borrowings | $ | 0 | | | | | $ | 150,000 | | | $ | 150,000 | |
Unamortized debt discount | 0 | | | | | (9,871) | | | (9,871) | |
Unamortized debt issuance costs* | 0 | | | | | (697) | | | (697) | |
Long-term borrowings | $ | 0 | | | | | $ | 139,432 | | | $ | 139,432 | |
Total borrowings | $ | 15,000 | | | | | $ | 139,432 | | | $ | 154,432 | |
| | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Revolving Credit Facility | | | | Notes | | Total |
Current portion of long-term borrowings | $ | 25,000 | | | | | $ | 0 | | | $ | 25,000 | |
| | | | | | | |
Long-term borrowings | $ | 64,000 | | | | | $ | 150,000 | | | $ | 214,000 | |
Unamortized debt discount | 0 | | | | | (11,235) | | | (11,235) | |
Unamortized debt issuance costs* | 0 | | | | | (804) | | | (804) | |
Long-term borrowings | $ | 64,000 | | | | | $ | 137,961 | | | $ | 201,961 | |
Total borrowings | $ | 89,000 | | | | | $ | 137,961 | | | $ | 226,961 | |
*Unamortized debt issuance costs for the Company’s revolving Credit Facility of $361 and $490 as of June 30, 2021 and December 31, 2020, respectively, is presented under “Other current assets” and “Other assets” in the consolidated balance sheets.
Credit Agreement
The Company’s $300,000 revolving credit facility pursuant to its credit agreement (the “Credit Agreement”) with certain lenders and Citibank N.A. as Administrative Agent (the “Credit Facility”) carried an effective interest rate as shown below.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Effective Interest Rate | | 1.8 | % | | 2.2 | % | | 1.9 | % | | 2.6 | % |
As of June 30, 2021 and December 31, 2020, the Company was in compliance with all financial and non-financial covenants listed under the Credit Agreement.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2021
(In thousands, except share and per share amounts)
Convertible Senior Notes
On October 1, 2018, the Company entered into an investment agreement (the “Investment Agreement”) with Orogen Echo LLC (the “Purchaser”), an affiliate of The Orogen Group LLC, relating to the issuance to the Purchaser of $150,000 in an aggregate principal amount of 3.5% per annum Convertible Senior Notes due October 1, 2024 (the “Notes”). The transactions contemplated by the Investment Agreement, including the issuance of the Notes, closed on October 4, 2018. The Notes bear interest at a rate of 3.5% per annum, payable semi-annually in arrears in cash on April 1 and October 1 of each year. Until October 4, 2020, under the Investment Agreement, the Purchaser was restricted from transferring the Notes or any shares of common stock issuable upon conversion of the Notes, or entering into any transaction that transfers such interests to a third party. The Notes carried an effective interest rate as shown below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Effective Interest Rate | | 3.7 | % | | 3.7 | % | | 3.7 | % | | 3.7 | % |
During the three and six months ended June 30, 2021 and 2020, the Company recognized interest expense and amortization of debt discount, on the Notes as below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Interest expense on the Notes | $ | 1,312 | | | $ | 1,312 | | | $ | 2,625 | | | $ | 2,625 | |
Amortization of debt discount on the Notes | $ | 691 | | | $ | 654 | | | $ | 1,364 | | | $ | 1,289 | |
Payments / maturities for all of the Company's borrowings as of June 30, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | Notes | | Revolving Credit Facility | | | | Total |
2021 (July - December) | | $ | 0 | | | $ | 15,000 | | | | | $ | 15,000 | |
2022 | | 0 | | | 0 | | | | | 0 | |
2023 | | 0 | | | 0 | | | | | 0 | |
2024 | | 150,000 | | | 0 | | | | | 150,000 | |
Total | | $ | 150,000 | | | $ | 15,000 | | | | | $ | 165,000 | |
Letters of Credit
In the ordinary course of business, the Company provides standby letters of credit to third parties primarily for facility leases. As of June 30, 2021 and December 31, 2020, the Company had outstanding letters of credit of $461, each, that were not recognized in the consolidated balance sheets.
18. Capital Structure
Common Stock
The Company has one1 class of common stock outstanding.
During the three months ended September 30, 2017 and 2016, the
The Company did not acquire anypurchased shares of common stock from employees in connection with withholding tax payments related to the vesting of restricted stock.stock units and performance-based restricted stock units, as below:
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2021
(In thousands, except share and per share amounts)
| | | | | | | | | | | | | | | | | |
| Shares repurchased | | Total consideration | | Weighted average purchase price per share (1) |
Three months ended June 30, 2021 | 0 | | $ | 0 | | | $ | 0 | |
Three months ended June 30, 2020 | 0 | | $ | 0 | | | $ | 0 | |
| | | | | |
Six months ended June 30, 2021 | 25,450 | | $ | 2,015 | | | $ | 79.18 | |
Six months ended June 30, 2020 | 26,601 | | $ | 2,012 | | | $ | 75.63 | |
On December 16, 2019, the nine months ended September 30, 2017 and 2016,Company’s Board of Directors authorized a $200,000 common stock repurchase program beginning January 1, 2020 through December 31, 2022 (the "2019 Repurchase Program"). Under the 2019 Repurchase Program, shares may be purchased by the Company acquired 65,003from time to time from the open market and 16,027through private transactions, or otherwise, as determined by the Company’s management as market conditions warrant. Repurchases may be discontinued at any time by the management.
The Company purchased shares of its common stock, respectively, from employees in connection with withholding tax payments related toincluding commissions, under the vesting of restricted stock for a total consideration of $3,016 and $728, respectively. 2019 Repurchase Program, as below:
| | | | | | | | | | | | | | | | | |
| Shares repurchased | | Total consideration | | Weighted average purchase price per share (1) |
Three months ended June 30, 2021 | 287,044 | | $ | 28,409 | | | $ | 98.97 | |
Three months ended June 30, 2020 | 0 | | $ | 0 | | | $ | 0 | |
| | | | | |
Six months ended June 30, 2021 | 600,076 | | $ | 55,409 | | | $ | 92.34 | |
Six months ended June 30, 2020 | 175,765 | | $ | 11,983 | | | $ | 68.18 | |
(1) The weighted average purchase price per share of $46.40 and $45.44, respectively, was the average of the high and lowclosing price of the Company’sCompany's share of common stock on the Nasdaq Global Select Market on the trading day prior to the vesting date of the shares of restricted stock.
On December 30, 2014, the Company’s Board of Directors authorized a common stock repurchase program (the “2014 Repurchase Program”), under which shares were authorized to be purchased by the Company from time to time from the open market and through private transactions during each of the fiscal years 2015 through 2017 up to an annual amount of $20,000.
On February 28, 2017, the Company’s Board of Directors authorized an additional common stock repurchase program (the “2017 Repurchase Program”), under which shares may be purchased by the Company from time to time from the open market and through private transactions during each of the fiscal years 2017 through 2019 up to an aggregate additional amount of $100,000. The approval increases the 2017 authorization from $20,000 to $40,000 and authorizes stock repurchases of up to $40,000 in each of 2018 and 2019.
During the three and nine months ended September 30, 2017, the Company purchased 160,033 and 584,017 shares of its common stock, respectively, for an aggregate purchase price of approximately $9,004 and $29,320, respectively, including commissions, representing an average purchase price per share of $56.26 and $50.20, respectively, under the 2014 and 2017 Repurchase Program.
During the three and nine months ended September 30, 2016, the Company purchased 108,143 and 302,953 shares of its common stock, respectively, for an aggregate purchase price of approximately $5,466 and $14,441, respectively, including commissions, representing an average purchase price per share of $50.54 and $47.67, respectively, under the 2014 Repurchase Program.
Repurchased shares have been recorded as treasury shares and will be held until the Company’s Board of Directors designates that these shares be retired or used for other purposes.
The 2019 Repurchase Program may be suspended or discontinued at any time. 16.
19. Employee Benefit Plans
The Company’s Gratuity PlansPlan in India ("Gratuity(the "India Plan") provideprovides for a lump sum payment to vested employees on retirement or upon termination of employment in an amount based on the respective employee’s salary and years of employment with the Company. Liabilities with regard to the Gratuity Plans are determined by actuarial valuation using the projected unit credit method. Current service costs for the Gratuity Plan are accrued in the year to which they relate. Actuarial gains or losses or prior service costs, if any, resulting from amendments to the plans are recognized and amortized over the remaining period of service of the employees.
In addition, the Company’s subsidiary operating in the Philippines conforms to the minimum regulatory benefit, which provide for lump sum payment to vested employees on retirement from employment in an amount based on the respective employee’s salary and years of employment with the Company (the "Philippines Plan"). The benefit costs ofLiabilities with regard to the India Plan and the Philippines Plan are determined by actuarial valuation using the projected unit credit method. Current service costs for these Plans are accrued in the year to which they relate. Actuarial gains or losses or prior service costs, if any, resulting from amendments to the plans are calculated on an actuarial basis. recognized and amortized over the remaining period of service of the employees.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
SeptemberJune 30, 20172021
(In thousands, except share and per share amounts)
Components of net periodic benefit costs, were as follows:
Net gratuity cost includes the following components: | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Service cost | $ | 885 | | | $ | 664 | | | $ | 1,774 | | | $ | 1,342 | |
Interest cost | 234 | | | 237 | | | 469 | | | 480 | |
Expected return on plan assets | (200) | | | (157) | | | (401) | | | (318) | |
Amortization of actuarial loss, gross of tax | 176 | | | 97 | | | 355 | | | 198 | |
Net gratuity cost | $ | 1,095 | | | $ | 841 | | | $ | 2,197 | | | $ | 1,702 | |
| | | | | | | |
Income tax benefit on amortization of actuarial loss | (71) | | | (55) | | | (122) | | | (64) | |
Amortization of actuarial loss, net of tax | $ | 105 | | | $ | 42 | | | $ | 233 | | | $ | 134 | |
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Service cost | $ | 491 |
| | $ | 402 |
| | $ | 1,469 |
| | $ | 1,203 |
|
Interest cost | 166 |
| | 150 |
| | 494 |
| | 449 |
|
Expected return on plan assets | (112 | ) | | (104 | ) | | (330 | ) | | (312 | ) |
Amortization of actuarial loss | 72 |
| | 23 |
| | 212 |
| | 67 |
|
Net gratuity cost | $ | 617 |
| | $ | 471 |
| | $ | 1,845 |
| | $ | 1,407 |
|
The GratuityIndia Plan in India is partially funded andwhereas the Philippines plan is unfunded. The Company makes annual contributions to the employees' gratuity fund of the India Plan established with Life Insurance Corporation of India and HDFC Standard Life Insurance Company. TheyFund managers manage these funds and calculate the annual contribution required to be made by the Company and manage the Gratuity Plans,India Plan, including any required payouts. Fund managers manage theseThese funds are managed on a cash accumulation basis and declare interest is declared retrospectively on March 31 of each year. The Company earnedexpects to earn a return of approximately 8.0%7.0% per annum on these Gratuity Plansthe India Plan for the periodyear ended September 30, 2017.December 31, 2021.
| | | | | | | | |
Change in Plan Assets | | |
Plan assets at January 1, 2021 | | $ | 11,512 | |
Actual return | | 394 | |
Employer contribution | | 0 | |
Benefits paid | | (774) | |
Effect of exchange rate changes | | (191) | |
Plan assets at June 30, 2021 | | $ | 10,941 | |
|
| | | | |
Change in Plan Assets | | |
Plan assets at January 1, 2017 | | $ | 5,640 |
|
Actual return | | 341 |
|
Employer contribution | | 1,694 |
|
Benefits paid | | (896 | ) |
Effect of exchange rate changes | | 227 |
|
Plan assets at September 30, 2017 | | $ | 7,006 |
|
The Company maintains several 401(k) plans (the “401(k) Plans”) under Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”), covering all eligible employees, as defined in the Code as a defined contribution plan. The Company may make discretionary contributions of up to a maximum of 4%4.0% of employee compensation within certain limits. Contributions
The Company's accrual for contributions to the 401(k) plans amounting to $487 and $554Plans were made during the three months ended September 30, 2017 and 2016, respectively, and $2,051 and $1,945 during the nine months ended September 30, 2017 and 2016, respectively.as follows:
During the three months ended September 30, 2017 and 2016, the Company contributed $1,845 and $1,608, respectively, and during the nine months ended September 30, 2017 and 2016, the Company contributed $5,350 and $4,619, respectively,
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Contribution to the 401(k) Plans | $ | 753 | | | $ | 29 | | | $ | 2,052 | | | $ | 255 | |
The Company's contribution for various defined contributionbenefit plans on behalf of its employees in India, the Philippines, Bulgaria, Romania, the Czech Republic, South Africa, Colombia, Australia and Singapore.Singapore were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Contribution to the defined benefit plans | $ | 3,418 | | | $ | 2,646 | | | $ | 6,712 | | | $ | 5,624 | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
SeptemberJune 30, 20172021
(In thousands, except share and per share amounts)
17.
20. Leases
The Company conducts its operations using facilities leased under operating lease agreements that expire at various dates. The Company finances its use of certain motor vehicles and other equipment under various lease arrangements provided by financial institutions. Future minimumThe lease payments under these capitalagreements do not contain any covenants to impose any restrictions except for market-standard practice for similar lease arrangements.
The Company had performed an evaluation of its contracts with suppliers in accordance with Topic 842, Leases, and had determined that, except for leases for office facilities, motor vehicles and other equipment as described above, none of September 30, 2017 arethe Company’s contracts contain a lease. In assessment of the lease term, the Company considers the extension option as follows:part of its lease term for those lease arrangements where the Company is reasonably certain of availing the extension option. As part of the Company’s effort to moderate the impact of COVID-19, the Company continued to evaluate its office facilities to determine where it can exit, consolidate, or otherwise optimize its use of office space. During the year ended December 31, 2020, the Company changed the lease term for certain of its leases and recognized the resultant amount of the remeasurement of the lease liability as an adjustment to the ROU assets.
|
| | | |
During the next twelve months ending September 30, |
|
2018 | $ | 227 |
|
2019 | 173 |
|
2020 | 128 |
|
2021 | 72 |
|
Total minimum lease payments | 600 |
|
Less: amount representing interest | 117 |
|
Present value of minimum lease payments | 483 |
|
Less: current portion | 168 |
|
Long term capital lease obligation | $ | 315 |
|
The Company conducts its operations using facilities leased under non-cancelable operatingimpact of COVID-19 on the economic environment is uncertain and has caused variability in the determination of the incremental borrowing rate and extension option, which have an impact on measurement of lease agreements that expire at various dates. Future minimumliabilities and ROU assets.
Supplemental balance sheet information
| | | | | | | | | | | |
| As of |
| June 30, 2021 | | December 31, 2020 |
Operating Lease | | | |
Operating lease right-of-use assets | $ | 83,280 | | | $ | 91,918 | |
| | | |
Operating lease liabilities - Current | $ | 18,039 | | | $ | 18,894 | |
Operating lease liabilities - Non-current | 76,518 | | | 84,874 | |
Total operating lease liabilities | $ | 94,557 | | | $ | 103,768 | |
| | | |
Finance Lease | | | |
Property and equipment, gross | $ | 2,598 | | | $ | 1,853 | |
Accumulated depreciation | (2,196) | | | (1,382) | |
Property and equipment, net | $ | 402 | | | $ | 471 | |
| | | |
Finance lease liabilities - Current | $ | 194 | | | $ | 229 | |
Finance lease liabilities - Non-current | 255 | | | 281 | |
Total finance lease liabilities | $ | 449 | | | $ | 510 | |
Finance lease payments under non-cancelable agreements expiring after September 30, 2017liabilities are set forth below:
|
| | | |
During the next twelve months ending September 30, |
|
2018 | $ | 10,477 |
|
2019 | 8,470 |
|
2020 | 4,795 |
|
2021 | 3,189 |
|
2022 | 1,064 |
|
2023 and thereafter | 933 |
|
| $ | 28,928 |
|
Rent expense
The operating leases are subject to renewal periodically and have scheduled rent increases. The Company recognizes rent on such leases onpresented as a straight-line basis over cancelable and non-cancelable lease period determined under ASC topic 840, "Leases":
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Rent expense | $ | 6,362 |
| | $ | 5,445 |
| | $ | 18,168 |
| | $ | 15,871 |
|
Deferred rent
|
| | | | | | | |
| As of |
| September 30, 2017 | | December 31, 2016 |
Cancelable and non - cancelable operating leases
| $ | 8,763 |
| | $ | 7,915 |
|
Deferred rent is included underpart of “Accrued expenses and other current liabilities” and “Non-current liabilities”“Other non-current liabilities,” as applicable, in the unauditedCompany’s consolidated balance sheets.
