UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 20212022
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 001-33089
EXLSERVICE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | |
Delaware | | 82-0572194 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | |
320 Park Avenue, | 29th Floor, | | |
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 ☒ 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 ☒ 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 | | ☐ |
| | | | |
Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ |
| | | | | | |
Emerging growth company | | ☐ | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 27, 2021,26, 2022, there were 33,174,61333,062,704 shares of the registrant’s common stock outstanding, par value $0.001 per share.
TABLE OF CONTENTS
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| 1A. | 1A. | | | | 1A. | | | |
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PART 1.I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXLSERVICE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)amount and share count)
| | | As of | | As of |
| | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| Assets | Assets | | Assets | |
Current assets: | Current assets: | | Current assets: | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 150,211 | | | $ | 218,530 | | Cash and cash equivalents | | $ | 106,304 | | | $ | 135,337 | |
Short-term investments | Short-term investments | | 144,533 | | | 184,286 | | Short-term investments | | 158,941 | | | 178,538 | |
Restricted cash | Restricted cash | | 5,065 | | | 4,690 | | Restricted cash | | 6,840 | | | 6,174 | |
Accounts receivable, net | Accounts receivable, net | | 182,111 | | | 147,635 | | Accounts receivable, net | | 237,453 | | | 194,232 | |
Prepaid expenses | Prepaid expenses | | 12,060 | | | 11,344 | | Prepaid expenses | | 15,621 | | | 14,655 | |
Advance income tax, net | Advance income tax, net | | 13,567 | | | 5,684 | | Advance income tax, net | | 12,712 | | | 15,199 | |
Other current assets | Other current assets | | 33,615 | | | 37,109 | | Other current assets | | 23,143 | | | 34,009 | |
Total current assets | Total current assets | | 541,162 | | | 609,278 | | Total current assets | | 561,014 | | | 578,144 | |
Property and equipment, net | Property and equipment, net | | 86,511 | | | 92,875 | | Property and equipment, net | | 82,649 | | | 86,008 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | | 83,280 | | | 91,918 | | Operating lease right-of-use assets | | 67,962 | | | 76,692 | |
Restricted cash | Restricted cash | | 2,260 | | | 2,299 | | Restricted cash | | 2,056 | | | 2,299 | |
Deferred tax assets, net | Deferred tax assets, net | | 24,132 | | | 7,749 | | Deferred tax assets, net | | 40,924 | | | 21,404 | |
Intangible assets, net | Intangible assets, net | | 52,853 | | | 59,594 | | Intangible assets, net | | 73,298 | | | 81,082 | |
Goodwill | Goodwill | | 348,747 | | | 349,088 | | Goodwill | | 406,575 | | | 403,902 | |
Other assets | Other assets | | 27,472 | | | 32,099 | | Other assets | | 53,195 | | | 30,369 | |
Investment in equity affiliate | Investment in equity affiliate | | 2,929 | | | 2,957 | | Investment in equity affiliate | | 3,261 | | | 3,004 | |
Total assets | Total assets | | $ | 1,169,346 | | | $ | 1,247,857 | | Total assets | | $ | 1,290,934 | | | $ | 1,282,904 | |
Liabilities and stockholders’ equity | Liabilities and stockholders’ equity | | | | | Liabilities and stockholders’ equity | | | | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Accounts payable | Accounts payable | | $ | 3,877 | | | $ | 6,992 | | Accounts payable | | $ | 4,377 | | | $ | 5,647 | |
Current portion of long-term borrowings | Current portion of long-term borrowings | | 15,000 | | | 25,000 | | Current portion of long-term borrowings | | 35,000 | | | 260,016 | |
Deferred revenue | Deferred revenue | | 12,017 | | | 32,649 | | Deferred revenue | | 22,013 | | | 20,000 | |
Accrued employee costs | Accrued employee costs | | 70,496 | | | 67,645 | | Accrued employee costs | | 75,698 | | | 114,285 | |
Accrued expenses and other current liabilities | Accrued expenses and other current liabilities | | 76,424 | | | 66,410 | | Accrued expenses and other current liabilities | | 89,030 | | | 76,350 | |
Current portion of operating lease liabilities | Current portion of operating lease liabilities | | 18,039 | | | 18,894 | | Current portion of operating lease liabilities | | 18,548 | | | 18,487 | |
Income taxes payable, net | Income taxes payable, net | | 11,256 | | | 3,488 | | Income taxes payable, net | | 21,348 | | | 901 | |
Total current liabilities | Total current liabilities | | 207,109 | | | 221,078 | | Total current liabilities | | 266,014 | | | 495,686 | |
Long-term borrowings, less current portion | Long-term borrowings, less current portion | | 139,432 | | | 201,961 | | Long-term borrowings, less current portion | | 250,000 | | | — | |
Operating lease liabilities, less current portion | Operating lease liabilities, less current portion | | 76,518 | | | 84,874 | | Operating lease liabilities, less current portion | | 59,224 | | | 68,506 | |
Income taxes payable | Income taxes payable | | 1,790 | | | 1,790 | | Income taxes payable | | 1,790 | | | 1,790 | |
Deferred tax liabilities, net | Deferred tax liabilities, net | | 902 | | | 847 | | Deferred tax liabilities, net | | 841 | | | 965 | |
Other non-current liabilities | Other non-current liabilities | | 15,581 | | | 18,135 | | Other non-current liabilities | | 27,412 | | | 22,801 | |
Total liabilities | Total liabilities | | 441,332 | | | 528,685 | | Total liabilities | | 605,281 | | | 589,748 | |
Commitments and contingencies (Refer to Note 24) | Commitments and contingencies (Refer to Note 24) | | 0 | | 0 | Commitments and contingencies (Refer to Note 24) | | 0 | | 0 |
Preferred stock, $0.001 par value; 15,000,000 shares authorized, NaN issued | | 0 | | | 0 | | |
Preferred stock, $0.001 par value; 15,000,000 shares authorized, none issued | | Preferred stock, $0.001 par value; 15,000,000 shares authorized, none issued | | — | | | — | |
ExlService Holdings, Inc. Stockholders’ equity: | ExlService Holdings, Inc. Stockholders’ equity: | | 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 | | |
Common stock, $0.001 par value; 100,000,000 shares authorized, 39,795,161 shares issued and 33,124,035 shares outstanding as of June 30, 2022 and 39,508,340 shares issued and 33,291,482 shares outstanding as of December 31, 2021 | | Common stock, $0.001 par value; 100,000,000 shares authorized, 39,795,161 shares issued and 33,124,035 shares outstanding as of June 30, 2022 and 39,508,340 shares issued and 33,291,482 shares outstanding as of December 31, 2021 | | 40 | | | 40 | |
Additional paid-in capital | Additional paid-in capital | | 439,051 | | | 420,976 | | Additional paid-in capital | | 420,306 | | | 395,742 | |
| Retained earnings | Retained earnings | | 701,331 | | | 641,379 | | Retained earnings | | 828,161 | | | 756,137 | |
Accumulated other comprehensive loss | | (86,745) | | | (74,984) | | |
Accumulated other comprehensive income/(loss) | | Accumulated other comprehensive income/(loss) | | (133,374) | | | (89,474) | |
Total including shares held in treasury | Total including shares held in treasury | | 1,053,676 | | | 987,410 | | Total including shares held in treasury | | 1,115,133 | | | 1,062,445 | |
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) | | |
Less: 6,671,126 shares as of June 30, 2022 and 6,216,858 shares as of December 31, 2021, held in treasury, at cost | | Less: 6,671,126 shares as of June 30, 2022 and 6,216,858 shares as of December 31, 2021, held in treasury, at cost | | (429,480) | | | (369,289) | |
Stockholders’ equity | Stockholders’ equity | | 728,014 | | | 719,172 | | Stockholders’ equity | | 685,653 | | | 693,156 | |
| Total equity | Total equity | | 728,014 | | | 719,172 | | Total equity | | 685,653 | | | 693,156 | |
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | | $ | 1,169,346 | | | $ | 1,247,857 | | Total liabilities and stockholders’ equity | | $ | 1,290,934 | | | $ | 1,282,904 | |
See accompanying notes to unaudited consolidated financial statements.
EXLSERVICE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except share and per share amounts)amount and share count)
| | | Three months ended June 30, | | Six months ended June 30, | | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Revenues, net | Revenues, net | | $ | 275,064 | | | $ | 222,473 | | | $ | 536,479 | | | $ | 468,463 | | Revenues, net | | $ | 346,782 | | | $ | 275,064 | | | $ | 675,990 | | | $ | 536,479 | |
Cost of revenues(1) | Cost of revenues(1) | | 170,701 | | | 158,401 | | | 329,522 | | | 321,057 | | Cost of revenues(1) | | 221,207 | | | 170,701 | | | 428,723 | | | 329,522 | |
Gross profit(1) | Gross profit(1) | | 104,363 | | | 64,072 | | | 206,957 | | | 147,406 | | Gross profit(1) | | 125,575 | | | 104,363 | | | 247,267 | | | 206,957 | |
Operating expenses: | Operating expenses: | | | | | | | | | Operating expenses: | | | | | | | | |
General and administrative expenses | General and administrative expenses | | 36,499 | | | 28,750 | | | 67,202 | | | 57,691 | | General and administrative expenses | | 40,434 | | | 36,499 | | | 80,379 | | | 67,202 | |
Selling and marketing expenses | Selling and marketing expenses | | 19,724 | | | 13,051 | | | 37,959 | | | 27,507 | | Selling and marketing expenses | | 23,985 | | | 19,724 | | | 48,155 | | | 37,959 | |
Depreciation and amortization expense | Depreciation and amortization expense | | 12,310 | | | 12,405 | | | 24,411 | | | 24,855 | | Depreciation and amortization expense | | 14,075 | | | 12,310 | | | 27,677 | | | 24,411 | |
| Total operating expenses | Total operating expenses | | 68,533 | | | 54,206 | | | 129,572 | | | 110,053 | | Total operating expenses | | 78,494 | | | 68,533 | | | 156,211 | | | 129,572 | |
Income from operations | Income from operations | | 35,830 | | | 9,866 | | | 77,385 | | | 37,353 | | Income from operations | | 47,081 | | | 35,830 | | | 91,056 | | | 77,385 | |
Foreign exchange gain, net | Foreign exchange gain, net | | 1,353 | | | 1,359 | | | 1,787 | | | 2,736 | | Foreign exchange gain, net | | 1,423 | | | 1,353 | | | 3,179 | | | 1,787 | |
Interest expense | Interest expense | | (2,520) | | | (2,883) | | | (4,994) | | | (5,955) | | Interest expense | | (1,502) | | | (2,520) | | | (2,378) | | | (4,994) | |
Other income, net | | 2,215 | | | 4,225 | | | 3,625 | | | 6,754 | | |
Other income/(loss), net | | Other income/(loss), net | | (174) | | | 2,215 | | | 2,237 | | | 3,625 | |
Income before income tax expense and earnings from equity affiliates | Income before income tax expense and earnings from equity affiliates | | 36,878 | | | 12,567 | | | 77,803 | | | 40,888 | | Income before income tax expense and earnings from equity affiliates | | 46,828 | | | 36,878 | | | 94,094 | | | 77,803 | |
Income tax expense | Income tax expense | | 8,865 | | | 4,072 | | | 17,823 | | | 9,927 | | Income tax expense | | 11,125 | | | 8,865 | | | 22,327 | | | 17,823 | |
Income before earnings from equity affiliates | Income before earnings from equity affiliates | | 28,013 | | | 8,495 | | | 59,980 | | | 30,961 | | Income before earnings from equity affiliates | | 35,703 | | | 28,013 | | | 71,767 | | | 59,980 | |
Gain / (loss) from equity-method investment | | 8 | | | (66) | | | (28) | | | (121) | | |
Gain/(loss) from equity-method investment | | Gain/(loss) from equity-method investment | | 143 | | | 8 | | | 257 | | | (28) | |
Net income attributable to ExlService Holdings, Inc. stockholders | Net income attributable to ExlService Holdings, Inc. stockholders | | $ | 28,021 | | | $ | 8,429 | | | $ | 59,952 | | | $ | 30,840 | | Net income attributable to ExlService Holdings, Inc. stockholders | | $ | 35,846 | | | $ | 28,021 | | | $ | 72,024 | | | $ | 59,952 | |
Earnings per share attributable to ExlService Holdings, Inc. stockholders: | Earnings per share attributable to ExlService Holdings, Inc. stockholders: | | | | | | | | | Earnings per share attributable to ExlService Holdings, Inc. stockholders: | | | | | | | | |
Basic | Basic | | $ | 0.83 | | | $ | 0.24 | | | $ | 1.78 | | | $ | 0.90 | | Basic | | $ | 1.07 | | | $ | 0.83 | | | $ | 2.15 | | | $ | 1.78 | |
Diluted | Diluted | | $ | 0.81 | | | $ | 0.24 | | | $ | 1.75 | | | $ | 0.89 | | Diluted | | $ | 1.06 | | | $ | 0.81 | | | $ | 2.13 | | | $ | 1.75 | |
Weighted-average number of shares used in computing earnings per share attributable to ExlService Holdings Inc. stockholders: | Weighted-average number of shares used in computing earnings per share attributable to ExlService Holdings Inc. stockholders: | | Weighted-average number of shares used in computing earnings per share attributable to ExlService Holdings Inc. stockholders: | |
Basic | Basic | | 33,571,074 | | | 34,486,202 | | 33,652,146 | | | 34,443,884 | Basic | | 33,403,411 | | | 33,571,074 | | 33,422,618 | | | 33,652,146 |
Diluted | Diluted | | 34,389,768 | | | 34,597,688 | | 34,353,593 | | | 34,659,146 | Diluted | | 33,830,539 | | | 34,389,768 | | 33,862,597 | | | 34,353,593 |
(1) Exclusive of depreciation and amortization expense.