The components of lease cost, which are included in the Company's unaudited consolidated statements of income, are as follows:
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
SeptemberJune 30, 20172021
(In thousands, except share and per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
Lease cost | Three months ended June 30, | | Six months ended June 30, |
Finance lease: | 2021 | | 2020 | | 2021 | | 2020 |
Amortization of right-of-use assets | $ | 50 | | | $ | 63 | | | $ | 102 | | | $ | 125 | |
Interest on lease liabilities | 22 | | | 20 | | | 39 | | | 50 | |
Operating lease(a) | 6,871 | | | 6,850 | | | 13,632 | | | 13,703 | |
| | | | | | | |
Total lease cost | $ | 6,943 | | | $ | 6,933 | | | $ | 13,773 | | | $ | 13,878 | |
18.(a) Includes short-term leases, which are immaterial.
Supplemental cash flow and other information related to leases are as follows:
| | | | | | | | | | | |
| Six months ended June 30, |
| 2021 | | 2020 |
Cash payments for amounts included in the measurement of lease liabilities : | | | |
Operating cash outflows for operating leases | $ | 13,327 | | | $ | 12,831 | |
Operating cash outflows for finance leases | $ | 39 | | | $ | 50 | |
Financing cash outflows for finance leases | $ | 107 | | | $ | 124 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 1,659 | | | $ | 17,999 | |
Right-of-use assets obtained in exchange for new finance lease liabilities | $ | 50 | | | $ | 75 | |
Weighted-average remaining lease term (in years) | | | |
Finance lease | 1.8 | | 2.1 |
Operating lease | 5.8 | | 6.8 |
Weighted-average discount rate | | | |
Finance lease | 14.1 | % | | 10.2 | % |
Operating lease | 7.4 | % | | 7.4 | % |
The Company determines the incremental borrowing rate by adjusting the benchmark reference rates, with appropriate financing spreads applicable to the respective geographies where the leases were entered and lease specific adjustments for the effects of collateral.
During the six months ended June 30, 2021 and year ended December 31, 2020, the Company modified certain of its operating leases, resulting in a reduction of its lease liabilities by $547 and $3,143 respectively, with a corresponding reduction in ROU assets.
As of June 30, 2021, the Company did not have any significant leases that have not yet commenced but that create significant rights and obligations for the Company.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2021
(In thousands, except share and per share amounts)
Maturities of lease liabilities as of June 30, 2021 were as follows:
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
2021 (July 1 - December 31) | $ | 12,366 | | | $ | 146 | |
2022 | 24,094 | | | 179 | |
2023 | 22,715 | | | 134 | |
2024 | 17,095 | | | 58 | |
2025 | 9,878 | | | 21 | |
2026 and thereafter | 33,965 | | | 6 | |
Total lease payments | $ | 120,113 | | | $ | 544 | |
Less: Imputed interest | 25,556 | | | 95 | |
Present value of lease liabilities | $ | 94,557 | | | $ | 449 | |
Maturities of lease liabilities as of December 31, 2020 were as follows:
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
2021 | $ | 25,829 | | | $ | 262 | |
2022 | 24,316 | | | 194 | |
2023 | 22,066 | | | 114 | |
2024 | 17,084 | | | 36 | |
2025 | 9,749 | | | 11 | |
2026 and thereafter | 34,334 | | | 0 | |
Total lease payments | $ | 133,378 | | | $ | 617 | |
Less: Imputed interest | 29,610 | | | 107 | |
Present value of lease liabilities | $ | 103,768 | | | $ | 510 | |
21. Income Taxes
The Company determines the tax provision for interim periods using an estimate of its annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period.rate. Each quarter, the Company updates its estimate of annual effective tax rate, and if its estimated tax rate changes, the Company makes a cumulative adjustment. The impact of COVID-19 on the economic environment is uncertain and may change the annual effective tax rate, which could impact tax expense.
The Company's effective tax rate decreased from 32.4% during the three months ended June 30, 2020 to 24.0% during the three months ended June 30, 2021. The Company recorded income tax expense of $2,819$8,865 and $5,646$4,072 for the three months ended SeptemberJune 30, 20172021 and 2016,2020, respectively. The increase in income tax expense was primarily as a result of higher profit during the three months ended June 30, 2021, compared to the three months ended June 30, 2020, partially offset by recording of a one-time tax expense of $1,320 due to election of a new tax regime, during the three months ended June 30, 2020, for two of the Company's Indian subsidiaries that provides for a lower tax rate on earnings in exchange for foregoing certain tax credits, including minimum alternative tax credits.
The Company's effective tax rate decreased from 26.0%24.3% during the threesix months ended SeptemberJune 30, 20162020 to 11.8%22.9% during the six months ended June 30, 2021. The Company recorded income tax expense of $17,823 and $9,927 for the six months ended June 30, 2021 and 2020, respectively. The increase in the income tax expense was primarily as a result of higher profit during the six months ended June 30, 2021, compared to the six months ended June 30, 2020, which was partially offset by (i) recording of a one-time tax expense of $1,320 due to election of a new tax regime, during the six months ended June 30, 2020, for two of the Company's Indian subsidiaries that provides for a lower tax rate on earnings in exchange for foregoing certain tax credits, including minimum alternative tax credits and (ii) recording of higher excess tax benefitbenefits related to stock awards of $3,488$1,822 pursuant to ASU No. 2016-09 during the threesix months ended SeptemberJune 30, 2017, (ii) higher earnings from foreign subsidiaries and lower domestic profit in2020, compared to $1,028 during the U.S., partially offset by higher tax expense on account of the expiration of a tax holiday for some of the operating centers in India.
The Company recorded income tax expense of $7,202 and $18,549 for the ninesix months ended SeptemberJune 30, 20172021.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2021
(In thousands, except share and 2016, respectively. The effective tax rate decreased from 28.6% during the nine months ended September 30, 2016 to 11.0% as a result of (i) excess tax benefit related to stock awards of $7,169 pursuant to ASU No. 2016-09 during the nine months ended September 30, 2017, (ii) conclusion of an uncertain tax position of $3,153 (including interest of $1,433), (iii) higher earnings from foreign subsidiaries and lower domestic profit in the U.S., partially offset by higher tax expense on account of the expiration of a tax holiday for some of the operating centers in India.
The following table summarizes the activity related to the gross unrecognized tax benefits from January 1, 2017 through September 30, 2017:
|
| | | |
Balance as of January 1, 2017 | $ | 3,087 |
|
Increases related to prior year tax positions | — |
|
Decreases related to prior year tax positions | (1,720 | ) |
Increases related to current year tax positions | — |
|
Decreases related to current year tax positions | — |
|
Effect of exchange rate changes | 85 |
|
Balance as of September 30, 2017 | $ | 1,452 |
|
The unrecognized tax benefits as of September 30, 2017 of $1,452, if recognized, would impact the effective tax rate.
During the three months ended SeptemberJune 30, 2017 and 2016,2021, the Company has recognized interestrepatriated to the United States $49,000 (net of nil$2,586 withholding taxes) from India, $42,500 (net of $7,494 withholding taxes) from the Philippines and $50, respectively, which are included$17,000 (net of $908 withholding taxes) from India in July 2021. As of June 30, 2021, the Company accrued withholding taxes of $10,988 associated with these distributions and increased the Company’s deferred tax assets. These distributions do not constitute a change in the income tax expenseCompany’s permanent reinvestment assertion. The Company bases its decision to continue to indefinitely reinvest earnings in India and the Philippines on its estimate of the working capital required to support its operations in these geographies and periodically reviews its capital initiatives to support and expand the Company’s global operations, as well as an economically viable rate of return on its investments made in India and the Philippines as compared to those made in the unaudited consolidated statements of income. As of September 30, 2017 and December 31, 2016, the Company has accrued interest and penalties of $240 and $1,553, relating to unrecognizedUnited States.
Income tax benefits.(deferred) recognized in “Other comprehensive income / (loss)” were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Deferred taxes benefit / (expense) recognized on: | | | | | | | |
Unrealized gain / (loss) on cash flow hedges | $ | 177 | | | $ | (2,578) | | | $ | (221) | | | $ | 2,128 | |
Reclassification adjustment for cash flow hedges | 427 | | | (124) | | | 816 | | | (22) | |
Reclassification adjustment for retirement benefits | (71) | | | (55) | | | (122) | | | (64) | |
Effect of tax rate changes on retirement benefits | 0 | | | 312 | | | 0 | | | 312 | |
Foreign currency translation loss | 945 | | | 57 | | | 1,229 | | | 4,291 | |
Total Income tax benefit recognized in other comprehensive income / (loss) | $ | 1,478 | | | $ | (2,388) | | | $ | 1,702 | | | $ | 6,645 | |
19.
22. Stock-Based Compensation
The following costs related to the Company’s stock-based compensation plan are included in the unaudited consolidated statements of income:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Cost of revenues | $ | 1,854 | | | $ | 1,624 | | | $ | 3,390 | | | $ | 3,042 | |
General and administrative expenses | 4,608 | | | 3,112 | | | 7,906 | | | 4,680 | |
Selling and marketing expenses | 3,608 | | | 2,990 | | | 6,606 | | | 4,782 | |
Total | $ | 10,070 | | | $ | 7,726 | | | $ | 17,902 | | | $ | 12,504 | |
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Cost of revenue | $ | 1,109 |
| | $ | 795 |
| | $ | 3,448 |
| | $ | 2,848 |
|
General and administrative expenses | 2,601 |
| | 1,905 |
| | 7,541 |
| | 6,241 |
|
Selling and marketing expenses | 1,998 |
| | 1,784 |
| | 5,782 |
| | 5,654 |
|
Total | $ | 5,708 |
| | $ | 4,484 |
| | $ | 16,771 |
| | $ | 14,743 |
|
As of SeptemberJune 30, 2017,2021, the Company had 1,492,0971,892,706 shares available for grant under the 2015 Amendment and Restatement2018 Omnibus Incentive Plan.
Stock Options
Stock option activity under the Company’s stock-based compensation plans is shown below:
Contents
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
SeptemberJune 30, 20172021
(In thousands, except share and per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Options | | Weighted-Average Exercise Price | | Aggregate Intrinsic Value | | Weighted-Average Remaining Contractual Life (Years) |
Outstanding at December 31, 2020 | 31,265 | | | $ | 25.43 | | | $ | 1,866 | | | 1.9 |
Granted | 0 | | | 0 | | | — | | | — | |
Exercised | (7,016) | | | 24.77 | | | 467 | | | — | |
Forfeited | 0 | | | 0 | | | — | | | — | |
Outstanding at June 30, 2021 | 24,249 | | | $ | 25.63 | | | $ | 1,955 | | | 1.6 |
Vested and exercisable at June 30, 2021 | 24,249 | | | $ | 25.63 | | | $ | 1,955 | | | 1.6 |
Stock Options
Stock option activity under the Company’s stock plans is shown below:
|
| | | | | | | | | | | | |
| Number of Options | | Weighted Avg Exercise Price | | Aggregate Intrinsic Value | | Weighted Avg Remaining Contractual Life (Years) |
Outstanding at December 31, 2016 | 811,902 |
| | $ | 16.31 |
| | $ | 27,718 |
| | 2.96 |
Granted | — |
| | — |
| | | | |
Exercised | (349,880 | ) | | 12.22 |
| | | | |
Forfeited | — |
| | — |
| | | | |
Outstanding at September 30, 2017 | 462,022 |
| | $ | 19.40 |
| | $ | 17,980 |
| | 2.97 |
Vested and exercisable at September 30, 2017 | 462,022 |
| | $ | 19.40 |
| | $ | 17,980 |
| | 2.97 |
The unrecognized compensation cost for outstanding options as of September 30, 2017 is nil. The Company did not grant any options during the three and nine months ended September 30, 2017 and 2016. There were no options that vested during the three months ended September 30, 2017 and 2016. The total grant date fair value of options vested during the nine months ended September 30, 2017 and 2016 was nil and $706, respectively.
Restricted Stock and Restricted Stock Units
Restricted stock and restricted stock unit activity under the Company’s stockstock-based compensation plans is shown below:
| | | | | | | | | | | |
| Restricted Stock |
| Number | | Weighted Average Fair Value |
Outstanding at December 31, 2020* | 903,666 | | | $ | 67.84 | |
Granted | 356,177 | | | 84.59 | |
Vested | (327,689) | | | 63.74 | |
Forfeited | (31,491) | | | 71.32 | |
Outstanding at June 30, 2021* | 900,663 | | | $ | 75.83 | |
|
| | | | | | | | | | | | | |
| Restricted Stock | | Restricted Stock Units |
| Number | | Weighted Avg Grant Date Fair Value | | Number | | Weighted Avg Grant Date Fair Value |
Outstanding at December 31, 2016* | 246,940 |
| | $ | 42.42 |
| | 1,256,288 |
| | $ | 37.38 |
|
Granted | — |
| | — |
| | 391,927 |
| | 48.02 |
|
Vested | (36,767 | ) | | 38.74 |
| | (449,977 | ) | | 34.69 |
|
Forfeited | (4,505 | ) | | 35.11 |
| | (96,140 | ) | | 41.03 |
|
Outstanding at September 30, 2017* | 205,668 |
| | $ | 43.24 |
| | 1,102,098 |
| | $ | 41.94 |
|
* As of SeptemberJune 30, 20172021 and December 31, 20162020 restricted stock units vested for which the underlying common stock is yet to be issued are 146,112was 200,542 and 135,054,181,638 respectively.
As of SeptemberJune 30, 2017,2021, unrecognized compensation cost of $39,553$57,540 is expected to be expensed over a weighted average period of 2.662.8 years.
Performance Based Stock Awards
Under the 2018 Plan, the Company grants performance-based restricted stock units (“PRSUs”) to executive officers and other specified employees. During the six months ended June 30, 2021, the Company granted PRSUs that cliff vest at the end of a three year period based on a market condition that is contingent on the Company's meeting the total shareholder return relative to a group of peer companies specified under the program measured over a three-year performance period. The award recipient may earn up to two hundred percent (200%) of the PRSUs granted based on the actual achievement of targets.
Performance restricted stock unit activity under the Company’s stock plans is shown below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Revenue Based PRSUs | | Market Condition Based PRSUs |
| Number | | Weighted Average Fair Value | | Number | | Weighted Average Fair Value |
Outstanding at December 31, 2020 | 105,892 | | | $ | 72.32 | | | 105,868 | | | $ | 97.85 | |
Granted | 0 | | | 0 | | | 121,180 | | | 119.80 | |
Vested | 0 | | | 0 | | | 0 | | | 0 | |
Forfeited | (157) | | | 78.34 | | | (157) | | | 102.10 | |
Outstanding at June 30, 2021 | 105,735 | | | $ | 72.31 | | | 226,891 | | | $ | 109.57 | |
As of June 30, 2021, unrecognized compensation cost of $18,481 is expected to be expensed over a weighted average period of 2.1 years.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
SeptemberJune 30, 20172021
(In thousands, except share and per share amounts)
Performance Based Stock Awards
PerformanceThe impact of COVID-19 on the economic environment is uncertain and has caused variability in the estimation of number of performance based restricted stock unit (the “PRSUs”) activity underunits that will eventually vest and the Company’s stock plans is shown below:
|
| | | | | | | | | | | | | |
| Revenue Based PRSUs | | Market Condition Based PRSUs |
| Number | | Weighted Avg Grant Date Fair Value | | Number | | Weighted Avg Grant Date Fair Value |
Outstanding at December 31, 2016 | 115,174 |
| | $ | 41.70 |
| | 215,171 |
| | $ | 47.42 |
|
Granted | 62,113 |
| | 47.73 |
| | 62,100 |
| | 54.10 |
|
Vested | — |
| | — |
| | — |
| | — |
|
Forfeited | (8,595 | ) | | 43.96 |
| | (8,595 | ) | | 59.40 |
|
Outstanding at September 30, 2017 | 168,692 |
| | $ | 43.81 |
| | 268,676 |
| | $ | 48.58 |
|
As of September 30, 2017, unrecognizedrelated compensation cost of $7,095 is expected to be expensed over a weighted average periodrecognized in the unaudited consolidated statements of 1.83 years.income.
20.
23. Related Party Disclosures
On October 1, 2018, the Company entered into the Investment Agreement with the Purchaser relating to the issuance to the Purchaser of $150,000 aggregate principal amount of the Notes. In connection with the investment, Vikram S. Pandit, Chairman and CEO of The Orogen Group LLC (an affiliate of the Purchaser), was appointed to Company’s Board of Directors.
The Company provides consulting serviceshad outstanding Notes with a principal amount of $150,000 each as of June 30, 2021 and December 31, 2020 and interest accrued of $1,312 and $1,313 as of June 30, 2021 and December 31, 2020, respectively, related to PharmaCord, LLC. One of the Company’s directors, Nitin Sahney, is the member-manager and chief executive officer of PharmaCord, LLC. Investment Agreement.