See accompanying notes to unaudited consolidated financial statements.
EXLSERVICE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)INCOME (UNAUDITED)
(In thousands)
| | | Three months ended June 30, | | Six months ended June 30, | | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Net income | Net income | | $ | 28,021 | | | $ | 8,429 | | | $ | 59,952 | | | $ | 30,840 | | Net income | | $ | 35,846 | | | $ | 28,021 | | | $ | 72,024 | | | $ | 59,952 | |
Other comprehensive income/(loss): | Other comprehensive income/(loss): | | Other comprehensive income/(loss): | |
Unrealized gain/(loss) on cash flow hedges | | (871) | | | 7,721 | | | (303) | | | (7,125) | | |
Unrealized loss on cash flow hedges | | Unrealized loss on cash flow hedges | | (14,632) | | | (871) | | | (15,149) | | | (303) | |
Loss on net investment hedges | Loss on net investment hedges | | (1,134) | | | 0 | | | (1,134) | | | 0 | | Loss on net investment hedges | | — | | | (1,134) | | | — | | | (1,134) | |
Foreign currency translation gain/(loss) | | (4,775) | | | 2,273 | | | (6,686) | | | (19,298) | | |
Foreign currency translation loss | | Foreign currency translation loss | | (22,782) | | | (4,775) | | | (30,227) | | | (6,686) | |
Reclassification adjustments | Reclassification adjustments | | Reclassification adjustments | |
(Gain)/loss on cash flow hedges(1) | | (2,866) | | | 1,127 | | | (5,695) | | | 198 | | |
Gain on cash flow hedges(1) | | Gain on cash flow hedges(1) | | (1,459) | | | (2,866) | | | (3,448) | | | (5,695) | |
Retirement benefits(2) | Retirement benefits(2) | | 176 | | | 97 | | | 355 | | | 198 | | Retirement benefits(2) | | 149 | | | 176 | | | 304 | | | 355 | |
Income tax effects relating to above(3) | Income tax effects relating to above(3) | | 1,478 | | | (2,388) | | | 1,702 | | | 6,645 | | Income tax effects relating to above(3) | | 3,656 | | | 1,478 | | | 4,620 | | | 1,702 | |
Total other comprehensive income/(loss) | Total other comprehensive income/(loss) | | $ | (7,992) | | | $ | 8,830 | | | $ | (11,761) | | | $ | (19,382) | | Total other comprehensive income/(loss) | | $ | (35,068) | | | $ | (7,992) | | | $ | (43,900) | | | $ | (11,761) | |
Total comprehensive income/(loss) | | $ | 20,029 | | | $ | 17,259 | | | $ | 48,191 | | | $ | 11,458 | | |
Total comprehensive income | | Total comprehensive income | | $ | 778 | | | $ | 20,029 | | | $ | 28,124 | | | $ | 48,191 | |
(1)These are reclassified to net income and are included either in cost of revenues orand 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,income/(loss), 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, 20212022 and 20202021
(In thousands, except share and per share amounts)count)
| | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Equity | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income/(Loss) | | Treasury Stock | | Total Equity |
| | | Shares | | Amount | | Shares | | Amount | | | 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 | | |
Balance as of March 31, 2022 | | Balance as of March 31, 2022 | 39,794,154 | | | $ | 40 | | | $ | 406,966 | | | $ | 792,315 | | | $ | (98,306) | | | (6,465,410) | | | $ | (400,674) | | | $ | 700,341 | |
Stock issued against stock-based compensation plans | Stock issued against stock-based compensation plans | 9,864 | | | — | | | 99 | | | — | | | — | | | — | | | — | | | 99 | | Stock issued against stock-based compensation plans | 1,007 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Stock-based compensation | Stock-based compensation | — | | | — | | | 10,070 | | | — | | | — | | | — | | | — | | | 10,070 | | Stock-based compensation | — | | | — | | | 13,340 | | | — | | | — | | | — | | | — | | | 13,340 | |
Acquisition of treasury stock | Acquisition of treasury stock | — | | | — | | | — | | | — | | | — | | | (287,044) | | | (28,409) | | | (28,409) | | Acquisition of treasury stock | — | | | — | | | — | | | — | | | — | | | (205,716) | | | (28,806) | | | (28,806) | |
| Other comprehensive loss | Other comprehensive loss | — | | | — | | | — | | | — | | | (7,992) | | | — | | | — | | | (7,992) | | Other comprehensive loss | — | | | — | | | — | | | — | | | (35,068) | | | — | | | — | | | (35,068) | |
Net income | Net income | — | | | — | | | — | | | 28,021 | | | — | | | — | | | — | | | 28,021 | | Net income | — | | | — | | | — | | | 35,846 | | | — | | | — | | | — | | | 35,846 | |
Balance as of June 30, 2021 | 39,283,853 | | | $ | 39 | | | $ | 439,051 | | | $ | 701,331 | | | $ | (86,745) | | | (6,034,144) | | | $ | (325,662) | | | $ | 728,014 | | |
Balance as of June 30, 2022 | | Balance as of June 30, 2022 | 39,795,161 | | | $ | 40 | | | $ | 420,306 | | | $ | 828,161 | | | $ | (133,374) | | | (6,671,126) | | | $ | (429,480) | | | $ | 685,653 | |
| | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Equity | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income/(Loss) | | Treasury Stock | | Total Equity |
| | | Shares | | Amount | | Shares | | Amount | | | 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 | | |
Balance as of March 31, 2021 | | 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 | Stock issued against stock-based compensation plans | 4,590 | | | — | | | 39 | | | — | | | — | | | — | | | — | | | 39 | | Stock issued against stock-based compensation plans | 9,864 | | | — | | | 99 | | | — | | | — | | | — | | | — | | | 99 | |
Stock-based compensation | Stock-based compensation | — | | | — | | | 7,726 | | | — | | | — | | | — | | | — | | | 7,726 | | Stock-based compensation | — | | | — | | | 10,070 | | | — | | | — | | | — | | | — | | | 10,070 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 8,830 | | | — | | | — | | | 8,830 | | |
Acquisition of treasury stock | | Acquisition of treasury stock | — | | | — | | | — | | | — | | | — | | | (287,044) | | | (28,409) | | | (28,409) | |
Other comprehensive loss | | Other comprehensive loss | — | | | — | | | — | | | — | | | (7,992) | | | — | | | — | | | (7,992) | |
Net income | Net income | — | | | — | | | — | | | 8,429 | | | — | | | — | | | — | | | 8,429 | | Net income | — | | | — | | | — | | | 28,021 | | | — | | | — | | | — | | | 28,021 | |
Balance as of June 30, 2020 | 38,818,365 | | | $ | 39 | | | $ | 404,704 | | | $ | 582,743 | | | $ | (104,274) | | | (4,497,779) | | | $ | (202,284) | | | $ | 680,928 | | |
Balance as of June 30, 2021 | | Balance as of June 30, 2021 | 39,283,853 | | | $ | 39 | | | $ | 439,051 | | | $ | 701,331 | | | $ | (86,745) | | | (6,034,144) | | | $ | (325,662) | | | $ | 728,014 | |
EXLSERVICE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
For the six months ended June 30, 20212022 and 20202021
(In thousands, except share and per share amounts)count)
| | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | | Total Equity | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income/(Loss) | | Treasury Stock | | | Total Equity |
| | | Total Equity | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income/(Loss) | Treasury Stock | | Total Equity |
| | Shares | | Amount | | Shares | | Amount | | | | Amount | | | Amount | | |
Balance as of January 1, 2021 | 38,968,052 | | | $ | 39 | | | $ | 420,976 | | | $ | 641,379 | | | $ | (74,984) | | | (5,408,618) | | | $ | (268,238) | | | | $ | 719,172 | | |
Balance as of January 1, 2022 | | Balance as of January 1, 2022 | 39,508,340 | | | $ | 40 | | | $ | 395,742 | | | $ | 756,137 | | | $ | (89,474) | | | (6,216,858) | | | $ | (369,289) | | | | $ | 693,156 | |
Stock issued against stock-based compensation plans | Stock issued against stock-based compensation plans | 315,801 | | | — | | | 173 | | | — | | | — | | | — | | | — | | | | 173 | | Stock issued against stock-based compensation plans | 286,821 | | | — | | | — | | | — | | | — | | | — | | | — | | | | — | |
Stock-based compensation | Stock-based compensation | — | | | — | | | 17,902 | | | — | | | — | | | — | | | — | | | | 17,902 | | Stock-based compensation | — | | | — | | | 24,564 | | | — | | | — | | | — | | | — | | | | 24,564 | |
Acquisition of treasury stock | Acquisition of treasury stock | — | | | — | | | — | | | — | | | — | | | (625,526) | | | (57,424) | | | | (57,424) | | Acquisition of treasury stock | — | | | — | | | — | | | — | | | — | | | (454,268) | | | (60,191) | | | | (60,191) | |
| Other comprehensive loss | Other comprehensive loss | — | | | — | | | — | | | — | | | (11,761) | | | — | | | — | | | | (11,761) | | Other comprehensive loss | — | | | — | | | — | | | — | | | (43,900) | | | — | | | — | | | | (43,900) | |
Net income | Net income | — | | | — | | | — | | | 59,952 | | | — | | | — | | | — | | | | 59,952 | | Net income | — | | | — | | | — | | | 72,024 | | | — | | | — | | | — | | | | 72,024 | |
Balance as of June 30, 2021 | 39,283,853 | | | $ | 39 | | | $ | 439,051 | | | $ | 701,331 | | | $ | (86,745) | | | (6,034,144) | | | $ | (325,662) | | | | $ | 728,014 | | |
Balance as of June 30, 2022 | | Balance as of June 30, 2022 | 39,795,161 | | | $ | 40 | | | $ | 420,306 | | | $ | 828,161 | | | $ | (133,374) | | | (6,671,126) | | | $ | (429,480) | | | | $ | 685,653 | |
| | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Equity | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income/(Loss) | | Treasury Stock | | Total Equity |
| | | Shares | | Amount | | Shares | | Amount | | | 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 | | |
Balance as of January 1, 2021 | | 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 | Stock issued against stock-based compensation plans | 337,711 | | | — | | | 960 | | | — | | | — | | | — | | | — | | | 960 | | Stock issued against stock-based compensation plans | 315,801 | | | — | | | 173 | | | — | | | — | | | — | | | — | | | 173 | |
Stock-based compensation | Stock-based compensation | — | | | — | | | 12,504 | | | — | | | — | | | — | | | — | | | 12,504 | | Stock-based compensation | — | | | — | | | 17,902 | | | — | | | — | | | — | | | — | | | 17,902 | |
Acquisition of treasury stock | Acquisition of treasury stock | — | | | — | | | — | | | — | | | — | | | (202,366) | | | (13,995) | | | (13,995) | | Acquisition of treasury stock | — | | | — | | | — | | | — | | | — | | | (625,526) | | | (57,424) | | | (57,424) | |
| Other comprehensive loss | Other comprehensive loss | — | | | — | | | — | | | — | | | (19,382) | | | — | | | — | | | (19,382) | | Other comprehensive loss | — | | | — | | | — | | | — | | | (11,761) | | | — | | | — | | | (11,761) | |
Net income | Net income | — | | | — | | | — | | | 30,840 | | | — | | | — | | | — | | | 30,840 | | Net income | — | | | — | | | — | | | 59,952 | | | — | | | — | | | — | | | 59,952 | |
Balance as of June 30, 2020 | 38,818,365 | | | $ | 39 | | | $ | 404,704 | | | $ | 582,743 | | | $ | (104,274) | | | (4,497,779) | | | $ | (202,284) | | | $ | 680,928 | | |
Balance as of June 30, 2021 | | Balance as of June 30, 2021 | 39,283,853 | | | $ | 39 | | | $ | 439,051 | | | $ | 701,331 | | | $ | (86,745) | | | (6,034,144) | | | $ | (325,662) | | | $ | 728,014 | |
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 | |
| | | | | | | | | | | |
| Six months ended June 30, |
| 2022 | | 2021 |
Cash flows from operating activities: | | | |
Net income | $ | 72,024 | | | $ | 59,952 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization expense | 27,739 | | | 24,734 | |
Stock-based compensation expense | 24,564 | | | 17,902 | |
Amortization of operating lease right-of-use assets | 12,005 | | | 13,632 | |
Unrealized (gain)/loss on short term investments | (275) | | | 6,777 | |
Unrealized foreign currency exchange gain, net | (10,280) | | | (2,634) | |
Deferred income tax benefit | (1,462) | | | (14,737) | |
Allowance / (reversal) of expected credit losses | 170 | | | (390) | |
Fair value changes in contingent consideration | 1,000 | | | — | |
| | | |
(Gain)/loss from equity-method investment | (257) | | | 28 | |
Amortization of non-cash interest expense related to convertible senior notes | — | | | 1,364 | |
| | | |
Others, net | 783 | | | 144 | |
Change in operating assets and liabilities, net of effects of acquisitions: | | | |
Accounts receivable | (46,385) | | | (34,152) | |
Prepaid expenses and other current assets | 2,861 | | | 189 | |
Advance income tax, net | 8,684 | | | 39 | |
Other assets | (6,584) | | | 1,589 | |
Accounts payable | (1,107) | | | (2,458) | |
Deferred revenue | 4,276 | | | (20,832) | |
Accrued employee costs | (34,016) | | | 3,833 | |
Accrued expenses and other liabilities | 11,190 | | | 12,290 | |
Operating lease liabilities | (11,922) | | | (13,327) | |
Net cash provided by operating activities | 53,008 | | | 53,943 | |
| | | |
Cash flows from investing activities: | | | |
Purchases of property and equipment | (25,054) | | | (19,903) | |
Proceeds from sale of property and equipment | 154 | | | 527 | |
| | | |
| | | |
Business acquisition (net of cash and cash equivalents acquired) | (2,572) | | | — | |
Purchases of investments | (96,082) | | | (32,987) | |
Proceeds from redemption of investments | 82,567 | | | 64,031 | |
Net cash (used for)/provided by investing activities | (40,987) | | | 11,668 | |
| | | |
Cash flows from financing activities: | | | |
Principal payments of finance lease liabilities | (75) | | | (107) | |
Proceeds from borrowings | 35,000 | | | 25,000 | |
Repayments of borrowings | (10,000) | | | (99,000) | |
| | | |
Acquisition of treasury stock | (60,191) | | | (57,424) | |
Proceeds from exercise of stock options | — | | | 174 | |
Net cash used for financing activities | (35,266) | | | (131,357) | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (5,365) | | | (2,237) | |
Net decrease in cash, cash equivalents and restricted cash | (28,610) | | | (67,983) | |
Cash, cash equivalents and restricted cash at the beginning of the period | 143,810 | | | 225,519 | |
Cash, cash equivalents and restricted cash at the end of the period | $ | 115,200 | | | $ | 157,536 | |
| | | |
Supplemental disclosure of cash flow information: | | | |
Cash paid during the period for: | | | |
Interest | $ | 2,694 | | | $ | 3,599 | |
Income taxes, net of refunds | $ | 14,301 | | | $ | 18,710 | |
Supplemental disclosure of non-cash investing and financing activities: | | | |
| | | |
Assets acquired under finance lease | $ | 118 | | | $ | 50 | |
See accompanying notes to unaudited consolidated financial statements.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 20212022
(In thousands, except share and per share amounts)amount and share count)
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 helps its clients build and grow sustainable businesses. By orchestrating its domain expertise,is a leading data analytics and digital technology,operations and solutions company that partners with clients to improve business outcomes and unlock growth. By bringing together deep domain expertise with robust data, powerful analytics, cloud, artificial intelligence and machine learning, the Company looks deepercreates agile, scalable solutions and executes complex operations for the world’s leading corporations in industries including insurance, healthcare, banking and financial services, media, and retail, among others. The Company’s data-led value creation framework enables better and faster decision making, leveraging its end-to-end data and analytics capabilities to designdrive improved business outcomes, and manage agile, customer-centricre-designing of operating models to improve globalintegrate advanced technology into operational workflows. The Company embeds digital operations drive profitability, enhance customer satisfaction, increase data-driven insights, and manage risksolutions into clients’ businesses and compliance. introduces its data led approach to transform operations. Accordingly, as the Company’s operations management services are now a part of its digital operations and solutions, they are referred to as “digital operations and solutions” herein; however, the Company has not changed the way in which it manages its business or its operating segments or segment reporting structure.
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 consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles (“U.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 U.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, 2020.2021.
The unaudited 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. The standalone financial statements of subsidiaries are fully consolidated on a line-by-line basis. Intra-group balances and transactions, and gains and losses arising from intra-group transactions, are eliminated while preparing consolidated financial statements.
Accounting policies of the respective 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 the fair value of the net assets of the investee at the acquisition date is recognized as goodwill. The proportionate share of net income or loss of the investee after its acquisition is recognized in the unaudited consolidated statements of income.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2022
(In thousands, except per share amount and share count)
(b)Investments
The Company’s short-term investments consist of investments in mutual funds and those term deposits with more than three months of original maturity and less than twelve months of remaining maturity as of the reporting date, while long-term investments consist of term deposits with more than twelve months of remaining maturity as of the reporting date.
The Company’s investments in term deposits with financial institutions are measured and recognized at cost and approximate fair value. Interest earned on such investments is included in interest income.
The Company’s mutual fund investments are in debt funds invested in India. These investments are accounted for in accordance with the fair value option under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 825, Financial Instruments, (“Topic 825”). The fair value is represented by original cost on the acquisition date and the net asset value (“NAV”) as quoted, at each reporting period and any changes in fair value are included in other income/(loss), net. Gain or loss on the disposal of these investments is calculated using the weighted average cost of the investments sold or disposed and is included in other income/(loss), net.
(c)Use of Estimates
The preparation of the unaudited consolidated financial statements in conformity with U.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, estimates of the fair value of the identifiable intangible assets and contingent consideration, purchase price allocation, including revenue projections and discount rate applied within the discounted cash flow model for business acquisitions, allowance for 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 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-lived assets, goodwill and 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 may materially change in future periods. Any changes in estimates are adjusted prospectively in the Company’s consolidated financial statements.
(d)
(c) Recent Accounting Pronouncements
In March 2020, FASB issued ASUAccounting Standard Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as interbank offered rates and London Inter-Bank Offered Rate (“LIBOR”). The ASU provides practical expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments are elective and are effective upon issuance for all entities through December 31, 2022. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
In August 2020,October 2021, FASB issued ASU No. 2020-06, 2021-08, Business Combinations (Topic 805): Accounting for Convertible InstrumentsContract Assets and Contract Liabilities from Contracts with Customers. This ASU provides guidance in Topic 805 to require the acquirer entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers, as if it had originated the contracts. Generally, this should result in an Entity’s Own Equity. This ASU simplifiesacquirer recognizing and measuring the accounting for certainacquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial instrumentsstatements, if the acquiree prepared financial statements in accordance with characteristics of liabilities 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 a single model (either debt or equity). The ASU also states that entities must apply the if-converted method to all convertible instruments for calculation of diluted EPS and the treasury stock method is no longer available. An entity can use either a full or modified retrospective approach to adopt the ASU’s guidance.U.S. GAAP. The ASU is effective for fiscal years beginning after December 15, 2021 and2022. An entity may be early adopted foradopt the ASU including adoption in an interim period, with retrospective application to all business combinations within the fiscal years beginning after December 15, 2020, andyear that includes such interim periods within those fiscal years.period. The Company is currently evaluating the impact of adoption of this ASU on its consolidated financial statements.
(d) Recently Adopted Accounting Pronouncements
In December 2019, FASB issued ASU No. 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 deferred tax liabilities for outside basis differences. The Company adopted this ASU on January 1, 2021. The adoption of this ASU has a minimal impact on the Company’s unaudited consolidated financial statements.
In October 2020, FASB issued ASU No. 2020-10, Codification Improvements, to provide guidance for technical corrections such as conforming amendments, clarifications to guidance, simplifications to wording or structure of guidance, and other minor improvements. The amendments in this ASU improve the consistency of the ASC by ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to financial statements is codified in the disclosure section of the ASC. The Company adopted this ASU on January 1, 2021. The adoption of this ASU did not have a material impact on the Company’s unaudited consolidated financial statements.
In January 2021, Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2021-01, Reference Rate Reform (Topic 848): Scope, to expand the scope of Topic 848 to include derivative instruments affected by changes to the interest rates used for discounting, margining or contract price alignment (commonly referred to as the discounting transition). This ASU extends some of Topic 848’s optional expedients and exceptions 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 the 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)
June 30, 20212022
(In thousands, except share and per share amounts)
that includes or is subsequent to March 12, 2020,amount and prospectively to any new contract modifications made on or after January 7, 2021 through December 31, 2022. The adoption of this ASU did not have a material impact on the Company’s unaudited consolidated financial statements.share count)
3. Segment and Geographical Information
The Company operates in the BPM industry and is a provider of data analytics and digital operations management and analytics services.solutions.
The Company manages and reports financial information through its 4 strategic business units:reportable segments: Insurance, Healthcare, Analytics and Emerging Business.Business, which reflects how management reviews financial information and makes operating decisions. These business units develop client-specific solutions, build capabilities, maintain a unified go-to-market approach and are integrally responsible for service delivery, customer satisfaction, growth and profitability.
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, certain 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.
The December 2021 and June 2022 acquisition of Clairvoyant AI Inc. (“Clairvoyant”) and Inbound Media Group, LLC (“Inbound”), respectively, are both included in the Analytics reportable segment. Refer to Note 9 - Business Combination, Goodwill and Intangible Assets to the unaudited consolidated financial statements for further details.