The Company recognized revenue of approximately $701 and $1,506 ininterest expense on the three months and nine months ended September 30, 2017, respectively, for services provided.
At September 30, 2017 and December 31, 2016, the Company had an account receivable of $379 and nil, respectively,Notes related to these services.the Investment Agreements as below. Refer to Note 17 – Borrowings to the unaudited consolidated financial statements for details.
| | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | | | Six months ended June 30, |
| 2021 | 2020 | | | | 2021 | | 2020 |
Interest expense on Notes | $ | 1,312 | | $ | 1,312 | | | | | $ | 2,625 | | | $ | 2,625 | |
21.
24. Commitments and Contingencies
Fixed Asset
Capital Commitments
At SeptemberJune 30, 2017,2021, the Company hashad committed to spend approximately $7,407$7,100 under agreements to purchase fixed assets.property and equipment. This amount is net of capital advances paid which are recognized in respect of these purchases.the unaudited consolidated balance sheets as “Capital work in progress” under “Property and equipment, net”.
Other Commitments
Certain units of the Company’s Indian subsidiaries were established as 100%Export-Oriented units or under the Software Technology Parks of India (“STPI”)or Special Economic Zone scheme promulgated by the Government of India. These units are exempt from customs, central excise duties, and levies on imported and indigenous capital goods, stores, and spares. The Company has undertaken to pay custom duties, service taxes, levies, and liquidated damages payable, if any, in respect of imported and indigenous capital goods, stores and spares consumed duty free, in the event that certain terms and conditions are not fulfilled. The Company’s managementCompany believes, however, that these units have in the past satisfied and will continue to satisfy the required conditions.
The Company’s operations centers in the Philippines are registered with the Philippine Economic Zone Authority (“PEZA”).Authority. The registration provides the Company with certain fiscal incentives on the import of capital goods and local purchase of services and materials and requires ExlService Philippines, Inc. to meet certain performance and investment criteria. The Company’s managementCompany believes that these centers have in the past satisfied and will continue to satisfy the required criteria.
Contingencies
U.S. and Indian transfer
Transfer pricing regulations generally require that any international transactioncontrolled intercompany transactions involving associated enterprisesrelated entities be at an arm’s-length price. Accordingly, the Company determines the appropriate pricingtransfer prices for the international transactions among its associated enterprisesrelated entities on the basis of a detailed functional and economic analysis involving benchmarking against transactions among entities that are not under common control. The taxunrelated. Tax authorities have jurisdiction to review this arrangementtransfer pricing results, and in the event that they determine that the transfer price applied was not appropriate, the Company may incur increasedadditional tax, liability, including accrued interest and penalties. The Company is currently involved in transfer pricing disputes with the Indian tax authorities over the applicationregarding transactions with some of its related entities.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
SeptemberJune 30, 20172021
(In thousands, except share and per share amounts)
of some of its transfer pricing policies for some of its subsidiaries. Further, the Company and a U.S. subsidiary are engaged in tax litigation with Indian tax authorities regarding a permanent establishment matter. For the income-taxUnited States, the Philippines and India, tax year 2016 and subsequent tax years remain open for examination by the tax authorities in India on the issueas of permanent establishment.June 30, 2021.
The aggregate disputed amount demanded by Indian tax authorities (net of advance payments, if any) from the Company primarily related to its transfer pricing and other corporate tax issues for years ranging from tax years 2003 to 20142019 and its permanent establishment issues ranging fromfor tax years 2003 to 20072006 as of SeptemberJune 30, 20172021 and December 31, 20162020 is $16,075$26,180 and $17,963, respectively, of which the$16,748, respectively. The Company has made payments and/or provided bank guarantee toguarantees against these demands in the extent $8,418amounts of $8,003 and $8,640,$8,120, respectively. Amounts paid as deposits in respect of such assessments aggregating to $6,389$6,221 and $6,690$6,307 as of SeptemberJune 30, 20172021 and December 31, 2016,2020, respectively, are included in “Other assets” and amounts deposited for bank guarantees aggregating to $2,029$1,782 and $1,950$1,813 as of SeptemberJune 30, 20172021 and December 31, 2016,2020, respectively, are included in “Restricted cash” in the non-current assets section of the Company’s unaudited consolidated balance sheets as of September 30, 2017 and December 31, 2016.sheets.
Based on advice from its Indian tax advisors, the facts underlying the Company’s position and its experience with these types of assessments, the Company believes that its position will more likely than not be sustained upon final examination by the probability that it will ultimately be found liable for these assessments is remotetax authorities based on its technical merits as of the reporting date and accordingly has not accrued any amount with respect to these matters in its unaudited consolidated financial statements. The Company does not expect any impact from these assessments on its future income tax expense. It is possible that the Company might receive similar orders or assessments from tax authorities for subsequent years. Accordingly, even if these disputes are resolved, the Indian tax authorities may still serve additional orders or assessments.
In February 2019, there was a judicial pronouncement in India with respect to defined social security contribution benefits payments interpreting certain statutory defined contribution obligations of employees and employers. Currently some of the Company's subsidiaries in India are undergoing assessment with the statutory authorities. As of the reporting date, it is unclear whether the interpretation set out in the pronouncement has retrospective application. If applied retrospectively, the interpretation may result in a significant increase in contributions payable by the Company for past periods for certain of its India-based employees. There are numerous interpretative challenges concerning the retrospective application of the judgment. Due to such challenges and a lack of interpretive guidance, and based on legal advice, the Company believes it is currently impracticable to reliably estimate the timing and amount of any payments the Company may be required to make. The Company will continue to monitor and evaluate its position based on future events and developments in this matter for the implications on the financial statements, if any.
22. Subsequent Event
On October 24, 2017,In September 2020, the Indian Parliament passed various consolidating labor codes, including the Code on Social Security, 2020 (the “Indian Social Security Code”) which aims to rationalize labor laws. The Indian Social Security Code has implications on defined social security contribution plans, provision of certain benefits or facilities to employees at employer’s costs and post-retirement benefits. Most specifically, it broadens the definition of an employee and wages and liberalizes the definition of “continuous period” for the purpose of determining employee benefits, amongst others. However, the rules for the Indian Social Security Code are yet to be published and the effective date from which these changes are applicable is yet to be notified. The Company will complete its evaluation once the subject rules are notified and will give appropriate impact in the financial statements in the period in which, the Indian Social Security Code becomes effective and the related rules to determine the financial impact are published.
From time to time, the Company, its subsidiaries, and/or their present officers or directors, on individual basis, may be or have been, named as a wholly owned subsidiarydefendant in litigation matters, including employment-related claims. The plaintiffs in those cases seek damages, including, where applicable, compensatory damages, punitive damages and attorney’s fees. With respect to pending litigation matters as of the reporting date, the Company believes that the damages amounts claimed in such cases are not meaningful indicators of the potential liabilities of the Company, entered into a definitive purchase agreementthat these matters are without merit, and that the Company intends to acquire substantially all the assetsvigorously defend each of Health Integrated, Inc. Based in Tampa, Florida, Health Integrated is a care management company that provides end-to-end technologythem.
The outcomes of legal actions are unpredictable and analytics-enabled care management services including case management, utilization management, disease management, special needs programs, and multichronic care management on behalf of health plans. Health Integrated currently serves over five million lives in the Medicaid, Medicare, and dual eligible populations. It is known for its strong capabilities in improving member health status through behavioral change. The acquisition is expected to close in the first quarter of 2018, subject to significant uncertainties, and thus it is inherently difficult to determine the fulfillmentlikelihood of certain closing conditions,the Company incurring a material loss or quantification of any such loss. With respect to pending litigation matters as of the reporting date, based on information currently available, including regulatorythe Company’s assessment of the facts underlying each matter and other consents.advice of counsel, the amount or range of reasonably possible losses, if any, cannot be reasonably estimated. Based on the Company’s assessment, including the availability of insurance recoveries, the Company’s management does not believe that currently pending litigation, individually or in aggregate, will have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in connection with our unaudited consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2020. Some of the statements in the following discussion are forward looking statements. Dollar amounts within Item 2 are presented as actual, approximated,rounded, dollar amounts.
We have described in this Quarterly Report on Form 10-Q, the impact of the global Coronavirus Disease 2019 pandemic (“COVID-19”) on our financial results for the three months ended June 30, 2021. See "Cautionary Note Regarding Forward-Looking Statements" below, Item 1A -“Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q and Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 for further information regarding risks and uncertainties relating to COVID-19.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements.statements within the meaning of the United States Private Securities Litigation Reform Act of 1995. You should not place undue reliance on these statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. These statements often include words such as “may,” “will,” “should,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or similar expressions. These statements are based on assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this Quarterly Report on Form 10-Q, you should understand that these statements are not guarantees of performance or results. They involve known and unknown risks, uncertainties and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements. Many of the following risks, uncertainties and other factors identified below have been, and will be, amplified by the COVID-19 pandemic (“COVID-19”). These factors include but are not limited to:
•the impact of COVID-19 and related response measures on our business, results of operations and financial condition, including the impact of governmental lockdowns and other restrictions on our operations and processes and those of our clients and suppliers;
•our dependence on a limited number of clients in a limited number of industries;
•worldwide political, economic or business conditions;
•negative public reaction in the U.S. or elsewhere to offshore outsourcing;
•fluctuations in our earnings;
•our ability to attract and retain clients including in a timely manner;
•our ability to successfully consummate or integrate strategic acquisitions;
•our ability to accurately estimate and/or manage the costs and/or timing of winding down businesses;
•restrictions on immigration;
•our ability to hire and retain enough sufficiently trained employees to support our operations;
•our ability to grow our business or effectively manage growth and international operations;
•any changes in the senior management team;
•increasing competition in our industry;
•telecommunications or technology disruptions;disruptions or breaches, natural or other disasters, or medical epidemics or pandemics;
•our ability to withstand the loss of a significant customer;
•our ability to realize the entire book value of goodwill and other intangible assets from acquisitions;
•our ability to make accurate estimates and assumptions in connection with the preparation of our consolidated financial statements;
•regulatory, legislative and judicial developments, including changes to or the withdrawal of governmental fiscal incentives;
•changes in tax laws or decisions regarding repatriation of funds held abroad;
•ability to service debt or obtain additional financing on favorable terms;
•legal liability arising out of customer contracts;
•technological innovation;
•political or economic instability in the geographies in which we operate;
•operational and information security failures arising as a result of remote work solutions adopted due to COVID-19;
•cyber security incidents, data breaches, or other unauthorized disclosure of sensitive or confidential client and customer data; and
•adverse outcome of our disputes with the Indian tax authorities.
These and other factors are more fully discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2020. These and other risks could cause actual results to differ materially from those implied by forward-looking statements in this Quarterly Report on Form 10-Q.
The forward-looking statements made by us in this Quarterly Report on Form 10-Q, or elsewhere, speak only as of the date on which they were made. New risks and uncertainties come up from time to time, and it is impossible for us to predict those events or how they may affect us. We have no obligation to update any forward-looking statements in this Quarterly Report on Form 10-Q after the date of this Quarterly Report on Form 10-Q, except as required by federal securities laws.
Executive Overview
We are a leading operations management and analytics company that helps our clients build and grow sustainable businesses. By orchestrating our domain expertise, data, analytics and digital technology, we look deeper to design and manage agile, customer-centric operating models to improve global operations, drive profitability, enhance customer satisfaction, increase data-driven insights, and manage risk and compliance. We serve customers in multiple industries, including insurance, healthcare, banking and financial services, utilities, travel, transportation and logistics, media and retail, among others.
We operate in the business process management (“BPM”) industry and we provide operations management and analytics services that help the business enhance growthservices. We manage and profitability. Usingreport financial information through our proprietary platforms, methodologies and tools we look deeper to help our clients improve global operations, enhance data-driven insights, increase customer satisfaction, and manage risk and compliance. Our eight operating segments arefour strategic business units that align our products and services with how we manage our business, approach our key markets and interact with our clients. Six of those operating segments provide BPM or “operations management” services, which we organize into industry-focused operating segments (Insurance, Healthcare, Travel, Transportation and Logistics, Banking and Financial Services, and Utilities) and one “capability” operating segment (Finance and Accounting) that provides services to clients in our industry-focused segments as well as clients across other industries. In each of these six operating segments we provide operations management services, which typically involve transfer to the Company of select business operations of a client, after which we administer and manage those operations for our client on an ongoing basis. Our remaining two operating segments are Consulting, which provides industry-specific transformational services related to operations management services, and our Analytics operating segment, which provides services that focus on driving improved business outcomes for clients by generating data-driven insights across all parts of their business.
In prior periods we presented two reportable segments: Operations Management (which included ourunits: Insurance, Healthcare, Travel, TransportationAnalytics and Logistics, Finance and Accounting, Banking and Financial services, Utilities and Consulting operating segments) and Analytics. Effective for the quarter and year ended December 31, 2016, we present information for the following reportable segments:Emerging Business.
Insurance
Healthcare
Travel, Transportation and Logistics (“TT&L”)
Finance and Accounting (“F&A”), and
Analytics
The remaining operating segments, which includes our Banking and Financial Services, Utilities and Consulting operating segments have been included in a category called “All Other”. This change in segment presentation does not affect our consolidated statements of income, balance sheets or statements of cash flows. For further descriptions of our operating segments, see Note 3 to the unaudited consolidated financial statements contained herein.
Our global delivery network, which includeincludes highly trained industry and process specialists across the United States, Latin America, South Africa, Europe and Asia (primarily India and the Philippines), is a key asset. We have operations centers in India, the U.S.,United States, the United Kingdom, the Philippines, Bulgaria, Colombia, South Africa, Romania and the Czech Republic.
Continued impact of COVID-19 on Our Business
The global COVID-19 pandemic continues to materially impact worldwide economic activity and levels of business confidence and has had widespread, rapidly-evolving and unpredictable impacts on global societies, economies, financial markets and business practices. During 2020, COVID-19 materially impacted our business, however during the first half of 2021, we saw moderate improvement in key indicators, despite being prevented from conducting business activities as usual from geographies affected by new variants of the COVID-19 virus. Over the course of 2020, and continuing into 2021, our customers, contractors, suppliers, and other partners adapted in order to conduct business activities in a COVID-19 environment. The U.S. economy continued on a path to recovery in the first half of 2021 with millions of Americans receiving the COVID-19 vaccine, and states and municipalities increasingly reopening. In addition, the U.S. federal government continued to enact policies to provide fiscal stimulus to the economy and relief to those affected by the pandemic. As the global
economy begins to emerge from the impact of COVID-19 in 2021, our clients are focused on receiving personalized customer experiences, optimizing costs and supporting resilient operating models. We remain committed to helping our clients adapt and thrive through the ongoing uncertainties caused by COVID-19 and, going forward, to the shifting business environment. Notwithstanding the moderate improvement in conditions during the first half of 2021, the COVID-19 pandemic continues, with temporary shutdowns at our operations centers requested or mandated by governmental authorities, and due to the associated uncertainties, we continue to evaluate the nature and scope of the impact to our business and may take further strategic actions in order to manage our business operations, costs and liquidity in response to the ongoing impacts and changing conditions and markets resulting from COVID-19.
We have a business continuity plan in place and have, since early in the pandemic, adapted delivery to a work from home model, while actively working to understand our clients’ changing requirements, continuing to ensure data security, prioritizing critical processes, adjusting service levels and managing discretionary costs (such as travel costs) and fixed costs (such as non-critical personnel costs). We have made ongoing efforts to reduce our reliance on travel by incorporating into our business model the ability to conduct business using virtual conferencing and collaboration tools. Our work from home delivery capability steadily improved throughout 2020 and continued to improve during the first half of 2021. We estimate that we are able to deliver a significant portion of our clients’ current requirements in a work from home model given the current lockdown restrictions in the locations in which we operate and certain clients not authorizing us to perform the remaining process work remotely due to its sensitive nature. In addition, we have also worked, and continue to work with national, state, and local authorities to comply with applicable rules and regulations related to COVID-19. There continues to be volatility and economic and geopolitical uncertainty in many markets around the world due to the emergence and spread of new variants of COVID-19 across geographies. Despite the efforts described above, there is a risk that if jurisdictions in which we operate reinstate prior restrictions, stagnate in their reopening processes, or implement new restrictions in response to new outbreaks or continued spread, our operations and business could be materially impacted. In late March 2021, a new serious outbreak of the COVID-19 virus began affecting India with an exorbitant spike in the number of COVID patients. The Indian government reinstated lockdowns limiting in certain cases the movement of our employees to offices, however these lockdowns were lifted as the situation in India improved. During the same period, the Philippines also began experiencing a spike in the number of COVID patients. Our Indian and Philippines operations were not materially affected as we initiated appropriate business continuity procedures, so as to minimize the effects of these new developments, but it is possible that our business and results of operations could nevertheless be materially affected if any further developments, including new variants of the COVID-19 virus, emerge.