Revenues and cost of revenues for the three months ended June 30, 20212022 and 2020,2021, 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 June 30, 2022 |
Insurance | | Healthcare | | Emerging Business | | Analytics | | Total |
|
Revenues, net | $ | 108,557 | | | $ | 23,051 | | | $ | 53,873 | | | $ | 161,301 | | | $ | 346,782 | |
Cost of revenues(1) | 70,645 | | | 17,694 | | | 31,214 | | | 101,654 | | | 221,207 | |
Gross profit(1) | $ | 37,912 | | | $ | 5,357 | | | $ | 22,659 | | | $ | 59,647 | | | $ | 125,575 | |
Operating expenses | | | | | | | | | 78,494 | |
Foreign exchange gain, interest expense and other loss, net | | | | | | | | | (253) | |
Income tax expense | | | | | | | | | 11,125 | |
Gain from equity-method investment | | | | | | | | | 143 | |
Net income | | | | | | | | | $ | 35,846 | |
(1) Exclusive of depreciation and amortization expense.
| | | Three months ended June 30, 2020 | | Three months ended June 30, 2021 |
Insurance | | Healthcare | | Emerging Business | | Analytics | | Total | Insurance | | Healthcare | | Emerging Business | | Analytics | | Total |
| | Insurance | | Healthcare | | Emerging Business | | Analytics | | Total | |
Revenues, net | Revenues, net | $ | 81,281 | | | $ | 24,978 | | | $ | 34,535 | | | $ | 81,679 | | | $ | 222,473 | | Revenues, net | $ | 94,719 | | | $ | 28,250 | | | $ | 40,690 | | | $ | 111,405 | | | $ | 275,064 | |
Cost of revenues(1) | Cost of revenues(1) | 59,113 | | | 19,640 | | | 22,416 | | | 57,232 | | | 158,401 | | Cost of revenues(1) | 59,359 | | | 17,685 | | | 22,346 | | | 71,311 | | | 170,701 | |
Gross profit(1) | Gross profit(1) | $ | 22,168 | | | $ | 5,338 | | | $ | 12,119 | | | $ | 24,447 | | | $ | 64,072 | | Gross profit(1) | $ | 35,360 | | | $ | 10,565 | | | $ | 18,344 | | | $ | 40,094 | | | $ | 104,363 | |
Operating expenses | Operating expenses | | | | | | | | | 54,206 | | Operating expenses | | | | | | | | | 68,533 | |
Foreign exchange gain, interest expense and other income, net | Foreign exchange gain, interest expense and other income, net | | 2,701 | | Foreign exchange gain, interest expense and other income, net | | 1,048 | |
Income tax expense | Income tax expense | | 4,072 | | Income tax expense | | 8,865 | |
Loss from equity-method investment | | 66 | | |
Gain from equity-method investment | | Gain from equity-method investment | | 8 | |
Net income | Net income | | $ | 8,429 | | Net income | | $ | 28,021 | |
(1) Exclusive of depreciation and amortization expense.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 20212022
(In thousands, except share and per share amounts)
(1) Exclusive of depreciationamount and amortization expense.share count)
Revenues and cost of revenues for the six months ended June 30, 20212022 and 2020,2021, respectively, for each of the reportable
segments, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2021 |
Insurance | | Healthcare | | Emerging Business | | Analytics | | Total |
|
Revenues, net | $ | 185,879 | | | $ | 58,515 | | | $ | 78,358 | | | $ | 213,727 | | | $ | 536,479 | |
Cost of revenues(1) | 115,452 | | | 35,076 | | | 43,190 | | | 135,804 | | | 329,522 | |
Gross profit(1) | $ | 70,427 | | | $ | 23,439 | | | $ | 35,168 | | | $ | 77,923 | | | $ | 206,957 | |
Operating expenses | | | | | | | | | 129,572 | |
Foreign exchange gain, interest expense and other income, net | | | | | | | | | 418 | |
Income tax expense | | | | | | | | | 17,823 | |
Loss from equity-method investment | | | | | | | | | 28 | |
Net income | | | | | | | | | $ | 59,952 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2022 |
Insurance | | Healthcare | | Emerging Business | | Analytics | | Total |
|
Revenues, net | $ | 211,823 | | | $ | 49,207 | | | $ | 104,620 | | | $ | 310,340 | | | $ | 675,990 | |
Cost of revenues(1) | 135,727 | | | 35,345 | | | 60,427 | | | 197,224 | | | 428,723 | |
Gross profit(1) | $ | 76,096 | | | $ | 13,862 | | | $ | 44,193 | | | $ | 113,116 | | | $ | 247,267 | |
Operating expenses | | | | | | | | | 156,211 | |
Foreign exchange gain, interest expense and other income, net | | | | | | | | | 3,038 | |
Income tax expense | | | | | | | | | 22,327 | |
Gain from equity-method investment | | | | | | | | | 257 | |
Net income | | | | | | | | | $ | 72,024 | |
(1) Exclusive of depreciation and amortization expense.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2021 |
Insurance | | Healthcare | | Emerging Business | | Analytics | | Total |
|
Revenues, net | $ | 185,879 | | | $ | 58,515 | | | $ | 78,358 | | | $ | 213,727 | | | $ | 536,479 | |
Cost of revenues(1) | 115,452 | | | 35,076 | | | 43,190 | | | 135,804 | | | 329,522 | |
Gross profit(1) | $ | 70,427 | | | $ | 23,439 | | | $ | 35,168 | | | $ | 77,923 | | | $ | 206,957 | |
Operating expenses | | | | | | | | | 129,572 | |
Foreign exchange gain, interest expense and other income, net | | | | | | | | | 418 | |
Income tax expense | | | | | | | | | 17,823 | |
Loss from equity-method investment | | | | | | | | | 28 | |
Net income | | | | | | | | | $ | 59,952 | |
(1) Exclusive of depreciation and amortization expense.
Revenues, net by service type, were as follows:
| | | Three months ended June 30, | | Six months ended June 30, | | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
BPM and related services(1) | $ | 163,659 | | | $ | 140,794 | | | $ | 322,752 | | | $ | 294,353 | | |
Digital operations and solutions(1) | | Digital operations and solutions(1) | $ | 185,481 | | | $ | 163,659 | | | $ | 365,650 | | | $ | 322,752 | |
Analytics services | Analytics services | 111,405 | | | 81,679 | | | 213,727 | | | 174,110 | | Analytics services | 161,301 | | | 111,405 | | | 310,340 | | | 213,727 | |
Revenues, net | Revenues, net | $ | 275,064 | | | $ | 222,473 | | | $ | 536,479 | | | $ | 468,463 | | Revenues, net | $ | 346,782 | | | $ | 275,064 | | | $ | 675,990 | | | $ | 536,479 | |
(1) BPMDigital operations and related servicessolutions include revenues of the Company'sCompany’s Insurance, Healthcare and Emerging Business reportable segments. Refer to the reportable segment disclosure above.
The Company attributes the revenues to regions based upon the location of its customers.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 20212022
(In thousands, except share and per share amounts)amount and share count)
The Company attributes the revenues to regions based upon the location of its customers.
| | | Three months ended June 30, | | Six months ended June 30, | | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Revenues, net | Revenues, net | | | | | | | | Revenues, net | | | | | | | |
United States | United States | $ | 235,288 | | | $ | 189,032 | | | $ | 459,656 | | | $ | 396,912 | | United States | $ | 298,520 | | | $ | 235,288 | | | $ | 580,899 | | | $ | 459,656 | |
Non-United States | Non-United States | | Non-United States | |
United Kingdom | United Kingdom | 26,175 | | | 18,830 | | | 50,926 | | | 42,108 | | United Kingdom | 32,090 | | | 26,175 | | | 64,863 | | | 50,926 | |
Rest of World | Rest of World | 13,601 | | | 14,611 | | | 25,897 | | | 29,443 | | Rest of World | 16,172 | | | 13,601 | | | 30,228 | | | 25,897 | |
Total Non-United States | Total Non-United States | 39,776 | | | 33,441 | | | 76,823 | | | 71,551 | | Total Non-United States | 48,262 | | | 39,776 | | | 95,091 | | | 76,823 | |
Revenues, net | Revenues, net | $ | 275,064 | | | $ | 222,473 | | | $ | 536,479 | | | $ | 468,463 | | Revenues, net | $ | 346,782 | | | $ | 275,064 | | | $ | 675,990 | | | $ | 536,479 | |
Long-lived assets by geographic area, which consist of property and equipment, net and operating lease right-of-use assets were as follows:
| | | As of | | As of |
| | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
Long-lived assets | Long-lived assets | | | | Long-lived assets | | | |
India | India | $ | 87,234 | | | $ | 97,261 | | India | $ | 65,899 | | | $ | 79,604 | |
United States | United States | 46,965 | | | 46,659 | | United States | 54,085 | | | 50,095 | |
Philippines | Philippines | 25,635 | | | 29,434 | | Philippines | 20,921 | | | 22,011 | |
Rest of World | Rest of World | 9,957 | | | 11,439 | | Rest of World | 9,706 | | | 10,990 | |
Long-lived assets | Long-lived assets | $ | 169,791 | | | $ | 184,793 | | Long-lived assets | $ | 150,611 | | | $ | 162,700 | |
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 | | As of |
| | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| Accounts receivable, net | Accounts receivable, net | $ | 182,111 | | | $ | 147,635 | | Accounts receivable, net | $ | 237,453 | | | $ | 194,232 | |
Contract assets | Contract assets | $ | 3,547 | | | $ | 4,437 | | Contract assets | $ | 1,648 | | | $ | 2,524 | |
Contract liabilities | | |
Contract liabilities: | | Contract liabilities: | |
Deferred revenue (consideration received in advance) | Deferred revenue (consideration received in advance) | $ | 10,503 | | | $ | 30,450 | | Deferred revenue (consideration received in advance) | $ | 18,617 | | | $ | 18,247 | |
Consideration received for process transition activities | Consideration received for process transition activities | $ | 1,966 | | | $ | 2,774 | | Consideration received for process transition activities | $ | 4,327 | | | $ | 2,203 | |
Accounts receivable includes $89,237$122,943 and $63,995$93,336 as of June 30, 20212022 and December 31, 2020,2021, 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 reduced from revenues. The Company’s assessment did not indicate any impairment losses on its contract assets for the periods presented.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 20212022
(In thousands, except share and per share amounts)amount and share count)
reduced from revenues. The Company’s assessment did not indicate any impairment losses on its contract assets for the periods presented.
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, 20212022 and 2020,2021, 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 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Deferred revenue (consideration received in advance) | $ | 4,306 | | | $ | 3,332 | | | $ | 13,870 | | | $ | 26,953 | |
Consideration received for process transition activities | $ | 298 | | | $ | 508 | | | $ | 664 | | | $ | 1,187 | |
Contract acquisition and fulfillment costs
The following table provides details of the Company’s contract acquisition and fulfillment costs:
| | | Contract Acquisition Costs | | Contract Acquisition Costs |
| | Three months ended | | Six months ended | | Year ended | | Three months ended | | Six months ended | | Year ended |
| | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 | | December 31, 2020 | | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 | | December 31, 2021 |
| Opening Balance | Opening Balance | $ | 785 | | | $ | 1,215 | | | $ | 1,027 | | | $ | 1,307 | | | $ | 1,307 | | Opening Balance | $ | 927 | | | $ | 785 | | | $ | 511 | | | $ | 1,027 | | | $ | 1,027 | |
Additions | Additions | 374 | | | 187 | | | 374 | | | 187 | | | 310 | | Additions | 180 | | | 374 | | | 727 | | | 374 | | | 277 | |
Amortization | Amortization | (292) | | | (132) | | | (534) | | | (224) | | | (590) | | Amortization | (124) | | | (292) | | | (255) | | | (534) | | | (793) | |
Closing Balance | Closing Balance | $ | 867 | | | $ | 1,270 | | | $ | 867 | | | $ | 1,270 | | | $ | 1,027 | | Closing Balance | $ | 983 | | | $ | 867 | | | $ | 983 | | | $ | 867 | | | $ | 511 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Contract Fulfillment Costs |
| Three months ended | | Six months ended | | Year ended |
| June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 | | December 31, 2021 |
| | | | | | | | | |
Opening Balance | $ | 7,435 | | | $ | 4,419 | | | $ | 5,795 | | | $ | 5,631 | | | $ | 5,631 | |
Additions | 3,308 | | | 158 | | | 5,485 | | | 164 | | | 3,742 | |
Amortization | (576) | | | (883) | | | (1,113) | | | (2,101) | | | (3,578) | |
Closing Balance | $ | 10,167 | | | $ | 3,694 | | | $ | 10,167 | | | $ | 3,694 | | | $ | 5,795 | |
There was 0no impairment for contract acquisition and contract fulfillment costs as of June 30, 20212022 and December 31, 2020.2021. 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
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2022
(In thousands, except per share amount and share count)
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 | | As of |
| | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
Accounts receivable, including unbilled receivables | Accounts receivable, including unbilled receivables | $ | 182,841 | | | $ | 148,824 | | Accounts receivable, including unbilled receivables | $ | 238,297 | | | $ | 194,805 | |
Less: Allowance for expected credit loss | (730) | | | (1,189) | | |
Less: Allowance for expected credit losses | | Less: Allowance for expected credit losses | (844) | | | (573) | |
Accounts receivable, net | Accounts receivable, net | $ | 182,111 | | | $ | 147,635 | | Accounts receivable, net | $ | 237,453 | | | $ | 194,232 | |
The movement in allowance“Allowance for expected credit losslosses” 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 | | Three months ended | | Six months ended | | Year ended |
| | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 | | December 31, 2020 | | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 | | December 31, 2021 |
Balance at the beginning of the period | Balance at the beginning of the period | $ | 1,183 | | | $ | 1,346 | | | $ | 1,189 | | | $ | 1,163 | | | $ | 1,163 | | Balance at the beginning of the period | $ | 588 | | | $ | 1,183 | | | $ | 573 | | | $ | 1,189 | | | $ | 1,189 | |
Additions / (Reductions) during the period | (445) | | | 186 | | | (395) | | | 381 | | | 300 | | |
Charged against allowance | (13) | | | (100) | | | (73) | | | (100) | | | (269) | | |
Additions / (reductions) during the period | | Additions / (reductions) during the period | 571 | | | (445) | | | 743 | | | (395) | | | (496) | |
Reductions due to write-off of Accounts Receivables | | Reductions due to write-off of Accounts Receivables | (314) | | | (13) | | | (472) | | | (73) | | | (129) | |
Translation adjustment | Translation adjustment | 5 | | | 2 | | | 9 | | | (10) | | | (5) | | Translation adjustment | (1) | | | 5 | | | — | | | 9 | | | 9 | |
Balance at the end of the period | Balance at the end of the period | $ | 730 | | | $ | 1,434 | | | $ | 730 | | | $ | 1,434 | | | $ | 1,189 | | Balance at the end of the period | $ | 844 | | | $ | 730 | | | $ | 844 | | | $ | 730 | | | $ | 573 | |
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 an assumed conversion premium of outstanding convertible notes, using the treasury stock method.method (as discussed further in the subsequent paragraph). Common stock equivalents and the 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.
DilutedIn 2021, diluted weighted-average shares outstanding iswas affected by the treatment of ourthe Company’s 3.5% per annum Convertible Senior Notes due October 1, 2024 (the “Notes”). The Company hashad a choice to settle the Notes in cash, shares or any combination of the two. The Company presently intends and hashad 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 for the portion of the period until actual settlement and 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 toDuring the unaudited consolidated financial statementsthird quarter of 2021, the Company settled the Notes by electing a combination of cash and shares of the Company’s common stock and as such included the count of shares issued on settlement in the calculation of basic earnings per share for further details.the portion of the period outstanding.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 20212022
(In thousands, except share and per share amounts)amount and share count)
The following table sets forth the computation of basic and diluted earnings per share:
| | | Three months ended June 30, | | Six months ended June 30, | | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Numerators: | Numerators: | | | | | | | | Numerators: | | | | | | | |
Net income | Net income | $ | 28,021 | | | $ | 8,429 | | | $ | 59,952 | | | $ | 30,840 | | Net income | $ | 35,846 | | | $ | 28,021 | | | $ | 72,024 | | | $ | 59,952 | |
Denominators: | Denominators: | | Denominators: | |
Basic weighted average common shares outstanding | Basic weighted average common shares outstanding | 33,571,074 | | | 34,486,202 | | | 33,652,146 | | | 34,443,884 | | Basic weighted average common shares outstanding | 33,403,411 | | | 33,571,074 | | | 33,422,618 | | | 33,652,146 | |
Dilutive effect of share-based awards | Dilutive effect of share-based awards | 330,063 | | | 111,486 | | | 336,528 | | | 215,262 | | Dilutive effect of share-based awards | 427,128 | | | 330,063 | | | 439,979 | | | 336,528 | |
Dilutive effect of conversion premium on convertible notes | 488,631 | | | 0 | | | 364,919 | | | 0 | | |
Dilutive effect of conversion premium on the Notes | | Dilutive effect of conversion premium on the Notes | — | | | 488,631 | | | — | | | 364,919 | |
Diluted weighted average common shares outstanding | Diluted weighted average common shares outstanding | 34,389,768 | | | 34,597,688 | | | 34,353,593 | | | 34,659,146 | | Diluted weighted average common shares outstanding | 33,830,539 | | | 34,389,768 | | | 33,862,597 | | | 34,353,593 | |
Earnings per share attributable to ExlService Holdings Inc. stockholders: | Earnings per share attributable to ExlService Holdings Inc. stockholders: | | | | | | Earnings per share attributable to ExlService Holdings Inc. stockholders: | | | | | |
Basic | Basic | $ | 0.83 | | | $ | 0.24 | | | $ | 1.78 | | | $ | 0.90 | | Basic | $ | 1.07 | | | $ | 0.83 | | | $ | 2.15 | | | $ | 1.78 | |
Diluted | Diluted | $ | 0.81 | | | $ | 0.24 | | | $ | 1.75 | | | $ | 0.89 | | Diluted | $ | 1.06 | | | $ | 0.81 | | | $ | 2.13 | | | $ | 1.75 | |
Weighted average potentially dilutive shares considered anti-dilutive and not included in computing diluted earnings per share | Weighted average potentially dilutive shares considered anti-dilutive and not included in computing diluted earnings per share | 1,748 | | | 638,318 | | | 874 | | | 404,315 | | Weighted average potentially dilutive shares considered anti-dilutive and not included in computing diluted earnings per share | 0 | | | 1,748 | | | 541 | | | 874 | |
6. Cash, Cash Equivalents and Restricted Cash
For the purposepurposes of the 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 | |
| | | | | | | | | | | | | | | | | |
| As of |
| June 30, 2022 | | June 30, 2021 | | December 31, 2021 |
Cash and cash equivalents | $ | 106,304 | | | $ | 150,211 | | | $ | 135,337 | |
Restricted cash (current) | 6,840 | | | 5,065 | | | 6,174 | |
Restricted cash (non-current) | 2,056 | | | 2,260 | | | 2,299 | |
Cash, cash equivalents and restricted cash | $ | 115,200 | | | $ | 157,536 | | | $ | 143,810 | |
7. Other Income,Income/(Loss), net
Other income,income/(loss), net consists of the following:
| | | Three months ended June 30, | | Six months ended June 30, | | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Gain on sale and mark-to-market of mutual funds | $ | 1,655 | | | $ | 3,109 | | | $ | 2,758 | | | $ | 5,166 | | |
Gain on sale and mark-to-market of mutual funds and money market funds | | Gain on sale and mark-to-market of mutual funds and money market funds | $ | 634 | | | $ | 1,655 | | | $ | 1,870 | | | $ | 2,758 | |
Interest and dividend income | Interest and dividend income | 689 | | | 632 | | | 1,291 | | | 1,164 | | Interest and dividend income | 847 | | | 689 | | | 2,217 | | | 1,291 | |
Others, net | Others, net | (129) | | | 484 | | | (424) | | | 424 | | Others, net | (1,655) | | | (129) | | | (1,850) | | | (424) | |
Other income, net | $ | 2,215 | | | $ | 4,225 | | | $ | 3,625 | | | $ | 6,754 | | |
Other income/(loss), net | | Other income/(loss), net | $ | (174) | | | $ | 2,215 | | | $ | 2,237 | | | $ | 3,625 | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 20212022
(In thousands, except share and per share amounts)amount and share count)
8. Property and Equipment, net
Property and equipment, net consists of the following:
| | | Estimated useful lives | | As of | | Estimated useful lives | | As of |
| | (Years) | | June 30, 2021 | | December 31, 2020 | | (Years) | | June 30, 2022 | | December 31, 2021 |
Owned Assets: | Owned Assets: | | | | | | Owned Assets: | | | | | |
Network equipment and computers | Network equipment and computers | 3-5 | | $ | 110,321 | | | $ | 107,016 | | Network equipment and computers | 3-5 | | $ | 123,117 | | | $ | 116,023 | |
Software | Software | 3-5 | | 99,187 | | | 99,708 | | Software | 2-5 | | 105,924 | | | 101,884 | |
Leasehold improvements | Leasehold improvements | 3-8 | | 42,547 | | | 48,052 | | Leasehold improvements | 3-8 | | 44,448 | | | 46,401 | |
Office furniture and equipment | Office furniture and equipment | 3-8 | | 20,276 | | | 22,210 | | Office furniture and equipment | 3-8 | | 20,892 | | | 22,302 | |
Motor vehicles | Motor vehicles | 2-5 | | 619 | | | 599 | | Motor vehicles | 2-5 | | 595 | | | 693 | |
Buildings | Buildings | 30 | | 1,070 | | | 1,089 | | Buildings | 30 | | 1,007 | | | 1,070 | |
Land | Land | — | | 700 | | | 712 | | Land | — | | 659 | | | 700 | |
Capital work in progress | Capital work in progress | — | | 5,766 | | | 4,647 | | Capital work in progress | — | | 8,508 | | | 10,288 | |
| | 280,486 | | | 284,033 | | | 305,150 | | | 299,361 | |
Less: Accumulated depreciation and amortization | Less: Accumulated depreciation and amortization | | (194,377) | | | (191,629) | | Less: Accumulated depreciation and amortization | | (222,870) | | | (213,699) | |
| | $ | 86,109 | | | $ | 92,404 | | | $ | 82,280 | | | $ | 85,662 | |
Right-of-use assets under finance leases: | | | | | |
Right-of-use assets under finance leases:* | | Right-of-use assets under finance leases:* | | | | |
Network equipment and computers | Network equipment and computers | | $ | 91 | | | $ | 93 | | Network equipment and computers | | $ | 86 | | | $ | 91 | |
Leasehold improvements | Leasehold improvements | | 1,126 | | | 817 | | Leasehold improvements | | 1,061 | | | 1,229 | |
Office furniture and equipment | Office furniture and equipment | | 725 | | | 255 | | Office furniture and equipment | | 685 | | | 787 | |
Motor vehicles | Motor vehicles | | 656 | | | 688 | | Motor vehicles | | 600 | | | 578 | |
| | 2,598 | | | 1,853 | | | 2,432 | | | 2,685 | |
Less: Accumulated depreciation and amortization | Less: Accumulated depreciation and amortization | | (2,196) | | | (1,382) | | Less: Accumulated depreciation and amortization | | (2,063) | | | (2,339) | |
| | $ | 402 | | | $ | 471 | | | $ | 369 | | | $ | 346 | |
Property and equipment, net | Property and equipment, net | | $ | 86,511 | | | $ | 92,875 | | Property and equipment, net | | $ | 82,649 | | | $ | 86,008 | |
*Depreciation on assets held under finance leases are computed using the straight-line method over the shorter of the assets estimated useful lives or the lease term.
Capital work in progress represents advances paid towards acquisition of property and equipment and costs incurred on internally developed software not yet ready to be placed in service.
During the three and six months ended June 30, 2021,2022, there were no changes in estimated useful lives of property and equipment.equipment during the ordinary course of operations.
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 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Depreciation and amortization expense | $ | 9,929 | | | $ | 8,913 | | | $ | 19,045 | | | $ | 17,653 | |
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)
June 30, 20212022
(In thousands, except share and per share amounts)amount and share count)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Effect of foreign exchange gain/(loss) | | $ | (5) | | | $ | 158 | | | $ | 62 | | | $ | 323 | |
Internally developed software costs, included under Software, was as follows:
| | | As of | | As of |
| | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
Cost | Cost | $ | 18,827 | | | $ | 18,371 | | Cost | $ | 27,015 | | | $ | 19,289 | |
Less : Accumulated amortization | Less : Accumulated amortization | (8,070) | | | (5,998) | | Less : Accumulated amortization | (12,788) | | | (10,226) | |
Internally developed software, net | Internally developed software, net | $ | 10,757 | | | $ | 12,373 | | Internally developed software, net | $ | 14,227 | | | $ | 9,063 | |
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 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Amortization expense | $ | 1,549 | | | $ | 1,055 | | | $ | 2,582 | | | $ | 2,079 | |
As of June 30, 20212022 and December 31, 2020,2021, the Company believes 0no 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.