We also took actions in response to the pandemic that focused on helping our employees. In the geographies most affected by the recent COVID-19 variants, these actions included healthcare support including securing and administering vaccines for our employees, facilitating our employees’ access to medical equipment, providing ambulance services and online medical consultations, extending medical insurance to our employees’ family members and enhancing the dollar value of such coverage. We also instituted a one-time employee compensation payment to beneficiaries of employees, facilitated voluntary contributions from our clients and employees to support the family members of deceased employees and providing financial support for their children's education. Other actions included disseminating guidance and information to our employees, facilitating work from home, implementing best practices for employees while working from home, periodic CEO messaging, various programs aimed at employee wellness, including a global wellness program, enhanced leave for employees affected by COVID-19, enhanced awareness towards information security, and updated cyber security and data privacy policies, among others. We continue to have broad travel restrictions and largely operating in virtual-only events for the safety of our employees and our customers. We also implemented pandemic-specific protocols for our essential employees whose jobs require them to be on-site or with our customers by implementing additional safety measures at all of our facilities, including increased frequency in cleaning and disinfecting, and enhanced hygiene and social distancing practices.
We continue to incur additional costs in order to ensure the continuity of our operations and support our work from home model. Such costs include purchase of desktops and laptops for our employees, software and internet connectivity devices, technology tools for productivity enhancement, accommodation, meal, overtime, transportation and regular sanitization and cleaning costs of our offices and facilities. We also expect that we will continue to incur additional costs to monitor and improve operational efficiency of our work from home model, implement new information technology solutions and security measures to safeguard against information security risks and protect the health and safety of our employees as they gradually return to the office. We believe that these short-to-medium-term costs may benefit us in the long-term, as these steps have broadened our “remote working” capabilities, which we expect to become a permanent feature in our future delivery model, as well as our business continuity plans.
In response to certain anticipated impacts from COVID-19, we implemented a series of temporary cost reduction measures in 2020 which continued in the first half of 2021 to further preserve financial flexibility. These actions included the postponement of certain discretionary spending including travel and marketing expenses, reevaluating the pace of our capital expenditures, rationalizing certain of our real estate and facilities, deferring non-critical hiring among others.
Certain impacts of COVID-19 on our business, results of operations, financial position and cash flow during the first half of 2021 has been described above and below, however the full extent of the impact for the period beyond the first half of 2021 is currently uncertain and will depend on many factors that are not within our control, including, but not limited to: the duration and scope of the pandemic; the effectiveness of actions taken to contain or mitigate the pandemic and prevent or limit any reoccurrence; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; development and availability of effective treatments and vaccines and the speed at which such vaccines are administered; significant increases in healthcare costs in the event that a significant number of our personnel become infected with COVID-19 and require medical treatment; general economic uncertainty in key global markets and financial market volatility; global economic conditions and levels of economic growth; and the pace of recovery when COVID-19 subsides. Due to the above circumstances and as described generally in this Quarterly Report on Form 10-Q, our financial results, including but not limited to net revenues, income from operations, net income, cash flow and earnings per share, are not necessarily indicative of the results to be expected for the full fiscal year of 2021. We continue to monitor the implications of COVID-19 on our business, as well as our customers’ and suppliers’ businesses.
For additional information and risks related to COVID-19, see Item 1A - “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q and Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Revenues
For the three months ended SeptemberJune 30, 2017,2021, we had revenues of $192.3$275.1 million compared to revenues of $171.2$222.5 million for the three months ended SeptemberJune 30, 2016,2020, an increase of $21.1$52.6 million, or 12.4%23.6%. For the ninesix months ended SeptemberJune 30, 2017,2021, we had revenues of $564.4$536.5 million compared to revenues of $508.7$468.5 million for the ninesix months ended SeptemberJune 30, 2016,2020, an increase of $55.7$68.0 million, or 11.0%14.5%.
We serve clientsclients mainly in the U.S.United States and the U.K.,United Kingdom, with these two regions generating approximately 82.4%85.5% and 13.9%9.5%, respectively, of our total revenues for the three months ended SeptemberJune 30, 20172021, and approximately 80.1%85.0% and 16.4%, respectively, of our revenues for the three months ended September 30, 2016. For the nine months ended September 30, 2017, these two regions generated 82.0% and 14.5%, respectively, of our total revenues and 80.1% and 16.6%8.5%, respectively, of our total revenues for the ninethree months ended SeptemberJune 30, 2016.2020. For the six months ended June 30, 2021, these two regions generated 85.7% and 9.5%, respectively, of our total revenues and 84.7% and 9.0%, respectively, of our total revenues for the six months ended June 30, 2020.
For the three months ended SeptemberJune 30, 20172021 and 2016,2020, our total revenues from our top ten clients accounted for 38.3%37.8% and 41.0%38.7% of our total revenues, respectively. For the ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, our total revenues from our top ten clients accounted for 38.7%38.5% and 40.6%37.1% of our total revenues, respectively. NoneOur revenue concentration with our top clients remains largely consistent year-over-year and we continue to develop relationships with new clients to diversify our client base. We believe that the loss of any of our top ten clients individually accounted for more than 10% ofcould have a material adverse effect on our total revenues during the three and nine months ended September 30, 2017 and 2016. Although we intend to continue increasing and diversifying our customer base, we expect in the near future that a significant portion of our revenue will continue to be contributed by a limited number of large clients.
financial performance.
Our Business
We provide operations management and analytics services. We market our services to our existing and prospective clients through our sales and client management teams, which are aligned by key industry verticals and cross-industry domains such as finance and accounting. Our sales and client management teams operate from the U.S.,United States, Europe and Australia.
Operations Management Services: We provide our clients with a range of operations management services principally in thefrom our Insurance, Healthcare Travel, Transportation and Logistics, Banking and Financial Services and Utilities sectors, among others, as well as cross-industry operations management services, such as Finance and Accounting Services. We also provide services related to operations management, through our Consulting services that provide advice regarding transformational initiatives.
Our operations management solutionsEmerging Business operating segments, which typically involve the transfer by our clients to the CompanyEXL of selectcertain of their business operations, of a client such as claims processing, clinical operations, or financial transaction processing, after which we administer and manage thethose operations for our client on an ongoing basis. As part of this transfer, we hire and train employees to work at our operations centers on the relevant business operations, implement a process migration to these operations centers and then provide services either to the client or directly to the client’s customers. Each client contract has different terms based
on the scope, deliverables and complexity of the engagement. We also provide consulting services related to operations management that include industry-specific digital transformational services as well as cross-industry finance and accounting services as part of the Emerging Business operating segment.
We provide our services under contracts with our clients, which typically have been observingterms of three or more years, with some being rolling contracts with no end dates. Typically, our clients can terminate these contracts with or without cause and with short notice periods. These contracts provide us with a relatively predictable revenue base for a substantial portion of our operations management business. However, we have a long selling cycle for our services and the budget and approval processes of prospective clients make it difficult to predict the timing of entering into definitive agreements with new clients. Similarly, new license sales and implementation projects for our technology service platforms and other software-based services have a long selling cycle, however ongoing annual maintenance and support contracts for existing arrangements provide us with a relatively predictable revenue base.
We charge for our services using various pricing models like time-and-material pricing, full-time-equivalent pricing, transaction-based pricing, outcome-based pricing, subscription-based pricing and other alternative pricing models. Outcome-based pricing arrangements are examples of non-linear pricing models where clients link revenues from platforms and solutions and the services we provide to usage or savings rather than the efforts deployed to provide these services. We continue to observe a shift in the industry pricing models toward transaction-based pricing, outcome-based pricing and other alternative pricing models. We believe this trend will continue and we have begun to use such alternative pricing models with some of our current clients and are seeking to move certain other clients from a billing ratefull-time-equivalent pricing model to a transaction-based or other alternative pricing model. These alternative pricing models place the focus on operating efficiency in order to maintain or improve our gross margins. In addition, we
We have also observed that prospective larger clients are entering into multi-vendor relationships with regard to their outsourcing needs. We believe that the trend toward multi-vendor relationships will continue. A multi-vendor relationship allows a client to seek more favorable pricing and other contract terms from each vendor, which can result in significantly reduced gross margins from the provision of services to such client for each vendor. To the extent our large clients expand their use of multi-vendor relationships and are able to extract more favorable contract terms from other vendors, our gross margins and revenues may be reduced with regard to such clients if we are required to modify the terms of our relationships with such clients to meet competition.
Analytics:Our existing agreements with original terms of three or more years provide us with a relatively predictable revenue base for a substantial portion of our operations management business, however, we have a long selling cycle for our services and the budget and approval processes of prospective clients make it difficult to predict the timing of entering into definitive agreements with new clients. Similarly, new license sales and implementation projects for our technology service platforms and other software-based services have a long selling cycle, however ongoing annual maintenance and support contracts for existing arrangements provide us with a relatively predictable revenue base.
Analytics: Our Analyticsanalytics services focus on driving improved business outcomes for our customers by generatingunlocking deep insights from data and create data-driven insightssolutions across all parts of our customers’ business. We also provide care optimization and reimbursement optimization services, for our clients through our healthcare analytics solutions and services. We also offer integrated solutions to help our clients in cost containment by leveraging technology platforms, customizable and configurable analytics and expertise in healthcare reimbursements to help clients enhance their claim payment accuracy. Our teams deliver predictive and prescriptive analytics in the areas of customer acquisition and lifecycle management, risk underwriting and pricing, operational effectiveness, credit and operational risk monitoring and governance, regulatory reporting, payment integrity and care management and data management. We enhance, modernize and enrich structured and unstructured data and use a spectrum of advanced analytical tools and techniques, including our in-house Machine Learning (“ML”) and Artificial Intelligence (“AI”) capabilities to create insights and improve decision making for our clients. We actively cross-sell and, where appropriate, integrate our Analytics services with other operations management services as part of a comprehensive offering set for our clients. Our projects-based analytics services are cyclical and can be significantly affected by variations in business cycles. In addition, our projects-based analytics services are documented in contracts with terms generally not exceeding one year and may not produce ongoing or recurring business for us once the project is completed. These contracts also usually contain provisions permitting termination of the contract after a short notice period. The short-term nature and specificity of these projects could lead to fluctuations and uncertainties in the revenues generated from providing analytics services.
We anticipate that revenues from our Analyticsanalytics services will grow as we expand our service offerings and client base, both organically and through acquisitions.
Critical Accounting Policies and Estimates
For a description of
There have been no significant changes in our critical accounting policies and estimates, referduring the three and six months ended June 30, 2021, as compared to the critical accounting policies and estimates referred in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – CriticalOperations” under “Critical Accounting Policies and Estimates” and Note 2 - Summary of Significant Accounting Policies to the Consolidated Financial Statementsour consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2020.
Results of Operations
The following table summarizes our results of operations for the three months and ninesix months ended SeptemberJune 30, 20172021 and 2016:2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (dollars in millions) | | (dollars in millions) |
Revenues, net | $ | 275.1 | | | $ | 222.5 | | | $ | 536.5 | | | $ | 468.5 | |
Cost of revenues(1) | 170.7 | | | 158.4 | | | 329.5 | | | 321.1 | |
Gross profit(1) | 104.4 | | | 64.1 | | | 207.0 | | | 147.4 | |
Operating expenses: | | | | | | | |
General and administrative expenses | 36.5 | | | 28.8 | | | 67.2 | | | 57.7 | |
Selling and marketing expenses | 19.8 | | | 13.0 | | | 38.0 | | | 27.5 | |
Depreciation and amortization expense | 12.3 | | | 12.4 | | | 24.4 | | | 24.9 | |
| | | | | | | |
Total operating expenses | 68.6 | | | 54.2 | | | 129.6 | | | 110.1 | |
Income from operations | 35.8 | | | 9.9 | | | 77.4 | | | 37.3 | |
Foreign exchange gain, net | 1.4 | | | 1.4 | | | 1.8 | | | 2.7 | |
Interest expense | (2.5) | | | (2.9) | | | (5.0) | | | (6.0) | |
Other income, net | 2.2 | | | 4.2 | | | 3.6 | | | 6.8 | |
Income before income tax expense and earnings from equity affiliates | 36.9 | | | 12.6 | | | 77.8 | | | 40.8 | |
Income tax expense | 8.9 | | | 4.1 | | | 17.9 | | | 9.9 | |
Income before earnings from equity affiliates | 28.0 | | | 8.5 | | | 59.9 | | | 30.9 | |
Loss from equity-method investment | — | | | 0.1 | | | — | | | 0.1 | |
Net income attributable to ExlService Holdings, Inc. stockholders | $ | 28.0 | | | $ | 8.4 | | | $ | 59.9 | | | $ | 30.8 | |
(1) Exclusive of depreciation and amortization expense.
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (dollars in millions) | | (dollars in millions)
|
Revenues, net | $ | 192.3 |
| | $ | 171.2 |
| | $ | 564.4 |
| | $ | 508.7 |
|
Cost of revenues (exclusive of depreciation and amortization) | 124.9 |
| | 111.8 |
| | 370.5 |
| | 332.2 |
|
Gross profit | 67.4 |
| | 59.4 |
| | 193.9 |
| | 176.5 |
|
Operating expenses: | | | | | | | |
General and administrative expenses | 26.9 |
| | 21.9 |
| | 75.8 |
| | 63.6 |
|
Selling and marketing expenses | 12.2 |
| | 11.6 |
| | 38.7 |
| | 37.9 |
|
Depreciation and amortization | 9.7 |
| | 8.6 |
| | 28.8 |
| | 25.0 |
|
Total operating expenses | 48.8 |
| | 42.1 |
| | 143.3 |
| | 126.5 |
|
Income from operations | 18.6 |
| | 17.3 |
| | 50.6 |
| | 50.0 |
|
Foreign exchange gain, net | 2.8 |
| | 1.7 |
| | 7.3 |
| | 3.6 |
|
Interest expense | (0.4 | ) | | (0.3 | ) | | (1.4 | ) | | (1.0 | ) |
Other income, net | 2.9 |
| | 2.9 |
| | 8.9 |
| | 12.2 |
|
Income before income tax expense | 23.9 |
| | 21.6 |
| | 65.4 |
| | 64.8 |
|
Income tax expense | 2.8 |
| | 5.6 |
| | 7.2 |
| | 18.5 |
|
Net income | $ | 21.1 |
| | $ | 16.0 |
| | $ | 58.2 |
| | $ | 46.3 |
|
Three Months Ended SeptemberJune 30, 20172021 Compared to Three Months Ended SeptemberJune 30, 20162020
Revenues.
The following table summarizes our revenues by reportable segmentsegments for the three months ended SeptemberJune 30, 20172021 and 2016:2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | | | Percentage change |
| 2021 | | 2020 | | Change | |
| (dollars in millions) | | | | |
Insurance | $ | 94.7 | | | $ | 81.3 | | | $ | 13.4 | | | 16.5 | % |
Healthcare | 28.3 | | | 25.0 | | | 3.3 | | | 13.1 | % |
Emerging Business | 40.7 | | | 34.5 | | | 6.2 | | | 17.8 | % |
Analytics | 111.4 | | | 81.7 | | | 29.7 | | | 36.4 | % |
Total revenues, net | $ | 275.1 | | | $ | 222.5 | | | $ | 52.6 | | | 23.6 | % |
|
| | | | | | | | | | | | | | |
| Three months ended September 30, | | | | Percentage change |
| 2017 | | 2016 | | Change | |
| (dollars in millions) | | | | |
Insurance | $ | 59.6 |
| | $ | 52.8 |
| | $ | 6.8 |
| | 12.9 | % |
Healthcare | 18.9 |
| | 16.0 |
| | 2.9 |
| | 18.2 | % |
Travel, Transportation and Logistics | 18.5 |
| | 17.5 |
| | 1.0 |
| | 5.6 | % |
Finance and Accounting | 21.6 |
| | 19.9 |
| | 1.7 |
| | 9.0 | % |
All Other | 20.0 |
| | 23.4 |
| | (3.4 | ) | | (14.7 | )% |
| | | | | | | |
Analytics | 53.7 |
| | 41.6 |
| | 12.1 |
| | 29.1 | % |
Total revenues, net | $ | 192.3 |
| | $ | 171.2 |
| | $ | 21.1 |
| | 12.4 | % |
Revenues for the three months ended SeptemberJune 30, 20172021 were $192.3$275.1 million, up $21.1$52.6 million, or 12.4%23.6%, compared to the three months ended SeptemberJune 30, 2016.2020.