9. Business Combination, Goodwill and Intangible Assets
GoodwillClairvoyant AI Inc.
On December 16, 2021, the Company, through its wholly owned subsidiary ExlService.com, LLC (“Buyer”), completed the acquisition of Clairvoyant, a Delaware corporation, pursuant to an equity securities purchase agreement dated December 16, 2021 (the “Purchase Agreement”). The Company purchased 100% of the issued and outstanding equity securities in Clairvoyant.
Clairvoyant is a global technology consulting and services company that helps organizations in their business transformation by maximizing the value of data through actionable insights. It provides data engineering, analytics, machine learning, product engineering, and cloud-based solutions. The acquisition strengthens the Company’s capabilities by adding additional expertise in data engineering and cloud enablement, further supporting its clients in insurance, healthcare, banking and financial services, and retail.
The aggregate purchase consideration payable was $90,325, including cash and cash equivalents acquired, debt, other post-closing adjustments and contingent consideration. The base purchase consideration payable at closing of the acquisition (the “Closing”) was $80,080, excluding cash and cash equivalents acquired, debt and estimated other post-closing adjustments. As of June 30, 2022 and December 31, 2021, of the total purchase consideration, the Company transitionedhas paid $78,234 and $76,831, respectively, net of cash and cash equivalents acquired. The Purchase Agreement also allows sellers the ability to new segment reporting structure effective January 1, 2020, which resulted inearn up to $20,000 of contingent consideration, based on the achievement of certain changes to its operating segmentsperformance goals by Clairvoyant during the 2022 and reporting units.2023 calendar years. The Company reallocated goodwill to its reporting units using a relativecontingent consideration had an estimated fair value approach. In addition,of $10,000 and $9,000, as of June 30, 2022 and December 31, 2021, respectively, and has been presented as contingent consideration under “Other non-current liabilities” and “Accrued expenses and other current liabilities,” as applicable, in the Company completed an assessmentconsolidated balance sheets. Changes in the fair value of any potential goodwill impairment for all its reporting units immediately prior tocontingent consideration were recognized in the reallocationunaudited consolidated statements of income and determined that no impairment existed.
presented as a part of
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 20212022
(In thousands, except share and per share amounts)amount and share count)
“Other income/(loss), net.” A portion of the purchase consideration otherwise payable was placed into escrow as security for the post-closing working capital adjustments and the indemnification obligations under the Purchase Agreement. To finance the acquisition at the Closing, the Company utilized its revolving Credit Facility in the amount of $75,000 and paid the balance with available cash on hand.
The Company accounted for the business combination using the acquisition method of accounting.
Pursuant to the Company’s business combinations accounting policy, the aggregate purchase consideration for Clairvoyant was allocated to identifiable net tangible and intangible assets based upon their fair values. The excess of the estimated purchase consideration over fair value of identifiable net tangible and intangible assets was recorded as goodwill. In order to allocate the consideration transferred for Clairvoyant, the fair values of all identifiable assets and liabilities must be established. For accounting and financial reporting purposes, fair value is defined under ASC No. 820, Fair Value Measurement and Disclosure, as the price that would be received upon sale of an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date. Market participants are assumed to be buyers and sellers in the principal (most advantageous) market for the asset or liability. Additionally, fair value measurements for an asset assume the highest and best use of that asset by market participants. Use of different estimates and judgments could yield different results.
The tables below presents the fair value of the consideration exchanged and the allocation of purchase consideration to the major classes of assets and liabilities of Clairvoyant as of December 16, 2021:
| | | | | | | |
Assets: | | | |
Cash and cash equivalents | | | $ | 5,598 | |
Accounts receivable, net | | | 8,709 | |
Other current assets | | | 360 | |
Property and equipment, net | | | 398 | |
Intangible assets, net | | | |
Customer relationships | | | 31,600 | |
Developed technology | | | 2,070 | |
Trade names and trademarks | | | 300 | |
Non-compete agreements | | | 300 | |
Other assets | | | 217 | |
Total assets | | | $ | 49,552 | |
| | | |
Liabilities: | | | |
Accounts payable | | | $ | (1,199) | |
Accrued expenses and other current liabilities | | | (4,873) | |
Deferred tax liabilities | | | (9,383) | |
Other non-current liabilities | | | (1,226) | |
Total liabilities | | | (16,681) | |
Net assets acquired | | | 32,871 | |
Goodwill | | | 57,454 | |
Total purchase consideration* | | | $ | 90,325 | |
* Includes contingent consideration of $9,000 recognized at fair value as of the date of acquisition.
During the three and six months ended June 30, 2022, the Company recognized measurement period adjustments, which led to increase in goodwill in an amount of $1,081 and $2,229, respectively. These adjustments primarily relate to an increase in income tax liabilities of $988 included under “other non-current liabilities” and post-closing purchase adjustments.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2022
(In thousands, except per share amount and share count)
The fair values of customer relationships were determined by using an “income approach,” specifically the Multi-Period Excess Earnings Method. The customer relationship assets are being amortized on a straight-line basis (which approximates the economic pattern of benefits) over the estimated economic life of 7 years.
The fair values of the developed technology intangible assets were determined by using the “cost approach,” specifically the replacement cost method. The technology assets are being amortized on a straight-line basis (which approximates the economic pattern of benefits) over the estimated economic life of 3 years.
The goodwill recognized represents the acquired capabilities, operating synergies and other benefits expected to result from combining the acquired operations with the Company’s existing operations. The amount of goodwill recognized from Clairvoyant’s acquisition is not deductible for tax purposes. The goodwill has been assigned to the Company’s Analytics reportable segment based upon the Company’s assessment of nature of services rendered by Clairvoyant.
Acquisition-related costs are being expensed as incurred and are included in general and administrative expenses in the consolidated statements of income. The Company recognized acquisition-related costs of $nil and $134 during the three and six months ended June 30, 2022, respectively, and $761 during the year ended December 31, 2021.
The results of operations of the acquired business and the fair value of the acquired assets and assumed liabilities are included in the Company’s consolidated financial statements with effect from the date of the acquisition. The acquisition did not materially impact the Company’s financial position, results of operations or cash flows, and therefore, the Company has not provided supplemental pro forma results.
Inbound Media Group, LLC
On June 10, 2022, the Company, through its wholly owned subsidiary ExlService.com, LLC, entered into an Asset Purchase Agreement to acquire certain assets of Inbound, a Wyoming limited liability company, which is a digital marketing business focused primarily on lead generation in the insurance space, for cash consideration of $1,469 and contingent consideration with an estimated fair value of $1,439 as of the date of acquisition based on the achievement of certain performance goals by Inbound during the 2022 to 2024 calendar years.
The Company accounted for this business combination using the acquisition method of accounting. Goodwill and intangible assets of $1,992 and $916, respectively, were recognized by the Company as a result of this transaction. The goodwill recognized for this business is deductible for income tax purposes. The acquisition strengthens the Company’s capabilities in digital direct-to-consumer marketing by adding performance marketing, lead generation and customer engagement capabilities to its suite of end-to-end marketing solutions, proprietary data sets and robust consumer analytics.
The results of operations of the acquired business and the fair value of the net assets acquired are included in the Company’s consolidated financial statements with effect from the date of the acquisition. The acquisition did not materially impact the Company’s financial position, results of operations or cash flows, and therefore, the Company has not provided unaudited supplemental pro forma results.
Goodwill
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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Insurance | | Healthcare | | Emerging Business | | Analytics | | Total |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Balance at January 1, 2022 | $ | 50,428 | | | $ | 21,942 | | | $ | 49,020 | | | $ | 282,512 | | | $ | 403,902 | |
Acquisition | — | | | — | | | — | | | 1,992 | | | 1,992 | |
Measurement period adjustments | — | | | — | | | — | | | 2,229 | | | 2,229 | |
Currency translation adjustments | (399) | | | (39) | | | (1,109) | | | (1) | | | (1,548) | |
Balance at June 30, 2022 | $ | 50,029 | | | $ | 21,903 | | | $ | 47,911 | | | $ | 286,732 | | | $ | 406,575 | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2022
(In thousands, except per share amount and share count)
During the fourth quarter of 2020,2021, 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, 2021,2022, 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 continuedcertain 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, generation and the Company’savailability of cash and expansion plans. The Company reviewed key assumptions, including revisions of projected future revenues for reporting units against the results of the annual impairment test performed during the fourth quarter of 2021. The Company did not identify any triggers or indications of potential impairment for its reporting units as of June 30, 2021.2022.
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 continuecontinues 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:
| | | | | | | | | | | | | | | | | |
| As of June 30, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Finite-lived intangible assets: | | | | | |
Customer relationships | $ | 99,146 | | | $ | (34,139) | | | $ | 65,007 | |
Developed technology | 24,878 | | | (18,326) | | | 6,552 | |
Trade names and trademarks | 1,700 | | | (1,157) | | | 543 | |
Non-compete agreements | 336 | | | (40) | | | 296 | |
| $ | 126,060 | | | $ | (53,662) | | | $ | 72,398 | |
Indefinite-lived intangible assets: | | | | | |
Trade names and trademarks | $ | 900 | | | $ | — | | | $ | 900 | |
Total intangible assets | $ | 126,960 | | | $ | (53,662) | | | $ | 73,298 | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 20212022
(In thousands, except share and per share amounts)amount and share count)
| | | | | | | | | | | | | | | | | |
| As of June 30, 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Finite-lived intangible assets: | | | | | |
Customer relationships | $ | 71,416 | | | $ | (29,341) | | | $ | 42,075 | |
Developed technology | 23,533 | | | (14,123) | | | 9,410 | |
Trade names and trademarks | 5,100 | | | (4,632) | | | 468 | |
| $ | 100,049 | | | $ | (48,096) | | | $ | 51,953 | |
Indefinite-lived intangible assets: | | | | | |
Trade names and trademarks | $ | 900 | | | $ | — | | | $ | 900 | |
Total intangible assets | $ | 100,949 | | | $ | (48,096) | | | $ | 52,853 | |
| | | As of December 31, 2020 | | As of December 31, 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: | | | | | | Finite-lived intangible assets: | | | | | |
Customer relationships | Customer relationships | $ | 73,357 | | | $ | (27,464) | | | $ | 45,893 | | Customer relationships | $ | 103,016 | | | $ | (33,018) | | | $ | 69,998 | |
Developed technology | Developed technology | 23,510 | | | (11,858) | | | 11,652 | | Developed technology | 25,040 | | | (15,850) | | | 9,190 | |
Trade names and trademarks | Trade names and trademarks | 5,100 | | | (3,951) | | | 1,149 | | Trade names and trademarks | 1,700 | | | (1,006) | | | 694 | |
Non-compete agreements | | Non-compete agreements | 300 | | | — | | | 300 | |
| | $ | 101,967 | | | $ | (43,273) | | | $ | 58,694 | | | $ | 130,056 | | | $ | (49,874) | | | $ | 80,182 | |
Indefinite-lived intangible assets: | Indefinite-lived intangible assets: | | Indefinite-lived intangible assets: | |
Trade names and trademarks | Trade names and trademarks | $ | 900 | | | $ | — | | | $ | 900 | | Trade names and trademarks | $ | 900 | | | $ | — | | | $ | 900 | |
Total intangible assets | Total intangible assets | $ | 102,867 | | | $ | (43,273) | | | $ | 59,594 | | Total intangible assets | $ | 130,956 | | | $ | (49,874) | | | $ | 81,082 | |
The amortization expense 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 June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Amortization expense | $ | 4,146 | | | $ | 3,397 | | | $ | 8,632 | | | $ | 6,758 | |
The remaining weighted average life of intangible assets is as follows:
| | | | | |
| (in years) |
Customer relationships | 6.56.0 |
Developed technology | 2.31.6 |
Trade names and trademarks (Finite lived) | 2.0 |
Non-compete agreements | 3.3 |
| 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 | | |
Estimated future amortization expense related to finite-lived intangible assets as of June 30, 2022 was as follows: | | Estimated future amortization expense related to finite-lived intangible assets as of June 30, 2022 was as follows: |
2022 (July 1 - December 31) | | 2022 (July 1 - December 31) | $ | 8,445 | |
2023 | 2023 | 9,054 | | 2023 | 14,595 | |
2024 | 2024 | 6,712 | | 2024 | 12,084 | |
2025 | 2025 | 5,960 | | 2025 | 10,648 | |
2026 and thereafter | 12,862 | | |
2026 | | 2026 | 10,313 | |
2027 and thereafter | | 2027 and thereafter | 16,313 | |
Total | Total | $ | 51,953 | | Total | $ | 72,398 | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 20212022
(In thousands, except share and per share amounts)amount and share count)
10. Other Current Assets
Other current assets consist of the following:
| | | As of | | As of |
| | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
Receivables from statutory authorities | | Receivables from statutory authorities | $ | 13,299 | | | $ | 18,023 | |
Derivative instruments | Derivative instruments | $ | 7,560 | | | $ | 9,755 | | Derivative instruments | 2,865 | | | 8,682 | |
Advances to suppliers | Advances to suppliers | 2,672 | | | 3,906 | | Advances to suppliers | 2,172 | | | 1,464 | |
Receivables from statutory authorities | 16,040 | | | 15,658 | | |
Deferred contract fulfillment costs | | Deferred contract fulfillment costs | 1,315 | | | 1,483 | |
Contract assets | Contract assets | 1,742 | | | 1,814 | | Contract assets | 872 | | | 1,319 | |
Deferred contract fulfillment costs | 1,935 | | | 2,888 | | |
Interest accrued on term deposits | Interest accrued on term deposits | 453 | | | 169 | | Interest accrued on term deposits | 645 | | | 892 | |
Others | Others | 3,213 | | | 2,919 | | Others | 1,975 | | | 2,146 | |
Other current assets | Other current assets | $ | 33,615 | | | $ | 37,109 | | Other current assets | $ | 23,143 | | | $ | 34,009 | |
11. Other Assets
Other assets consist of the following:
| | | As of | | As of |
| | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
Long-term investments | | Long-term investments | $ | 22,997 | | | $ | 186 | |
Lease deposits | Lease deposits | $ | 9,721 | | | $ | 9,788 | | Lease deposits | 9,251 | | | 9,649 | |
Deferred contract fulfillment costs | | Deferred contract fulfillment costs | 8,852 | | | 4,312 | |
Deposits with statutory authorities | | Deposits with statutory authorities | 6,516 | | | 6,417 | |
Derivative instruments | Derivative instruments | 4,631 | | | 6,933 | | Derivative instruments | 1,043 | | | 6,307 | |
Deposits with statutory authorities | 6,255 | | | 6,341 | | |
Term deposits | 180 | | | 216 | | |
Contract assets | Contract assets | 1,805 | | | 2,623 | | Contract assets | 776 | | | 1,205 | |
Deferred contract fulfillment costs | 1,759 | | | 2,743 | | |
Receivable from Statutory authorities | | Receivable from Statutory authorities | 225 | | | 222 | |
Others | Others | 3,121 | | | 3,455 | | Others | 3,535 | | | 2,071 | |
Other assets | Other assets | $ | 27,472 | | | $ | 32,099 | | Other assets | $ | 53,195 | | | $ | 30,369 | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 20212022
(In thousands, except share and per share amounts)amount and share count)
12. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
| | | As of | | As of |
| | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
Accrued expenses | Accrued expenses | $ | 42,169 | | | $ | 39,951 | | Accrued expenses | $ | 47,611 | | | $ | 44,405 | |
Payable to statutory authorities | Payable to statutory authorities | 17,850 | | | 10,594 | | Payable to statutory authorities | 15,032 | | | 13,902 | |
Accrued capital expenditures | 4,921 | | | 7,857 | | |
Derivative instruments | Derivative instruments | 681 | | | 435 | | Derivative instruments | 6,617 | | | 1,852 | |
Client liabilities | Client liabilities | 5,131 | | | 4,740 | | Client liabilities | 6,461 | | | 6,097 | |
Contingent consideration | | Contingent consideration | 5,280 | | | — | |
Accrued capital expenditures | | Accrued capital expenditures | 2,277 | | | 8,630 | |
Interest payable | Interest payable | 1,398 | | | 1,399 | | Interest payable | 282 | | | 252 | |
Finance lease liabilities | | Finance lease liabilities | 127 | | | 141 | |
Other current liabilities | Other current liabilities | 4,080 | | | 1,205 | | Other current liabilities | 5,343 | | | 1,071 | |
Finance lease liabilities | 194 | | | 229 | | |
Accrued expenses and other current liabilities | Accrued expenses and other current liabilities | $ | 76,424 | | | $ | 66,410 | | Accrued expenses and other current liabilities | $ | 89,030 | | | $ | 76,350 | |
13. Other Non-Current Liabilities
Other non-current liabilities consist of the following:
| | | As of | | As of |
| | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
Retirement benefits | | Retirement benefits | $ | 11,029 | | | $ | 9,604 | |
Contingent consideration | | Contingent consideration | 6,159 | | | 9,000 | |
Derivative instruments | Derivative instruments | $ | 1,052 | | | $ | 29 | | Derivative instruments | 3,978 | | | 1,785 | |
Unrecognized tax benefits | Unrecognized tax benefits | 907 | | | 907 | | Unrecognized tax benefits | 2,142 | | | 1,068 | |
Retirement benefits | 9,332 | | | 8,940 | | |
Deferred transition revenue | Deferred transition revenue | 724 | | | 924 | | Deferred transition revenue | 2,957 | | | 995 | |
Accrued capital expenditures | 0 | | | 3,486 | | |
Other liabilities | 3,311 | | | 3,568 | | |
Finance lease liabilities | Finance lease liabilities | 255 | | | 281 | | Finance lease liabilities | 262 | | | 229 | |
| Others | | Others | 885 | | | 120 | |
Other non-current liabilities | Other non-current liabilities | $ | 15,581 | | | $ | 18,135 | | Other non-current liabilities | $ | 27,412 | | | $ | 22,801 | |
14. Accumulated Other Comprehensive LossIncome/(Loss)
Accumulated other comprehensive lossincome/(loss) (“AOCL”AOCI”) consists of actuarial gain/(loss) on retirement benefits and 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 815. Cumulative changes in the fair values of these foreign currency exchange contracts are recognized in AOCLAOCI on the Company'sCompany’s unaudited consolidated balance sheets. Upon settlement of foreign exchange contracts designated as cash flow hedges, fair value changes are reclassified from AOCLAOCI 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 June 30, 20212022 and June 30, 20202021 are as follows:
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 20212022
(In thousands, except share and per share amounts)amount and share count)
| | | | | | | | | | | | | | | | | | | | | | | |
| 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) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Accumulated Other Comprehensive Income/(Loss) |
| Foreign currency translation loss | | Unrealized gain/(loss) on cash flow hedges | | Retirement benefits | | Total |
Balance as of January 1, 2022 | $ | (95,437) | | | $ | 8,420 | | | $ | (2,457) | | | $ | (89,474) | |
Losses recognized during the period | (30,227) | | | (15,149) | | | — | | | (45,376) | |
| | | | | | | |
Reclassification to net income (1) | — | | | (3,448) | | | 304 | | | (3,144) | |
Income tax effects (2) | 979 | | | 3,733 | | | (92) | | | 4,620 | |
Accumulated other comprehensive income/(loss) as of June 30, 2022 | $ | (124,685) | | | $ | (6,444) | | | $ | (2,245) | | | $ | (133,374) | |
| | | | | | | |
Balance as of January 1, 2021 | $ | (86,185) | | | $ | 13,799 | | | $ | (2,598) | | | $ | (74,984) | |
Losses recognized during the period | (6,686) | | | (303) | | | — | | | (6,989) | |
Losses on net investment hedges | (1,134) | | | — | | | — | | | (1,134) | |
Reclassification to net income (1) | — | | | (5,695) | | | 355 | | | (5,340) | |
Income tax effects (2) | 1,229 | | | 595 | | | (122) | | | 1,702 | |
Accumulated other comprehensive income/(loss) as of June 30, 2021 | $ | (92,776) | | | $ | 8,396 | | | $ | (2,365) | | | $ | (86,745) | |
(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
June 30, 20212022 and December 31, 2020.2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Other Unobservable Inputs | | |
As of June 30, 2022 | (Level 1) | | (Level 2) | | (Level 3) | | Total |
Assets | | | | | | | |
Cash equivalents - Money market funds* | $ | 332 | | | $ | — | | | $ | — | | | $ | 332 | |
Mutual funds** | 107,425 | | | — | | | — | | | 107,425 | |
Derivative financial instruments | — | | | 3,908 | | | — | | | 3,908 | |
Total | $ | 107,757 | | | $ | 3,908 | | | $ | — | | | $ | 111,665 | |
Liabilities | | | | | | | |
Derivative financial instruments | $ | — | | | $ | 10,595 | | | $ | — | | | $ | 10,595 | |
Contingent consideration*** | — | | | — | | | 11,439 | | | 11,439 | |
Total | $ | — | | | $ | 10,595 | | | $ | 11,439 | | | $ | 22,034 | |
| | | | | | | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 20212022
(In thousands, except share and per share amounts)amount and share count)
| | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Other Unobservable Inputs | | | 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 | |
As of December 31, 2021 | | As of December 31, 2021 | (Level 1) | | (Level 2) | | (Level 3) | | Total |
Assets | Assets | | | | | | | | Assets | | | | | | | |
Mutual funds* | $ | 96,481 | | | $ | 0 | | | $ | 0 | | | $ | 96,481 | | |
Cash equivalents - Money market funds* | | Cash equivalents - Money market funds* | $ | 5,374 | | | $ | — | | | $ | — | | | $ | 5,374 | |
Mutual funds** | | Mutual funds** | 127,551 | | | — | | | — | | | 127,551 | |
Derivative financial instruments | Derivative financial instruments | 0 | | | 12,191 | | | 0 | | | 12,191 | | Derivative financial instruments | — | | | 14,989 | | | — | | | 14,989 | |
Total | Total | $ | 96,481 | | | $ | 12,191 | | | $ | 0 | | | $ | 108,672 | | Total | $ | 132,925 | | | $ | 14,989 | | | $ | — | | | $ | 147,914 | |
Liabilities | Liabilities | | | | | | | | Liabilities | | | | | | | |
Derivative financial instruments | Derivative financial instruments | $ | 0 | | | $ | 1,733 | | | $ | 0 | | | $ | 1,733 | | Derivative financial instruments | $ | — | | | $ | 3,637 | | | $ | — | | | $ | 3,637 | |
Contingent consideration*** | | Contingent consideration*** | — | | | — | | | 9,000 | | | 9,000 | |
Total | Total | $ | 0 | | | $ | 1,733 | | | $ | 0 | | | $ | 1,733 | | Total | $ | — | | | $ | 3,637 | | | $ | 9,000 | | | $ | 12,637 | |
| | 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 money market funds which are carried at the fair value option under ASC 825 “Financial Instruments”.
** Represents those short-term investments which are carried at the fair value option under ASC 825 "Financial“Financial Instruments”.
*** Contingent consideration is presented under “Accrued Expenses and Other Current Liabilities” and “Other Non-Current Liabilities,” as applicable, in the consolidated balance sheets.
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. Refer to Note 16 - Derivatives and Hedge Accounting to the unaudited consolidated financial statements for further details.
Fair Value of Contingent Consideration:
The fair value measurement of contingent consideration is determined using Level 3 inputs. The Company’s contingent consideration represents a component of the total purchase consideration for its acquisition of Clairvoyant and Inbound. The measurement is calculated using unobservable inputs based on the Company’s own assessment of achievement of certain performance goals by Clairvoyant during the 2022 and 2023 calendar years and Inbound during the 2022 to 2024 calendar years. The Company estimated the fair value of the contingent consideration to be $11,439 and $9,000, as of June 30, 2022 and December 31, 2021, respectively, based on the Monte Carlo simulation model and scenario-based method. Refer to Note 9 - Business Combination, Goodwill and Intangible Assets to the unaudited consolidated financial statements for further details.