Revenue growth in Insurance of $6.8$13.4 million was primarily driven by expansion of business from our existing clients aggregating to $12.1 million and an increase in revenues of $1.3 million that was mainly attributable to the appreciation of the Australian dollar, the U.K. pound sterling and the South African ZAR against the U.S. dollar during the three months ended June 30, 2021, compared to the three months ended June 30, 2020. Insurance revenues were 34.4% and 36.5% of our total revenues in the three months ended June 30, 2021 and June 30, 2020, respectively.
Revenue growth in Healthcare of $3.3 million was primarily driven by expansion of business from our new and existing clients of $6.4 million. The remaining increase of $0.4aggregating to $3.3 million is attributable to a net impact of appreciation of the South African Rand and Indian rupee during the three months ended SeptemberJune 30, 2017 compared to the three months ended September 30, 2016. Insurance2021. Healthcare revenues were 31.0%10.3% and 30.9%11.2% of our total revenues in the three months ended SeptemberJune 30, 20172021 and SeptemberJune 30, 2016,2020, respectively.
Revenue growth in HealthcareEmerging Business of $2.9$6.2 million was primarily driven by expansion of business from our new and existing clients. Healthcareclients aggregating to $5.6 million and an increase in revenues of $0.6 million that was mainly attributable to the appreciation of the Indian rupee and the U.K. pound sterling against the U.S. dollar during the three months ended June 30, 2021, compared to the three months ended June 30, 2020. Emerging Business revenues were 9.8%14.8% and 9.3%15.5% of our total revenues in the three months ended SeptemberJune 30, 20172021 and SeptemberJune 30, 2016,2020, respectively.
Revenue growth in Travel, Transportation and Logistics ("TT&L")Analytics of $1.0$29.7 million was primarily driven by net volume increaseattributable to the higher volumes in our annuity and project-based engagements from our new and existing clients of $1.2$28.7 million partially offset by $0.2and an increase in revenues of $1.0 million impact duemainly attributable to depreciationthe appreciation of the Philippine PesoU.K. pound sterling against the U.S. dollar during the three months ended SeptemberJune 30, 20172021, compared to the three months ended SeptemberJune 30, 2016. TT&L2020. Analytics revenues were 9.6%40.5% and 10.2%36.7% of our total revenues in the three months ended SeptemberJune 30, 20172021 and SeptemberJune 30, 2016,2020, respectively.
Revenue growth in Finance and Accounting ("F&A") of $1.7 million was driven by expansion of business from our new and existing clients. F&A revenues were 11.3% and 11.6% of our total revenues in the three months ended September 30, 2017 and September 30, 2016, respectively.
Revenue decline in All Other of $3.4 million was driven primarily by lower revenue in our Consulting and Utilities operating segments, aggregating to $3.7 million. This was partially offset by a net increase of $0.3 million due to the appreciation of the Indian rupee against the U.S. dollar during the three months ended September 30, 2017 compared to the three months ended September 30, 2016. All Other revenues were 10.4% and 13.7% of our total revenues in the three months ended September 30, 2017 and September 30, 2016, respectively.
Revenue growth in Analytics of $12.1 million was driven by our recurring and project based engagements from our new and existing clients of $11.9 million, including $6.5 million from our IQR Consulting Inc. ("IQR") and Datasource Consulting, LLC ("Datasource") acquisitions in 2016. The increase of $0.2 million is attributable to the appreciation of Indian rupee during the three months ended September 30, 2017 compared to the three months ended September 30, 2016. Analytics revenues were 27.9% and 24.3% of our total revenues in the three months ended September 30, 2017 and September 30, 2016, respectively.
Cost of Revenues and Gross Margin: The following table sets forth cost of revenues and gross margin of our reportable segments.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of Revenues | | Gross Margin |
| Three months ended June 30, | | Change | | Percentage change | | Three months ended June 30, | | Change |
| 2021 | | 2020 | | | | 2021 | | 2020 | |
| (dollars in millions) | | | | | | | | | | |
Insurance | $ | 59.4 | | | $ | 59.1 | | | $ | 0.3 | | | 0.5 | % | | 37.3 | % | | 27.3 | % | | 10.0 | % |
Healthcare | 17.7 | | | 19.6 | | | (1.9) | | | (9.7) | % | | 37.4 | % | | 21.4 | % | | 16.0 | % |
Emerging Business | 22.3 | | | 22.5 | | | (0.2) | | | (0.9) | % | | 45.1 | % | | 35.1 | % | | 10.0 | % |
Analytics | 71.3 | | | 57.2 | | | 14.1 | | | 24.7 | % | | 36.0 | % | | 29.9 | % | | 6.1 | % |
Total | $ | 170.7 | | | $ | 158.4 | | | $ | 12.3 | | | 7.8 | % | | 37.9 | % | | 28.8 | % | | 9.1 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Cost of Revenues | | Gross Margin |
| Three months ended September 30, | | | | Percentage change | | Three months ended September 30, | | Change |
| 2017 | | 2016 | | Change | | | 2017 | | 2016 | |
| (dollars in millions) | | | | | | | | | | |
Insurance | $ | 39.7 |
| | $ | 37.8 |
| | $ | 1.9 |
| | 5.0 | % | | 33.4 | % | | 28.4 | % | | 5.0 | % |
Healthcare | 12.0 |
| | 10.9 |
| | 1.1 |
| | 9.9 | % | | 36.6 | % | | 31.8 | % | | 4.8 | % |
TT&L | 10.1 |
| | 10.6 |
| | (0.5 | ) | | (4.7 | )% | | 45.2 | % | | 39.3 | % | | 5.9 | % |
F & A | 13.3 |
| | 12.0 |
| | 1.3 |
| | 10.8 | % | | 38.5 | % | | 39.5 | % | | (1.0 | )% |
All Other | 13.6 |
| | 14.7 |
| | (1.1 | ) | | (7.0 | )% | | 31.8 | % | | 37.4 | % | | (5.6 | )% |
| | | | | | | | | | | | | |
Analytics | 36.2 |
| | 25.8 |
| | 10.4 |
| | 40.2 | % | | 32.7 | % | | 38.1 | % | | (5.4 | )% |
Total | $ | 124.9 |
| | $ | 111.8 |
| | $ | 13.1 |
| | 11.7 | % | | 35.1 | % | | 34.7 | % | | 0.4 | % |
For the three months ended SeptemberJune 30, 2017,2021, cost of revenues was $124.9$170.7 million compared to $111.8$158.4 million for the three months ended SeptemberJune 30, 2016,2020, an increase of $13.1$12.3 million, or 11.7%7.8%. Our gross margin for the three months ended SeptemberJune 30, 20172021 was 35.1%37.9% compared to 34.7%28.8% for the three months ended SeptemberJune 30, 2016,2020, an increase of 40 basis points (“bps”).9.1% primarily driven by higher revenues and operational efficiencies during the three months ended June 30, 2021, compared to the impact of COVID-19 related expenses during the three months ended June 30, 2020.
The increase in cost of revenues in Insurance of $1.9$0.3 million for the three months ended June 30, 2021 was primarily due to an increaseincreases in employee-related costs, of $1.6 million on account of higher headcount and wage inflation, technology and infrastructure costs of $0.6 million. This was partially offset by a decreaselower COVID-19 related expenses. Gross margin in other operating costs of $0.4 million. There was a net increase of $0.2 million due to the appreciation of the Indian rupee and depreciation of the Philippine peso against the U.S. dollarInsurance increased by 10.0% during the three months ended SeptemberJune 30, 20172021, compared to the three months ended SeptemberJune 30, 2016. Gross margin increased by 500 bps during the three months ended September 30, 2017 compared to the three months ended September 30, 2016, primarily due to higher revenues and margin expansion in existing clients.
The increase in cost of revenues in Healthcare of $1.1 million was primarily due to an increase in employee-related costs of $1.2 million on account of higher headcount and wage inflation, technology and infrastructure costs of $0.3 million. This was partially offset by $0.4 million due to the depreciation of the Philippine peso against the U.S. dollar during the three months ended September 30, 2017 compared to the three months ended September 30, 2016. Gross margin increased by 480 bps during the three months ended September 30, 2017 compared to the three months ended September 30, 2016,2020, primarily due to higher revenues and operational efficiencies.efficiencies during the three months ended June 30, 2021, compared to the impact of COVID-19 related expenses during the three months ended June 30, 2020.
The decrease in cost of revenues in TT&LHealthcare of $0.5$1.9 million for the three months ended June 30, 2021 was primarily due to a decreasedecreases in employee-related costs of $0.2 million on account of lower headcount (partially offset$1.9 million. Gross margin in Healthcare increased by wage inflation), decrease in infrastructure costs of $0.1 million and decrease in other operating costs of $0.1 million. There was a decrease of $0.1 million due to the depreciation of the Philippine peso against the U.S. dollar16.0% during the three months ended SeptemberJune 30, 20172021, compared to the three months ended SeptemberJune 30, 2016. Gross margin increased by 590 bps2020, primarily due to higher revenues during the three months ended SeptemberJune 30, 2017 as2021, compared to the impact of COVID-19 related expenses during the three months ended June 30, 2020.
The decrease in cost of revenues in Emerging Business of $0.2 million for the three months ended June 30, 2021 was primarily due to decreases in employee-related costs. Gross margin in Emerging Business increased by 10.0% during the three months ended June 30, 2021, compared to the three months ended SeptemberJune 30, 2016 due to margin expansion in existing clients and lower operating costs.
The increase in cost of revenues in F&A of $1.3 million was2020, primarily due to an increasehigher revenues, decrease in employee-related costs of $0.6 million on account of higher headcount and wage inflation, infrastructure costs of $0.1 million and travel costs of $0.4 million. There was an increase of $0.3 million due to the appreciation of the Indian rupee against the US dollaroperational efficiencies during the three months ended SeptemberJune 30, 20172021, compared to the three months ended September 30, 2016. Gross margin decreased by 100 bpsimpact of COVID-19 related expenses during the three months ended SeptemberJune 30, 2017 compared to the three months ended September 30, 2016 primarily due to migration costs associated with our new client wins and higher reimbursable travel related costs with lower gross margin.2020.
The decline in cost of revenues in All Other of $1.1 million was primarily due to a decrease in employee-related costs of $0.6 million on account of lower headcount, partially offset by wage inflation. There was also a decrease in travel related costs of $0.3 million, infrastructure costs and other operating costs aggregating to $0.2 million during the three months ended September 30, 2017 compared to the three months ended September 30, 2016. Gross margin decreased by 560 bps during the three months ended September 30, 2017 compared to the three months ended September 30, 2016, primarily due to lower revenues in our Consulting and Utilities operating segments.
The increase in cost of revenues in Analytics of $10.4$14.1 million for the three months ended June 30, 2021 was primarily due to an increaseincreases in employee-related costs of $9.0$8.5 million, (including $5.4higher other operating costs of $5.2 million related to the IQR and Datasource acquisitions in 2016) on account of higher
headcount and wage inflation, and an increase in technology costs of $0.4 million, infrastructure costs of $0.5 million and travel costs of $0.4 million. This was partially offsetGross margin in Analytics increased by a reduction in our other operating expenses of $0.4 million. There was an increase of $0.3 million due to the appreciation of the Indian rupee against the U.S. dollar6.1% during the three months ended SeptemberJune 30, 20172021, compared to the three months ended SeptemberJune 30, 2016. Gross margin decreased by 540 bps2020, primarily due to higher revenues during the three months ended SeptemberJune 30, 20172021, compared to the impact of COVID-19 related expenses during the three months ended SeptemberJune 30, 2016, primarily due to higher operating costs and lower gross margin from our 2016 acquisitions.2020.
Selling, General and Administrative (“SG&A”) Expenses.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Change | | Percentage change |
| 2021 | | 2020 | | |
| (dollars in millions) | | | | |
General and administrative expenses | $ | 36.5 | | | $ | 28.8 | | | $ | 7.7 | | | 26.7 | % |
Selling and marketing expenses | 19.8 | | | 13.0 | | | 6.8 | | | 52.3 | % |
Selling, general and administrative expenses | $ | 56.3 | | | $ | 41.8 | | | $ | 14.5 | | | 34.7 | % |
As a percentage of revenues | 20.4 | % | | 18.8 | % | | | | |
|
| | | | | | | | | | | | | | |
| Three months ended September 30, | | | | Percentage change |
| 2017 | | 2016 | | Change | |
| (dollars in millions) | | | | |
General and administrative expenses | $ | 26.9 |
| | $ | 21.9 |
| | $ | 5.0 |
| | 23.0 | % |
Selling and marketing expenses | 12.2 |
| | 11.6 |
| | 0.6 |
| | 5.2 | % |
Selling, general and administrative expenses | $ | 39.1 |
| | $ | 33.5 |
| | $ | 5.6 |
| | 16.8 | % |
As a percentage of revenues | 20.3 | % | | 19.6 | % | |
| | |
The increase in SG&A expenses of $14.5 million was primarily due to an increase inhigher employee-related costs of $13.0 million, COVID-19-related expenses of $2.2 million, (including $1.6 million of incremental employee-related costsprimarily related to our 2016 acquisitions)financial support to family members of deceased employees and higher other operating costs of $0.6 million, partially offset by lower facilities costs of $1.3 million due to optimization of office space.
Depreciation and Amortization.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Change | | Percentage change |
| 2021 | | 2020 | | |
| (dollars in millions) | | | | |
Depreciation expense | $ | 8.9 | | | $ | 9.0 | | | $ | (0.1) | | | (1.1) | % |
Intangible amortization expense | 3.4 | | | 3.4 | | | — | | | — | % |
Depreciation and amortization expense | $ | 12.3 | | | $ | 12.4 | | | $ | (0.1) | | | (0.8) | % |
As a percentage of revenues | 4.5 | % | | 5.6 | % | | | | |
The decrease in depreciation expense of $0.1 million was primarily due to lower depreciation on assets related to operating centers closed as a result of annual wage incrementsoptimization of office space and an increase in our average headcount to supportincreased reliance on the increased business volumes. There was an increase of $1.8 million due to recognition of reserve for doubtful account receivables, $0.5 million of infrastructure costs related to our new operating centers and $0.5 million of other operating expenses. There was a net increase of $0.2 millionwork from home model, due to the appreciationimpact of the Indian rupee and depreciation of the Philippine peso against the U.S. dollarCOVID-19 during the three months ended SeptemberJune 30, 20172021, compared to the three months ended SeptemberJune 30, 2016.2020.
Depreciation and Amortization.
|
| | | | | | | | | | | | | | |
| Three months ended September 30, | | | | Percentage change |
| 2017 | | 2016 | | Change | |
| (dollars in millions) | | | | |
Depreciation expense | $ | 6.2 |
| | $ | 5.7 |
| | $ | 0.5 |
| | 8.2 | % |
Intangible amortization expense | 3.5 |
| | 2.9 |
| | 0.6 |
| | 22.4 | % |
Depreciation and amortization expense | $ | 9.7 |
| | $ | 8.6 |
| | $ | 1.1 |
| | 12.9 | % |
As a percentage of revenues | 5.0 | % | | 5.0 | % | | | | |
Depreciation and amortization expenseIncome from Operations. Income from operations increased by $1.1$25.9 million, or 12.9%261.6%, from $8.6$9.9 million for the three months ended SeptemberJune 30, 20162020 to $9.7$35.8 million for the three months ended SeptemberJune 30, 2017. The increase in intangibles amortization expense of $0.6 million was2021, primarily due to amortizationhigher revenues, partially offset by higher cost of intangibles associated with IQRrevenues and Datasource acquisitions in 2016. There was an increase in our depreciation expense of $0.5 million, due to depreciation related to our new operating centers in India and the Philippines to support our business growth and impact of our 2016 acquisitions.
Income from Operations. Income from operations increased $1.3 million, or 7.5%, from $17.3 million forhigher SG&A expenses during the three months ended SeptemberJune 30, 2016 to $18.6 million for the three months ended September 30, 2017.2021. As a percentage of revenues, income from operations decreasedincreased from 10.1%4.4% for the three months ended SeptemberJune 30, 20162020 to 9.7%13.0% for the three months ended SeptemberJune 30, 2017.2021.
Foreign Exchange Gain/(Loss). Net foreign exchange gains and losses are primarily attributable to the movement of the U.S. dollar against the Indian rupee, the U.K. Poundpound sterling, the Philippine peso and the Philippine pesoSouth African ZAR during the three months ended SeptemberJune 30, 2017.2021. The average exchange rate of the U.S. dollar against the Indian rupee decreased from 66.7375.41 during the three months ended SeptemberJune 30, 20162020 to 64.4573.67 during the three months ended SeptemberJune 30, 2017.2021. The average exchange rate of the U.K. Poundpound sterling against the U.S. dollar remained flat at 1.31increased from 1.24 during the three months ended SeptemberJune 30, 2016 and September2020 to 1.40 during the three months ended June 30, 2017.2021. The average exchange rate of the U.S. dollar against the Philippine peso increaseddecreased from 47.4050.28 during the three months ended SeptemberJune 30, 20162020 to 50.8248.20 during the three months ended SeptemberJune 30, 2017.2021. The average exchange rate of the U.S. dollar against the South African ZAR decreased from 17.66 during the three months ended June 30, 2020 to 14.15 during the three months ended June 30, 2021.
We recorded a net foreign exchange gain of $2.8$1.4 million, each, for the three months ended June 30, 2021 and 2020.
Interest expense. Interest expense decreased from $2.9 million for the three months ended SeptemberJune 30, 2017 compared2020 to $1.7$2.5 million for the three months ended SeptemberJune 30, 2016.
2021, primarily due to lower outstanding borrowings and lower effective interest rates of
1.8% under our Credit Facility during the three months ended June 30, 2021, compared to 2.2% during the three months ended June 30, 2020.
Interest expense. Interest expense increased $0.1Other Income, net.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | | | Percentage change |
| 2021 | | 2020 | | Change | |
| (dollars in millions) | | | | |
Gain on sale and mark-to-market of mutual funds | $ | 1.6 | | | $ | 3.1 | | | $ | (1.5) | | | (48.4) | % |
Interest and dividend income | 0.7 | | | 0.6 | | | 0.1 | | | 16.7 | % |
Other, net | (0.1) | | | 0.5 | | | (0.6) | | | (120.0) | % |
Other income, net | $ | 2.2 | | | $ | 4.2 | | | $ | (2.0) | | | (47.6) | % |
Other income, net decreased by $2.0 million, from $0.3$4.2 million for the three months ended SeptemberJune 30, 20162020 to $0.4$2.2 million for the three months ended SeptemberJune 30, 2017.
Other Income, net. Other2021, primarily due to lower return on mutual fund investments of $1.5 million, partially offset by increase in interest income net was flat at $2.9of $0.1 million during the three months ended SeptemberJune 30, 2017.2021, compared to the three months ended June 30, 2020.
Income Tax Expense. The effective tax rate decreased from 26.0%32.4% during the three months ended SeptemberJune 30, 20162020 to 11.8% as a result of (i) excess tax benefit related to stock awards of $3.5 million pursuant to ASU No. 2016-0924.0% during the three months ended SeptemberJune 30, 2017, and (ii) higher earnings from foreign subsidiaries and lower domestic profit in the U.S., partially offset by higher2021. We recorded income tax expense on account of the expiration of a tax holiday for some of the operating centers in India
Net Income. Net income increased from $16.0$8.9 million and $4.1 million for the three months ended SeptemberJune 30, 20162021 and 2020, respectively. The increase in income tax expense was primarily as a result of higher profit during the three months ended June 30, 2021, compared to $21.1the three months ended June 30, 2020, partially offset by recording of a one-time tax expense of $1.3 million due to the election of a new tax regime, during the three months ended June 30, 2020, for two of our Indian subsidiaries that provides for a lower tax rate on earnings in exchange for foregoing certain tax credits, including minimum alternative tax credits.
Net Income. Net income increased from $8.4 million for the three months ended SeptemberJune 30, 2017,2020 to $28.0 million for the three months ended June 30, 2021, primarily due to lower income tax expense of $2.8 million, higherincrease in income from operations of $1.3$25.9 million, higher foreign exchange gainlower interest expense of $1.1$0.4 million and lower loss from equity-method investment of $0.1 million, partially offset by higher interestincome tax expense of $0.1$4.8 million and lower other income, net of $2.0 million. As a percentage of revenues, net income increased from 9.4%3.8% for the three months ended SeptemberJune 30, 20162020 to 11.0%10.2% for the three months ended SeptemberJune 30, 2017.2021.
Six Months Ended SeptemberJune 30, 20172021 Compared to NineSix Months Ended SeptemberJune 30, 20162020
Revenues.
The following table summarizes our revenues by reportable segmentsegments for the ninesix months ended SeptemberJune 30, 20172021 and 2016:2020:
| | | Nine months ended September 30, | | | | Percentage change | | Six months ended June 30, | | Percentage change |
| 2017 | | 2016 | | Change | | | 2021 | | 2020 | | Change | |
| (dollars in millions) | | | | | | (dollars in millions) | | | | |
Insurance | $ | 173.8 |
| | $ | 151.7 |
| | $ | 22.1 |
| | 14.6 | % | Insurance | $ | 185.8 | | | $ | 165.0 | | | $ | 20.8 | | | 12.6 | % |
Healthcare | 56.7 |
| | 49.8 |
| | 6.9 |
| | 13.9 | % | Healthcare | 58.6 | | | 52.0 | | | 6.6 | | | 12.5 | % |
Travel, Transportation and Logistics | 53.4 |
| | 52.6 |
| | 0.8 |
| | 1.4 | % | |
Finance and Accounting | 63.7 |
| | 59.0 |
| | 4.7 |
| | 8.0 | % | |
All Other | 62.5 |
| | 75.4 |
| | (12.9 | ) | | (17.1 | )% | |
| | | | | | | | |
Emerging Business | | Emerging Business | 78.4 | | | 77.4 | | | 1.0 | | | 1.3 | % |
Analytics | 154.3 |
| | 120.2 |
| | 34.1 |
| | 28.4 | % | Analytics | 213.7 | | | 174.1 | | | 39.6 | | | 22.8 | % |
Total revenues, net | $ | 564.4 |
| | $ | 508.7 |
| | $ | 55.7 |
| | 11.0 | % | Total revenues, net | $ | 536.5 | | | $ | 468.5 | | | $ | 68.0 | | | 14.5 | % |
Revenues for the ninesix months ended SeptemberJune 30, 20172021 were $564.4$536.5 million, up $55.7$68.0 million, or 11.0%14.5%, compared to the ninesix months ended SeptemberJune 30, 2016.2020.
Revenue growth in Insurance of $22.1$20.8 million was primarily driven by expansion of business from our existing clients aggregating to $18.4 million and an increase in revenues $2.4 million that was mainly attributable to the appreciation of the Australian dollar, the U.K. pound sterling and the South African ZAR against the U.S. dollar during the six months ended June 30, 2021, compared to the six months ended June 30, 2020. Insurance revenues were 34.6% and 35.2% of our total revenues in the six months ended June 30, 2021 and June 30, 2020, respectively.
Revenue growth in Healthcare of $6.6 million was primarily driven by expansion of business from our new and existing clients of $21.1aggregating to $6.6 million including incremental $2.6 million related to the July 2016 acquisition of Liss Systems Limited ("Liss"). The remaining increase of $1.0 million is attributable to a net impact of appreciation of the South African Rand and Indian rupee and depreciation of the U.K. Pound sterling against the U.S. dollar during the ninesix months ended SeptemberJune 30, 2017 compared to the nine months ended September 30, 2016. Insurance2021. Healthcare revenues were 30.8%10.9% and 29.8%11.1% of our total revenues in the ninesix months ended SeptemberJune 30, 20172021 and SeptemberJune 30, 2016,2020, respectively.
Revenue growth in HealthcareEmerging Business of $6.9$1.0 million was driven by expansion of business from our existing and new clients. Healthcare revenues were 10.0% and 9.8% of our total revenues in the nine months ended September 30, 2017 and September 30, 2016, respectively.
Revenue growth in TT&L of $0.8 million was primarily driven by net volume increases from our existing clients of $1.6 million, partially offset by an impact of $0.8 million due to the depreciation of the Philippine Peso against the U.S. dollar during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. TT&L revenues were 9.5% and 10.4% of our total revenues in the nine months ended September 30, 2017 and September 30, 2016, respectively.
Revenue growth in F&A of $4.7 million was driven by expansion of business from our new clients and existing clients of $4.4 million. The remaining increase ofaggregating to $0.3 million isand an increase in revenues of $0.7 million that was mainly attributable to the appreciation of the Indian rupee against the U.S. dollar
during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. F&A revenues were 11.3% and 11.6% of our total revenues in the nine months ended September 30, 2017 and September 30, 2016, respectively.
Revenue decline in All Other of $12.9 million was driven primarily by lower revenue in our Consulting and Utilities operating segments, partially offset by higher revenue in our Banking and Financial Services operating segment, aggregating to $13.1 million. This was partially offset by $0.2 million impact due to the depreciation of the U.K. Poundpound sterling against the U.S. dollar during the ninesix months ended SeptemberJune 30, 20172021 compared to the ninesix months ended SeptemberJune 30, 2016 in our Consulting operating segment. All Other2020.Emerging Business revenues were 11.1%14.6% and 14.8%16.5% of our total revenues in the ninesix months ended SeptemberJune 30, 20172021 and SeptemberJune 30, 2016,2020, respectively.
Revenue growth in Analytics of $34.1$39.6 million was driven byattributable to the higher volumes in our recurringannuity and project based engagements from our new and existing clientsof $34.4$37.9 million including incremental $18.6and an increase in revenues $1.7 million from IQR and Datasource acquisitions in 2016. The increase was partially offset by a decrease of $0.3 million duemainly attributable to the depreciationappreciation of the U.K. Poundpound sterling and the South African ZAR against the U.S. dollar during the ninesix months ended SeptemberJune 30, 20172021, compared to the ninesix months ended SeptemberJune 30, 2016.2020. Analytics revenues were 27.3%39.8% and 23.6%37.2% of our total revenues in the ninesix months ended SeptemberJune 30, 20172021 and SeptemberJune 30, 2016,2020, respectively.
Cost of Revenues and Gross Margin: The following table sets forth cost of revenues and gross margin of our reportable segments.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of Revenues | | Gross Margin |
| Six months ended June 30, | | | | Percentage change | | Six months ended June 30, | | Change |
| 2021 | | 2020 | | Change | | | 2021 | | 2020 | |
| (dollars in millions) | | | | | | | | | | |
Insurance | $ | 115.5 | | | $ | 118.1 | | | $ | (2.6) | | | (2.2) | % | | 37.9 | % | | 28.4 | % | | 9.5 | % |
Healthcare | 35.1 | | | 39.2 | | | (4.1) | | | (10.5) | % | | 40.1 | % | | 24.6 | % | | 15.5 | % |
Emerging Business | 43.1 | | | 48.0 | | | (4.9) | | | (10.2) | % | | 44.9 | % | | 38.1 | % | | 6.8 | % |
Analytics | 135.8 | | | 115.8 | | | 20.0 | | | 17.3 | % | | 36.5 | % | | 33.5 | % | | 3.0 | % |
Total | $ | 329.5 | | | $ | 321.1 | | | $ | 8.4 | | | 2.6 | % | | 38.6 | % | | 31.5 | % | | 7.1 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Cost of Revenues | | Gross Margin |
| Nine months ended September 30, | | | | Percentage change | | Nine months ended September 30, | | Change |
| 2017 | | 2016 | | Change | | | 2017 | | 2016 | |
| (dollars in millions) | | | | | | | | | | |
Insurance | $ | 119.0 |
| | $ | 108.5 |
| | $ | 10.5 |
| | 9.7 | % | | 31.5 | % | | 28.5 | % | | 3.0 | % |
Healthcare | 36.4 |
| | 32.5 |
| | 3.9 |
| | 12.2 | % | | 35.8 | % | | 34.8 | % | | 1.0 | % |
TT&L | 30.8 |
| | 31.9 |
| | (1.1 | ) | | (3.4 | )% | | 42.2 | % | | 39.4 | % | | 2.8 | % |
F & A | 39.2 |
| | 35.4 |
| | 3.8 |
| | 10.7 | % | | 38.5 | % | | 40.0 | % | | (1.5 | )% |
All Other | 42.8 |
| | 47.8 |
| | (5.0 | ) | | (10.6 | )% | | 31.6 | % | | 36.6 | % | | (5.0 | )% |
| | | | | | | | | | | | | |
Analytics | 102.3 |
| | 76.1 |
| | 26.2 |
| | 34.4 | % | | 33.7 | % | | 36.7 | % | | (3.0 | )% |
Total | $ | 370.5 |
| | $ | 332.2 |
| | $ | 38.3 |
| | 11.5 | % | | 34.4 | % | | 34.7 | % | | (0.3 | )% |
For the ninesix months ended SeptemberJune 30, 2017,2021, cost of revenues was $370.5$329.5 million compared to $332.2$321.1 million for the ninesix months ended SeptemberJune 30, 2016,2020, an increase of $38.3$8.4 million, or 11.5%2.6%. Our gross margin for the ninesix months ended SeptemberJune 30, 20172021 was 34.4%38.6% compared to 34.7%31.5% for the ninesix months ended SeptemberJune 30, 2016, a decrease of 30 basis points (bps).
The increase in cost of revenues in Insurance of $10.5 million was primarily due to2020, an increase in employee-related costs of $8.2 million (including $1.3 million from our Liss acquisition) on account of higher headcount and wage inflation, and technology and infrastructure costs of $2.8 million. This was partially offset7.1% primarily driven by a decrease in travel related costs of $0.6 million and other operating costs of $0.7 million. There was a net increase of $0.7 million due to the appreciation of the Indian rupee and depreciation of the Philippine peso against the U.S. dollar during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Gross margin increased by 300 bps during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to higher revenues and lower operating costs.
The increase in cost of revenues in Healthcare of $3.9 million was primarily due to an increase in employee-related costs of $3.9 million on account of higher headcount and wage inflation, technology costs of $0.6 million and infrastructure costs of $0.4 million. This was partially offset by a decrease of $1.0 million due to the depreciation of the Philippine peso against the U.S. dollar during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Gross margin increased by 100 bps during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to higher revenues and operational efficiencies.efficiencies during the six months ended June 30, 2021, compared to the impact of COVID-19 related expenses during the six months ended June 30, 2020.
The decrease in cost of revenues in TT&LInsurance of $1.1$2.6 million for the six months ended June 30, 2021 was primarily due to decreases in other operating costs of $4.4 million, due to the impact of COVID-19 related expenses during the six months ended June 30, 2020 and foreign exchange gain, net of hedging of $0.1 million. This was partially offset by higher employee-related costs of $1.9 million. Gross margin in Insurance increased by 9.5% during the six months ended June 30, 2021, compared to the six months ended June 30, 2020, primarily due to higher revenues, expansion in margin in certain existing clients and operational efficiencies during the six months ended June 30, 2021, compared to the impact of COVID-19 related expenses during the six months ended June 30, 2020.
The decrease in infrastructure cost of $0.3revenues in Healthcare of $4.1 million for the six months ended June 30, 2021 was primarily due to decreases in employee-related costs of $4.3 million, partially offset by higher other operating costs of $0.2 million and employee-related costs of $0.1 million on account of lower headcount (partially offsetmillion. Gross margin in Healthcare increased by wage inflation).The cost of revenue also decreased due to depreciation of the Philippine peso against the U.S. dollar of $0.3 million15.5% during the ninesix months ended SeptemberJune 30, 20172021, compared to the ninesix months ended September
June 30, 2016. Gross margin increased by 280 bps during the nine months ended September 30, 2017 as compared to the nine months ended September 30, 20162020, primarily due to higher revenues and lower operating costs.during the six months ended June 30, 2021, compared to the impact of COVID-19 related expenses during the six months ended June 30, 2020.
The increasedecrease in cost of revenues in F&AEmerging Business of $3.8$4.9 million for the six months ended June 30, 2021 was primarily due to an increasedecreases in employee-related costs of $2.3$3.8 million, on account of higher headcount and wage inflation and infrastructurelower other operating costs of $0.7$0.9 million and foreign exchange gain, net of hedging $0.2 million. There was an increase of $0.7 million due to the appreciation of the Indian rupee against the U.S. dollarGross margin in Emerging Business increased by 6.8% during the ninesix months ended SeptemberJune 30, 20172021, compared to the ninesix months ended SeptemberJune 30, 2016. Gross margin decreased by 150 bps during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016,2020, primarily due to migration costs associated with our new client wins and higher reimbursable travel related costs with lower gross margin.
The decline in cost of revenues, in All Other of $5.0 million was primarily due to a decrease in employee-related costs of $2.9 million on account of lower headcount, partially offset by wage inflation. There was also a decrease in travel related costs of $1.6 million and other operating expenses of $0.5 million. Gross margin decreased by 500 bpshigher operational efficiencies during the ninesix months ended SeptemberJune 30, 20172021, compared to the nineimpact of COVID-19 related expenses during the six months ended SeptemberJune 30, 2016, primarily due to lower revenues in our Consulting and Utilities operating segments.2020.
The increase in cost of revenues in Analytics of $26.2$20.0 million for the six months ended June 30, 2021 was primarily due to an increaseincreases in employee-related costs of $24.8$13.3 million, (including incremental $15.1higher other operating costs of $7.4 million related to our IQR and Datasource acquisitions in 2016) on account of higher headcount and wage inflation, an increase in technology costs of $0.9$1.2 million, infrastructure costsprimarily due to increased usage of $0.9 million and travel costs of $0.3 million.the work from home model. This was partially offset by reduction in our other operatinglower travel costs of $1.4$1.5 million and foreign exchange gain, net of hedging of $0.4 million. There was an increase of $0.6 million due to the appreciation of the Indian rupee against the U.S. dollarGross margin in Analytics increased by 3.0% during the ninesix months ended SeptemberJune 30, 20172021, compared to the ninesix months ended SeptemberJune 30, 2016. Gross margin decreased by 300 bps during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016,2020, primarily due to higher employee costs and lower gross margin from our 2016 acquisitions.revenues during the six months ended June 30, 2021, compared to the impact of COVID-19 related expenses during the six months ended June 30, 2020.
Selling, General and Administrative (“SG&A”) Expenses.
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, | | | | Percentage change |
| 2021 | | 2020 | | Change | |
| (dollars in millions) | | | | |
General and administrative expenses | $ | 67.2 | | | $ | 57.7 | | | $ | 9.5 | | | 16.5 | % |
Selling and marketing expenses | 38.0 | | | 27.5 | | | 10.5 | | | 38.2 | % |
Selling, general and administrative expenses | $ | 105.2 | | | $ | 85.2 | | | $ | 20.0 | | | 23.5 | % |
As a percentage of revenues | 19.6 | % | | 18.2 | % | | | | |
|
| | | | | | | | | | | | | | |
| Nine months ended September 30, | | | | Percentage change |
| 2017 | | 2016 | | Change | |
| (dollars in millions) | | | | |
General and administrative expenses | $ | 75.8 |
| | $ | 63.6 |
| | $ | 12.2 |
| | 19.2 | % |
Selling and marketing expenses | 38.7 |
| | 37.9 |
| | 0.8 |
| | 2.2 | % |
Selling, general and administrative expenses | $ | 114.5 |
| | $ | 101.5 |
| | $ | 13.0 |
| | 12.8 | % |
As a percentage of revenues | 20.3 | % | | 20.0 | % | | | | |
The increase in SG&A expenses was primarily due to an increase in employee-related costs of $8.2 million (including $4.1 million of incremental employee-related costs related to our 2016 acquisitions) as a result of annual wage increments and an increase in our average headcount to support the increased business volumes. There was an increase of $2.7 million due to recognition of reserve for doubtful account receivables and infrastructure costs of $1.5 million related to our new operating centers. There was a net increase of $0.7 million due to the appreciation of the Indian rupee and depreciation of the Philippine peso against the U.S. dollar during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.
Depreciation and Amortization.
|
| | | | | | | | | | | | | | |
| Nine months ended September 30, | | | | Percentage change |
| 2017 | | 2016 | | Change | |
| (dollars in millions) | | | | |
Depreciation expense | $ | 18.3 |
| | $ | 16.7 |
| | $ | 1.6 |
| | 9.3 | % |
Intangible amortization expense | 10.5 |
| | 8.3 |
| | 2.2 |
| | 26.7 | % |
Depreciation and amortization expense | $ | 28.8 |
| | $ | 25.0 |
| | $ | 3.8 |
| | 15.1 | % |
As a percentage of revenues | 5.1 | % | | 4.9 | % | | | | |
Depreciation and amortization expense increased by $3.8 million, or 15.1%, from $25.0 million for the nine months ended September 30, 2016 to $28.8 million for the nine months ended September 30, 2017. The increase in intangible amortization expense of $2.2$20.0 million was primarily due to higher employee-related costs of $19.7 million, COVID-19-related expenses of $2.2 million primarily related to financial support to family members of deceased employees, higher other operating costs of $2.0 million, partially offset by lower facilities costs of $2.8 million due to optimization of office space and lower travel costs of $1.1 million due to COVID-19 cost reduction measures.
Depreciation and Amortization.
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, | | | | Percentage change |
| 2021 | | 2020 | | Change | |
| (dollars in millions) | | | | |
Depreciation expense | $ | 17.6 | | | $ | 17.3 | | | $ | 0.3 | | | 1.7 | % |
Intangible amortization expense | 6.8 | | | 7.6 | | | (0.8) | | | (10.5) | % |
Depreciation and amortization expense | $ | 24.4 | | | $ | 24.9 | | | $ | (0.5) | | | (2.0) | % |
As a percentage of revenues | 4.6 | % | | 5.3 | % | | | | |
The decrease in intangibles amortization expense of intangibles associated with our 2016 acquisitions. Further, there$0.8 million was anprimarily due to end of useful lives for certain intangible assets during the six months ended June 30, 2021, compared to the six months ended June 30, 2020. The increase in our depreciation expense of $1.6$0.3 million was primarily due to depreciation related to our investments in new operating centers, internally developed software and accelerated depreciation resulting from a reduction in India anduseful lives related to certain operating centers, due to the Philippines andimpact of COVID-19 during the six months ended June 30, 2021, compared to support our business growth and depreciation expense associated with our 2016 acquisitions.the six months ended June 30, 2020.
Income from Operations. Income from operations increased by $0.6$40.1 million, or 1.3%107.5%, from $50.0$37.3 million for the ninesix months ended SeptemberJune 30, 20162020 to $50.6$77.4 million for the ninesix months ended SeptemberJune 30, 2017.2021, primarily due to higher revenues, partially offset by higher cost of revenues, higher SG&A expenses during the six months ended June 30, 2021. As a percentage of revenues, income from operations decreasedincreased from 9.8%8.0% for the ninesix months ended SeptemberJune 30, 20162020 to 9.0%14.4% for the ninesix months ended SeptemberJune 30, 2017.2021.
Foreign Exchange Gain/(Loss). Net foreign exchange gains and losses are primarily attributable to the movement of the U.S. dollar against the Indian rupee, the U.K. Poundpound sterling, and the Philippine peso and the South African ZAR during the ninesix months ended SeptemberJune 30, 2017.2021. The average exchange rate of the U.S. dollar against the Indian rupee decreased from 67.1074.25 during the ninesix months ended SeptemberJune 30, 20162020 to 65.1273.42 during the ninesix months ended SeptemberJune 30, 2017.2021. The average exchange rate of the U.K. Poundpound sterling against the U.S. dollar decreasedincreased from 1.381.26 during the ninesix months ended SeptemberJune 30, 20162020 to 1.281.39 during the ninesix months ended SeptemberJune 30, 2017.2021. The average exchange rate of the U.S. dollar against the Philippine peso increaseddecreased from 47.1350.55 during the ninesix months ended SeptemberJune 30, 20162020 to 50.3148.29 during the ninesix months ended SeptemberJune 30, 2017.2021. The average exchange rate of the U.S. dollar against the South African ZAR decreased from 16.90 during the six months ended June 30, 2020 to 14.58 during the six months ended June 30, 2021.
We recorded a net foreign exchange gain of $7.3$1.8 million for the ninesix months ended SeptemberJune 30, 20172021, compared to the net foreign exchange gain of $2.7 million for the six months ended June 30, 2020.
Interest expense. Interest expense decreased from $6.0 million for the six months ended June 30, 2020 to $5.0 million for the six months ended June 30, 2021 primarily due tolower outstanding borrowings and lower effective interest rates of 1.9%
under our Credit Facility during the six months ended June 30, 2021, compared to 2.6% during the six months ended June 30, 2020.
Other Income, net.
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, | | | | Percentage change |
| 2021 | | 2020 | | Change | |
Gain on sale and mark-to-market of mutual funds | $ | 2.7 | | | $ | 5.2 | | | $ | (2.5) | | | (48.1) | % |
Interest and dividend income | 1.3 | | | 1.2 | | | 0.1 | | | 8.3 | % |
Other, net | (0.4) | | | 0.4 | | | (0.8) | | | (200.0) | % |
Other income, net | $ | 3.6 | | | $ | 6.8 | | | $ | (3.2) | | | (47.1) | % |
Other income, net decreased by $3.2 million, from $6.8 million for the six months ended June 30, 2020 to $3.6 million for the ninesix months ended SeptemberJune 30, 2016.
Interest expense. Interest expense increased by $0.4 million from $1.0 million for the nine months ended September 30, 2016 to $1.4 million for the nine months ended September 30, 2017,2021, primarily due to financing cost associated with purchase of software.
Other Income, net
|
| | | | | | | | | | | | | | |
| Nine months ended September 30, | | | | Percentage change |
| 2017 | | 2016 | | Change | |
| (dollars in millions) | | | | |
Interest and dividend income | $ | 1.3 |
| | $ | 1.2 |
| | $ | 0.1 |
| | 9.0 | % |
Gain on mutual fund investments | 6.8 |
| | 6.2 |
| | 0.6 |
| | 9.5 | % |
Change in fair value of earn-out consideration | — |
| | 4.1 |
| | (4.1 | ) | | (100.0 | )% |
Other, net | 0.8 |
| | 0.7 |
| | 0.1 |
| | 5.3 | % |
Other income, net | $ | 8.9 |
| | $ | 12.2 |
| | $ | (3.3 | ) | | (27.3 | )% |
Increase in interest and dividend income of $0.1 million and increase in gainlower return on mutual fund investments of $0.6$2.5 million was primarily due to higher cash balances in certain of our foreign subsidiaries and higher gain on sale of investment during the ninesix months ended SeptemberJune 30, 20172021, compared to the ninesix months ended SeptemberJune 30, 2016. We also recorded other income of $4.1 million during the nine months ended September 30, 2016 due to the reversal of earn-out liability related to our RPM acquisition in 2015.2020.
Income Tax Expense. The effective tax rate decreased from 28.6%24.3% during the ninesix months ended SeptemberJune 30, 20162020 to 11.0%22.9% during the six months ended June 30, 2021. We recorded income tax expense of $17.9 million and $9.9 million for the six months ended June 30, 2021 and 2020, respectively. The increase in income tax expense was primarily as a result of higher profit during the six months ended June 30, 2021, compared to the six months ended June 30, 2020, which was partially offset by (i) recording of a one-time tax expense of $1.3 million due to the election of a new tax regime, during the six months ended June 30, 2020, for two of our Indian subsidiaries that provides for a lower tax rate on earnings in exchange for foregoing certain tax credits, including minimum alternative tax credits and (ii) recording of higher excess tax benefitbenefits related to stock awards of $7.2$1.8 million pursuant to ASU No. 2016-09 during the ninesix months ended SeptemberJune 30, 2017, (ii) conclusion2020 compared to $1.0 million during the six months ended June 30, 2021.
Net Income. Net income increased from $30.8 million for the six months ended June 30, 2020 to $59.9 million for the six months ended June 30, 2021, primarily due to increase in income from operations of an uncertain tax position$40.1 million, lower interest expense of $3.2$1.0 million (including interest of $1.4 million), and (iii) higher earnings from foreign subsidiaries and lower domestic profit in the U.S.,loss from equity-method investment of $0.1 million, partially offset by higher tax expense on account of the expiration of a tax holiday for some of the operating centers in India.
Net Income. Net income increased from $46.3 million for the nine months ended September 30, 2016 to $58.2 million for the nine months ended September 30, 2017, primarily due to lower income tax expense of $11.3$8.0 million, higherlower other income, net of $3.2 million and foreign exchange gain, net of $3.7 million, higher income from operations of $0.6 million partially offset by lower other income of $3.3 million and higher interest expense of $0.4$0.9 million.
As a percentage of revenues, net income increased from 9.1%6.6% for the ninesix months ended SeptemberJune 30, 20162020 to 10.3%11.2% for the ninesix months ended SeptemberJune 30, 2017.2021.
Liquidityand Capital Resources
| | | | | | | | | | | |
| Six months ended June 30, |
| 2021 | | 2020 |
| (dollars in millions) |
Opening cash, cash equivalents and restricted cash | $ | 225.5 | | | $ | 127.0 | |
Net cash provided by operating activities | 53.9 | | | 58.9 | |
Net cash provided by investing activities | 11.7 | | | 1.1 | |
Net cash used for financing activities | (131.4) | | | (13.4) | |
Effect of exchange rate changes | (2.2) | | | (2.8) | |
Closing cash, cash equivalents and restricted cash | $ | 157.5 | | | $ | 170.8 | |
|
| | | | | | | |
| Nine months ended September 30, |
| 2017 | | 2016 |
| (dollars in millions) |
Opening cash and cash equivalents | $ | 213.2 |
| | $ | 205.3 |
|
Net cash provided by operating activities | 72.2 |
| | 56.0 |
|
Net cash used for investing activities | (171.2 | ) | | (126.2 | ) |
Net cash used for financing activities | (28.2 | ) | | (34.2 | ) |
Effect of exchange rate changes | 1.7 |
| | (2.5 | ) |
Closing cash and cash equivalents | $ | 87.7 |
| | $ | 98.4 |
|
As of SeptemberJune 30, 20172021 and December 31, 2016,2020, we had $249.4$294.7 million and $226.6$335.6 million, respectively, in cash, cash equivalents and short-term investments, (including $205.1of which $254.2 million and $170.1$275.5 million, respectively, held byis located in foreign jurisdictions that upon distribution may be subject to withholding and other taxes. We periodically evaluate opportunities to distribute cash among our group entities to fund our operations in the United States and other geographies, and as and when we decide to distribute, we may have to accrue, additional taxes in accordance with local tax laws, rules and regulations in the relevant foreign subsidiaries). Wejurisdictions. During the three months ended June 30, 2021, we repatriated to the United States $49.0 million (net of $2.6 million withholding taxes) from India, $42.5 million (net of $7.5 million withholding taxes) from the Philippines and $17.0 million (net of $0.9 million withholding taxes) from India in July 2021. These distributions do not intendconstitute a change in our permanent reinvestment assertion. We base our decision to repatriate funds held bycontinue to indefinitely reinvest earnings in India and the Philippines on our foreign subsidiaries since our future growth partially depends upon continued infrastructure and technology investments, geographical expansions and acquisitions outsideestimate of the U.S. Therefore, we anticipate that we will indefinitely reinvestworking capital required to support our operations in these geographies and periodically review our capital initiatives to support and expand our global operations, as well as an economically viable rate of return on our investments made in India and the earnings generated outside ofPhilippines as compared to those made in the U.S. If we were to repatriate our overseas funds, we would accrue and pay applicable taxes.United States.
Operating Activities: Cash flows from Net cash provided by operating activities increased by $16.2 million from $56.0was $53.9 million for the ninesix months ended SeptemberJune 30, 20162021 as compared to $72.2net cash provided by operating activities of $58.9 million for the ninesix months ended SeptemberJune 30, 2017.2020, reflecting higher working capital needs, offset by cash earnings. The increasemajor drivers contributing to the decrease of $5.0 million year-over-year included the following:
•Changes in accounts receivable, including advance billings, contributed lower cash flows from operations forflow of $71.9 million in the ninesix months ended SeptemberJune 30, 20172021 compared to the ninesix months ended SeptemberJune 30, 20162020. The decrease was a result of higher accounts receivable resulting from revenue growth, change in credit terms for certain clients during the six months ended June 30, 2021, and advance collections during the three months ended December 31, 2020. This was partially offset by our accounts receivable days sales outstanding, which improved to 58 days as of June 30, 2021 from 63 days as of June 30, 2020.
•Increase in net income of $29.1 million in the six months ended June 30, 2021 compared to the six months ended June 30, 2020, primarily due to an increase in net income from operations of $40.1 million driven by $12.0 million, increase in non-cash adjustmenthigher revenues, offset by higher income tax expense of $3.9$8.0 million and decreaselower other income, net of interest expense of $3.1 million.
•Increase in working capitalaccrued employee costs, accrued expenses and other liabilities contributed higher cash flow of $0.3$51.6 million from $25.2 million duringin the ninesix months ended SeptemberJune 30, 20162021 compared to $24.9 million during the ninesix months ended SeptemberJune 30, 2017.
Investing Activities: Cash flows used for investing activities increased by $45.0 million from $126.2 million for the nine months ended September 30, 2016 to $171.2 million for the nine months ended September 30, 2017.2020. The increase was primarily due to an increase in short-term investmentslower payment and higher provisions of $47.2annual performance incentives of $23.3 million, (nethigher other employee cost accruals of redemption)$4.0 million and due to an increase in capital expenditureshigher accrued expenses and other liabilities of $6.4$24.3 million, during the ninesix months ended SeptemberJune 30, 20172021 compared to the ninesix months ended SeptemberJune 30, 2016. This was partially offset2020.
•Other drivers decreasing cash flows during the six months ended June 30, 2021 compared to the six months ended June 30, 2020 included: income tax payments, net of refunds, of $13.8 million, primarily due to higher advance income tax payments on account of higher net income.
Investing Activities: Cash flows provided by amount paidinvesting activities were $11.7 million for business acquisitionthe six months ended June 30, 2021 as compared to cash flows provided by investing activities of $9.4$1.1 million for the six months ended June 30, 2020. The increase is mainly due to net redemption of investments of $31.0 million during six months ended June 30, 2021 as compared to
net redemption of investments of $23.8 million during the ninesix months ended SeptemberJune 30, 20162020, lower capital expenditures for purchase of long-lived assets, including investments in infrastructure, technology assets, software and product developments of $2.7 million during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 and acquisition of an additional stake in our equity affiliate of $0.7 million paid for settlement of working capital and purchase consideration payable related to 2016 acquisitions during the ninesix months ended SeptemberJune 30, 2017.2020.
Financing Activities: Cash flows used for financing activities was $28.2were $131.4 million during the ninesix months ended SeptemberJune 30, 20172021 as compared to $34.2 million during the nine months ended September 30, 2016. The decrease in cash flowflows used for financing activities between periods isof $13.4 million during the six months ended June 30, 2020. The increase in cash flows used for financing activities was primarily due to higher net repayment of borrowings of $25.0$73.8 million under theour revolving Credit Agreement (as described below in “Financing Arrangements”) during the nine months ended September 30, 2016. This was partially offset byFacility, higher purchases of treasury stock of $17.2by $43.4 million under our share repurchase program and lower proceeds from the exercise of stock options of $2.0$0.8 million during the ninesix months ended SeptemberJune 30, 20172021 as compared to the ninesix months ended SeptemberJune 30, 2016.2020.
We expect to use cash from operating activities to maintain and expand our business. As we have focused on expanding our cash flow from operating activities we continue to make capitalbusiness by making investments primarily related to new facilities and capital expenditures associated with leasehold improvements to build our facilities, digital capabilities and the purchase of telecommunications equipment and computer hardware and software in connection with managing client operations.
We incurred $26.8$19.9 million of capital expenditures in the ninesix months ended SeptemberJune 30, 2017.2021. We expect to incur capital expenditures of between $30.0 million to $35.0 million and $40.0 million in 2017,2021, primarily to meet our growth requirements, including additions to our facilities as well as investments in technology applications, product development, digital technology, advanced automation, robotics and infrastructure, but the actual amount may vary based on economic conditions or other factors.infrastructure.
In connection with any tax assessment orders that have been issued or may be issued against us or our subsidiaries, we may be required to deposit additional amounts with respect to such assessment orders (refer(see Note 24 - Commitments and Contingencies to Note 21 to theour unaudited consolidated financial statements contained herein for further details). We anticipate that we will continue to rely upon cash from operating activities to finance our smaller acquisitions,working capital needs, capital expenditures and working capital needs.smaller acquisitions. If we have significant growth through acquisitions, we may need to obtain additional financing.
the employer share of Federal Insurance Contributions Act (“FICA”) taxes for the period from April 1, 2020 and ending December 31, 2020. As of June 30, 2021 and December 31, 2020, we deferred our contributions to FICA of $6.3 million each under the CARES Act. The deferred amount will be payable as follows: (1) 50% of the deferred amount will be paid on or before December 31, 2021 and (2) the remaining 50% of the deferred amount will be paid on or before December 31, 2022.
Financing Arrangements (Debt Facility)Facility and Notes)
Our Credit Agreement providesThe following tables summarizes our Debt balances as of June 30, 2021 and December 31, 2020.
| | | | | | | | | | | | | | | | | | | | |
| | As of June 30,2021 |
| | (dollars in millions) |
| | Revolving Credit Facility | | Notes | | Total |
Current portion of long-term borrowings | | $ | 15.0 | | | $ | — | | | $ | 15.0 | |
| | | | | | |
Long-term borrowings | | $ | — | | | $ | 150.0 | | | $ | 150.0 | |
Unamortized debt discount | | — | | | (9.9) | | | (9.9) | |
Unamortized debt issuance costs* | | — | | | (0.7) | | | (0.7) | |
Long-term borrowings | | $ | — | | | $ | 139.4 | | | $ | 139.4 | |
Total borrowings | | $ | 15.0 | | | $ | 139.4 | | | $ | 154.4 | |
| | | | | | | | | | | | | | | | | | | | |
| | As of December 31,2020 |
| | (dollars in millions) |
| | Revolving Credit Facility | | Notes | | Total |
Current portion of long-term borrowings | | $ | 25.0 | | | $ | — | | | $ | 25.0 | |
| | | | | | |
Long-term borrowings | | $ | 64.0 | | | $ | 150.0 | | | $ | 214.0 | |
Unamortized debt discount | | — | | | (11.2) | | | (11.2) | |
Unamortized debt issuance costs* | | — | | | (0.8) | | | (0.8) | |
Long-term borrowings | | $ | 64.0 | | | $ | 138.0 | | | $ | 202.0 | |
Total borrowings | | $ | 89.0 | | | $ | 138.0 | | | $ | 227.0 | |
*Unamortized debt issuance costs for our revolving credit facility (the “Credit Facility”), including a letter of credit sub-facility, in the amount of $100.0 million. The Credit Facility has a maturity date of October 24, 2019$0.4 million and $0.5 million as of June 30, 2021 and December 31, 2020, respectively, is voluntarily pre-payable from time to time without premium or penalty. As of September 30, 2017, we had outstanding indebtedness of $45.0 million which is includedpresented under “long term borrowings”“Other current assets” and “Other assets” in the unauditedour consolidated balance sheets.
See Note 17 - Borrowings under the Credit Facility may be usedto our unaudited consolidated financial statements herein for working capital and general corporate purposes of the Company and its subsidiaries and for acquisitions.
Dependingfurther details on the type of borrowing, loans under the Credit Agreement bear interest at a rate equal to the specified prime rate (alternate base rate) or adjusted LIBO rate, plus, in each case, an applicable margin. The applicable margin is tied to the Company’s leverage ratio and ranges from 0.3% to 0.8% per annum with respect to loans pegged to the specified prime rate, and 1.3% to 1.8% per annum on loans pegged to the adjusted LIBO rate. The revolving credit commitments under the Credit Agreement are subject to a commitment fee. The commitment fee is also tied to the Company’s leverage ratio, and ranges from 0.2% to 0.3% per annum on the average daily amount by which the aggregate revolving commitments exceed the sum of outstanding revolving loans and letter of credit obligations. The Credit Facility carried an effective interest rate per annum of 2.9% and 2.7% during the three and nine months ended September 30, 2017, respectively.our debt facilities.
Off-Balance Sheet Arrangements
In the ordinary course of business, we provide standby letters of credit to third parties primarily for facility leases. As of SeptemberJune 30, 20172021 and December 31, 2016,2020, we had outstanding letters of credit of $0.5 million each, that were not recognized in our unaudited and audited consolidated balance sheets, respectively. These are not reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We had no other off-balance sheet arrangements or obligations.
Contractual Obligations
The following table sets forth our contractual obligations as of SeptemberJune 30, 2017:2021:
|
| | | | | | | | | | | | | | | | | | | | |
| | Payment Due by Period | | |
| | Less than | | 1-3 | | 4-5 | | After | |
|
| | 1 year | | years | | years | | 5 years | | Total |
| | (dollars in millions) |
Capital leases | | $ | 0.2 |
| | $ | 0.3 |
| | $ | 0.1 |
| | $ | — |
| | $ | 0.6 |
|
Operating leases | | 10.5 |
| | 13.3 |
| | 4.3 |
| | 0.9 |
| | 29.0 |
|
Purchase obligations | | 7.2 |
| | 0.2 |
| | — |
| | — |
| | 7.4 |
|
Other obligations(a) | | 2.8 |
| | 4.6 |
| | 3.7 |
| | 5.2 |
| | 16.3 |
|
Borrowings | |
| | | | | | | | |
Principal payments | | — |
| | 45.0 |
| | — |
| | — |
| | 45.0 |
|
Interest Payments(b) | | 1.3 |
| | 1.3 |
| | — |
| | — |
| | 2.6 |
|
Total contractual cash obligations(c) | | $ | 22.0 |
| | $ | 64.7 |
| | $ | 8.1 |
| | $ | 6.1 |
| | $ | 100.9 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payment Due by Period | | |
| | Less than | | 1-3 | | 4-5 | | After | | |
| | 1 year | | years | | years | | 5 years | | Total |
| | (dollars in millions) |
Finance leases | | $ | 0.2 | | | $ | 0.3 | | | $ | — | | | $ | — | | | $ | 0.5 | |
Operating leases(a) | | 24.2 | | | 44.5 | | | 21.5 | | | 29.9 | | | 120.1 | |
Purchase obligations | | 7.1 | | | — | | | — | | | — | | | 7.1 | |
Other obligations(b) | | 2.8 | | | 5.0 | | | 3.9 | | | 7.0 | | | 18.7 | |
Borrowings: | | | | | | | | | | |
Principal payments(c) | | 15.0 | | | — | | | 150.0 | | | — | | | 165.0 | |
Interest payments(d) | | 5.3 | | | 10.5 | | | 2.6 | | | — | | | 18.4 | |
Total contractual cash obligations(e) | | $ | 54.6 | | | $ | 60.3 | | | $ | 178.0 | | | $ | 36.9 | | | $ | 329.8 | |
| |
(a) | Represents estimated payments under the Gratuity Plan. |
| |
(b) | Interest on borrowings is calculated based on the effective interest rate on the outstanding borrowings as of September 30, 2017. |
| |
(c) | Excludes $1.5 million related to uncertain tax positions, since the extent of the amount and timing of payment is currently not reliably estimable or determinable. |
(a)Represents undiscounted operating lease liabilities payable over the lease term.
(b)Represents estimated employee benefit payments under the Gratuity Plan.
(c)Represents our intent and ability to settle the principal amount of our Notes of $150 million in cash and does not reflect any assumptions about our ability or intent to settle the Notes before their maturity.
(d)Interest on borrowings is calculated based on the interest rate on the outstanding borrowings as of June 30, 2021.
(e)Excludes $0.9 million related to uncertain tax positions, since the extent of the amount and timing of payment is currently not reliably estimable or determinable.
Certain units of our Indian subsidiaries were established as 100% Export-Oriented units under the “STPI”Software Technology Parks of India or Special Economic Zone scheme promulgated by the Government of India. These units are exempt from customs, central excise duties, and levies on imported and indigenous capital goods, stores, and spares. We have undertaken to pay custom duties, service taxes, levies, and liquidated damages payable, if any, in respect of imported and indigenous capital goods, stores, and spares consumed duty free, in the event that certain terms and conditions are not fulfilled. We believe, however, that these units have in the past satisfied and will continue to satisfy the required conditions.
Our operations centers in the Philippines are registered with the “PEZA.”Philippine Economic Zone Authority. The registration provides us with certain fiscal incentives on the import of capital goods and local purchase of services and materials and requires that ExlService Philippines, Inc. to meet certain performance and investment criteria. We believe that these centers have in the past satisfied and will continue to satisfy the required criteria.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, see Note 2—“Recent Accounting Pronouncements” to the unaudited consolidated financial statements contained herein.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
During the three months ended SeptemberJune 30, 2017,2021, there were no material changes in our market risk exposure. For a discussion of our market risk associated with exchange rate risk and interest rate risk, see Part II, Item 7A “Quantitative and Qualitative Disclosures aboutAbout Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2020.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including ourits Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), to allow timely decisions regarding required disclosure. In connection with the preparation of this Quarterly Report on Form 10-Q, our management carried out an evaluation, under the supervision and with the participation of the CEO and CFO, of the effectiveness and operation of our disclosure controls and procedures as of SeptemberJune 30, 2017.2021. Based upon that evaluation, the CEO and CFO have concluded that as of September 30, 2017, our disclosure controls and procedures, as of June 30, 2021, were effective.
Changes in Internal Control over Financial Reporting
During the three months ended SeptemberJune 30, 2017,2021, there waswere no changechanges in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
PART II. Other Information
ITEM 1. Legal Proceedings
In the course of our normal business activities, various lawsuits, claims and proceedings may be instituted or asserted against us. WeAlthough there can be no assurance, we believe that the disposition of matters currently instituted or asserted will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. Please seeSee Note 21 24 - Commitments and Contingenciesto theour unaudited consolidated financial statements contained herein for details regarding our tax proceedings.details.
ITEM 1A. Risk Factors
We have discloseddiscussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 20162020 (the “2020 Form 10-K”), supplemented by the disclosure below, a number of risks which may materially affect our business, financial condition or results of operations. You should carefully consider the “Risk Factors” set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016these Risk Factors and the other information set forth elsewhere in this Quarterly Report on Form 10-Q. You should be aware that these risk factors and other information may not describe every risk facing our Company. Additional risks and uncertainties not currently known to us may also materially adversely affect our business, financial condition and/or results of operations.
The following constitutes a supplement to the 2020 Form 10-K, Part I, Item 1A “Risk Factors” under “Our business, results of operations and financial condition have been adversely affected, and could in the future be materially adversely affected, by the coronavirus pandemic.”
In late March 2021, a new serious outbreak of COVID-19 virus began affecting India. The outbreak resulted in an exorbitant spike in the number of COVID patients, which overwhelmed the healthcare infrastructure in India. The Indian government reinstated lockdowns limiting in certain cases the movement of our employees to offices. During the same period, the Philippines also began experiencing a spike in the number of COVID patients. Although the situation has improved and our Indian and Philippines operations were not materially affected as a result of our appropriate business continuity procedures, it is possible that any further developments, including the emergence of new variants of the COVID-19 virus, could adversely affect our business and results of operations.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Use of Proceeds
None.
Purchases of Equity Securities by the Issuer
During the three months ended SeptemberJune 30, 2017,2021, purchases of common stock were as follows:
|
| | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs(1) |
July 1, 2017 through July 31, 2017 | | — |
| | — |
| | — |
| | 19,684,088 |
|
August 1, 2017 through August 31, 2017 | | 107,633 |
| | 56.12 |
| | 107,633 |
| | 13,643,362 |
|
September 1, 2017 through September 30, 2017 | | 52,400 |
| | 56.55 |
| | 52,400 |
| | 10,680,041 |
|
Total | | 160,033 |
| | 56.26 |
| | 160,033 |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per share(1) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs |
April 1, 2021 through April 30, 2021 | | 85,358 | | | $ | 93.72 | | | 85,358 | | | $ | 87,182,152 | |
May 1, 2021 through May 31, 2021 | | 126,848 | | | $ | 98.49 | | | 126,848 | | | $ | 74,688,547 | |
June 1, 2021 through June 30, 2021 | | 74,838 | | | $ | 105.77 | | | 74,838 | | | $ | 66,772,646 | |
Total | | 287,044 | | | $ | 98.97 | | | 287,044 | | | $ | — | |
(1) Average of high and low price of common stock on the trading day prior to the vesting date of the shares of restricted stock.(1)
On February 28, 2017, the Company’sDecember 16, 2019, our Board of Directors authorized an additionala $200.0 million common stock repurchase program beginning January 1, 2020 through December 31, 2022 (the “2017“2019 Repurchase Program”), under which. The shares may be purchased by the Companyus from time to time from the open market and through private transactions, during each of the fiscal years 2017 throughor otherwise, as determined by us as market conditions warrant. The 2019 up to an aggregate additional amount of $100 million. The approval increases the 2017 authorization from $20 million to $40 million and authorizes stock repurchases of up to $40 million in each of 2018 and 2019.Repurchase Program may be suspended or discontinued at any time.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
None.
ITEM 6.Exhibits
See Exhibit Index immediately following the signature page hereto, which Exhibit Index is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | |
Date: October 26, 2017 | EXLSERVICE HOLDINGS, INC. |
| | | |
| By: | | /S/ VISHAL CHHIBBAR
|
| | | Vishal Chhibbar
Chief Financial Officer
(Duly Authorized Signatory, Principal Financial and Accounting Officer)
|
EXHIBIT INDEX
The following exhibits are being filed as part of this Quarterly Report on Form 10-Q:
| | | | | | | | |
| | |
3.1 | | |
| | |
3.1 | | |
| | |
3.2 | | |
| | |
3.3 | | |
| | |
10.131.1 | | |
| | |
31.1 | | |
| | |
31.2 | | |
| | |
32.1 | | |
| | |
32.2 | | |
| | |
101.INS | | XBRL Instance Document |
| | |
101.SCH | | XBRL Taxonomy Extension Scheme |
| | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase |
| | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase |
| | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase |
| | |
101.PRE | | XBRL Extension Presentation Linkbase |
| | |
104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
| | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
Date: July 29, 2021 | EXLSERVICE HOLDINGS, INC. |
| | | |
| By: | | /S/ MAURIZIO NICOLELLI |
| | | MAURIZIO NICOLELLI Chief Financial Officer (Duly Authorized Signatory, Principal Financial and Accounting Officer) |