Financial instruments not carriedInstruments Not Carried at fair valueFair Value:
The Company’s other financial instruments not carried at fair value consist primarily of cash and cash equivalents (except investments in money market funds, as disclosed above), short-term investments (except investments in mutual funds, as disclosed above), restricted cash, accounts receivable, net, interest accrued interest on term deposits,short-term and long-term investments, long-term investments, accrued capital expenditures, accrued expenses, client liabilities and interest payable on borrowings for which fair values approximate their carrying amounts due to their short-term nature.amounts. 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, 20212022
(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, 2021amount 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.share count)
16. 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 so 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 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 $520,560$568,300 as of June 30, 20212022 and $451,935$514,580 as of December 31, 2020.2021.
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”,expenses,” and “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$3,795 of derivative gains,losses, net, excluding tax effects, included in AOCL,AOCI, representing changes in the value of cash flow hedges based on exchange rates prevailing as of June 30, 2022, could be reclassified into earnings within the next twelve months based on exchange rates prevailing as of June 30, 2021.months. At June 30, 2021,2022, the maximum outstanding term of the cash flow hedges was 45approximately 42 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, 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) line item. The Company’s primary exchange rate exposure is with the Indian rupee, the U.K. pound sterling (GBP) and the Philippine peso. The Company also has exposure to Colombian pesos (COP), Czech koruna, the Euro (EUR), South African ZAR, the Australian dollar (AUD) and other local currencies in which it operates. Outstanding foreign currency forward contracts amounted to USD 124,195,156,066, GBP 6,928,8,700, EUR 1,4251,736 and COP 8,172,8682,777,668 as of June 30, 20212022 and USD 143,394,134,612, GBP 6,753,6,763, EUR 2,4471,343 and COP 8,287,9502,541,902 as of December 31, 2020.2021.
The Company uses 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 AOCLAOCI as part of foreign currency translation adjustments.
All of the assets 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 counterparty in the case 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 our unaudited consolidated statements of financial position. There is no financial collateral (including cash collateral) provided or received by us related to our foreign exchange 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:
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2021
(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 | |
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 six months ended June 30, 2021 and 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) | |
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 |
| | 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, 20212022
(In thousands, except share and per share amounts)amount and share count)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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) | |
| | | | | | | | | | | | | | |
Derivatives designated as hedging instruments: | | As of |
Foreign currency exchange contracts | | June 30, 2022 | | December 31, 2021 |
Other current assets | | $ | 2,727 | | | $ | 8,669 | |
Other assets | | $ | 1,043 | | | $ | 6,307 | |
Accrued expenses and other current liabilities | | $ | 6,522 | | | $ | 1,324 | |
Other non-current liabilities | | $ | 3,978 | | | $ | 1,785 | |
| | | | |
Derivatives not designated as hedging instruments: | | As of |
Foreign currency exchange contracts | | June 30, 2022 | | December 31, 2021 |
Other current assets | | $ | 138 | | | $ | 13 | |
Accrued expenses and other current liabilities | | $ | 95 | | | $ | 528 | |
EffectThe following tables set forth the effect of net investment hedgesforeign currency exchange contracts on accumulated other comprehensive loss:income/(loss) and the unaudited consolidated statements of income for the three and six months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
Forward Exchange Contracts: | | 2022 | | 2021 | | 2022 | | 2021 |
Unrealized loss recognized in AOCI | | | | | | | | |
Derivatives in cash flow hedging relationships | | $ | (14,632) | | | $ | (871) | | | $ | (15,149) | | | $ | (303) | |
| | | | | | | | |
Loss recognized in unaudited consolidated statements of income | | | | | | | | |
Derivatives not designated as hedging instruments | | $ | (5,457) | | | $ | (805) | | | $ | (6,356) | | | $ | (589) | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 20212022
(In thousands, except share and per share amounts)amount and share count)
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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, |
| | 2022 | | 2021 |
| | As per unaudited consolidated statements of income | | Gain on foreign currency exchange contracts | | As per unaudited consolidated statements of income | | Gain on foreign currency exchange contracts |
Cash flow hedging relationships | | | | | | | | |
Location in unaudited consolidated statements of income where gain was reclassed from AOCI | | | | | | | | |
| | | | | | | | |
Cost of revenues | | $ | 221,207 | | | $ | 1,194 | | | $ | 170,701 | | | $ | 2,418 | |
General and administrative expenses | | $ | 40,434 | | | 181 | | | $ | 36,499 | | | 294 | |
Selling and marketing expenses | | $ | 23,985 | | | 15 | | | $ | 19,724 | | | 15 | |
Depreciation and amortization expense | | $ | 14,075 | | | 69 | | | $ | 12,310 | | | 139 | |
Total before tax | | | | 1,459 | | | | | 2,866 | |
Income tax effects on above | | | | (420) | | | | | (427) | |
Net of tax | | | | $ | 1,039 | | | | | $ | 2,439 | |
| | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | |
Location in unaudited consolidated statements of income where gain/(loss) was recognized | | | | | | | | |
| | | | | | | | |
Foreign exchange gain/(loss), net | | $ | 1,423 | | | $ | (5,457) | | | $ | 1,353 | | | $ | (805) | |
| | $ | 1,423 | | | $ | (5,457) | | | $ | 1,353 | | | $ | (805) | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 20212022
(In thousands, except share and per share amounts)amount and share count)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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, |
| | 2022 | | 2021 |
| | As per unaudited consolidated statements of income | | Gain on foreign currency exchange contracts | | As per unaudited consolidated statements of income | | Gain on foreign currency exchange contracts |
Cash flow hedging relationships | | | | | | | | |
Location in unaudited consolidated statements of income where gain was reclassed from AOCI | | | | | | | | |
| | | | | | | | |
Cost of revenues | | $ | 428,723 | | | $ | 2,777 | | | $ | 329,522 | | | $ | 4,842 | |
General and administrative expenses | | $ | 80,379 | | | 475 | | | $ | 67,202 | | | 546 | |
Selling and marketing expenses | | $ | 48,155 | | | 29 | | | $ | 37,959 | | | 28 | |
Depreciation and amortization expense | | $ | 27,677 | | | 167 | | | $ | 24,411 | | | 279 | |
Total before tax | | | | 3,448 | | | | | 5,695 | |
Income tax effects on above | | | | (935) | | | | | (816) | |
Net of tax | | | | $ | 2,513 | | | | | $ | 4,879 | |
| | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | |
Location in unaudited consolidated statements of income where gain/(loss) was recognized | | | | | | | | |
| | | | | | | | |
Foreign exchange gain/(loss), net | | $ | 3,179 | | | $ | (6,356) | | | $ | 1,787 | | | $ | (589) | |
| | $ | 3,179 | | | $ | (6,356) | | | $ | 1,787 | | | $ | (589) | |
Effect of net investment hedges on accumulated other comprehensive income/(loss):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | Amount of loss recognized in AOCI | | Amount of loss recognized in AOCI |
Net investment hedging relationships | | 2022 | | 2021 | | 2022 | | 2021 |
Foreign exchange contracts | | $ | — | | | $ | 1,134 | | | $ | — | | | $ | 1,134 | |
17. Borrowings
The following tables summarizes the Company’s debt position: | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2022 | | As of December 31, 2021 |
| Revolving Credit Facility | | Total | | Revolving Credit Facility | | | Total |
Current portion of long-term borrowings | $ | 35,000 | | | $ | 35,000 | | | $ | 260,016 | | | | $ | 260,016 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Long-term borrowings | 250,000 | | | 250,000 | | | — | | | | — | |
Total borrowings | $ | 285,000 | | | $ | 285,000 | | | $ | 260,016 | | | | $ | 260,016 | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2022
(In thousands, except per share amount and share count)
Unamortized debt issuance costs for the Company’s revolving Credit Facility of $1,314 and $232 as of June 30, 2022 and December 31, 2021, respectively, are presented under “Other current assets” and “Other assets,” as applicable in the consolidated balance sheets.
Credit Agreement
The Company held a $300,000 revolving credit facility pursuant to its credit agreement (the “Credit Agreement”), dated as of November 21, 2017 with certain lenders and Citibank N.A. as Administrative Agent (the “Credit Facility”). The Credit Facility had a maturity date of November 21, 2022 and was voluntarily pre-payable from time to time without premium or penalty.
On April 18, 2022, the Company and each of the Company’s wholly owned material domestic subsidiaries entered into an Amendment and Restatement Agreement with Citibank, N.A. as Administrative Agent and certain lenders (the “2022 Credit Agreement”), pursuant to which the parties thereto amended and restated the Credit Agreement. Among other things, the 2022 Credit Agreement (a) provides for the issuance of new revolving credit commitments such that the aggregate amount of revolving credit commitments available to the Company is equal to $400,000; (b) extends the maturity date of the Credit Facility from November 21, 2022 to April 18, 2027; and (c) replaces LIBOR with Secured Overnight Financing Rate (“SOFR”) as the reference rate for the U.S. dollar borrowings.
The 2022 Credit Agreement provides an option to increase the commitments by up to $200,000, subject to certain approvals and conditions. The 2022 Credit Agreement includes a letter of credit sub facility and is voluntarily pre-payable from time to time without premium or penalty. Borrowings under the 2022 Credit Agreement can be used for working capital and general corporate purposes, including permitted acquisitions.
Obligations under the 2022 Credit Agreement are guaranteed by the Company’s material domestic subsidiaries and are secured by all or substantially all of the assets of the Company and our material domestic subsidiaries. The 2022 Credit Agreement contains customary affirmative and negative covenants, including, but not limited to, restrictions on the ability to incur indebtedness, create liens, make certain investments, make certain dividends and related distributions, enter into, or undertake, certain liquidations, mergers, consolidations or acquisitions and dispose of certain assets or subsidiaries.
The Credit Facility carried an effective interest rate as shown below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Effective Interest Rate | 2.0 | % | | 1.8 | % | | 1.7 | % | | 1.9 | % |
As of June 30, 2022 and December 31, 2021, the Company was in compliance with all financial and non-financial covenants listed under the Credit Agreement.
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 bearcarried 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 theThe Notes or anywere convertible at an initial conversion rate of 13.3333 shares of the common stock issuable upon conversionper one thousand dollar principal amount of the Notes (which represented an initial conversion price of approximately $75 per share). The Company had the option to redeem the principal amount of the Notes, at its option, if the closing sale price of the common stock exceeded 150% of the then-current conversion price for 20 or entering into any transaction that transfers such interestsmore trading days in the 30 consecutive trading day period preceding the Company’s exercise of this redemption right (including the trading day immediately prior to a third party. The Notes carried an effective interest rate as shown below:the date of the notice of redemption).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | % |
On August 27, 2021, the Company entered into a Payoff and Termination Agreement with the Purchaser, pursuant to which the Company prepaid and settled its outstanding obligations under the Notes, by electing a combination of cash and shares of the Company’s common stock. During the three and six months ended June 30, 2021, and 2020, the Company recognized interest expense and amortization of debt discount of $2,003 and $3,989, respectively, on the Notes as below:Notes.
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
EXLSERVICE HOLDINGS, INC.
Payments / maturitiesNOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2022
(In thousands, except per share amount and share count)
Expected payments for all of the Company'sCompany’s borrowings as of June 30, 20212022 were as follows:
| | | Notes | | Revolving Credit Facility | | | Total | | Revolving Credit Facility | | Interest Payments* |
2021 (July - December) | | $ | 0 | | | $ | 15,000 | | | | $ | 15,000 | | |
2022 | | 0 | | | 0 | | | | 0 | | |
2022 (July 1 - December 31) | | 2022 (July 1 - December 31) | $ | 25,000 | | | $ | 4,273 | |
2023 | 2023 | | 0 | | | 0 | | | | 0 | | 2023 | 10,000 | | | 7,850 | |
2024 | 2024 | | 150,000 | | | 0 | | | | 150,000 | | 2024 | — | | | 7,734 | |
2025 | | 2025 | — | | | 7,734 | |
2026 | | 2026 | — | | | 7,734 | |
2027 and thereafter | | 2027 and thereafter | 250,000 | | | 2,900 | |
Total | Total | | $ | 150,000 | | | $ | 15,000 | | | | $ | 165,000 | | Total | $ | 285,000 | | | $ | 38,225 | |
* Interest payments are based on effective interest rate as of June 30, 2022.
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, 20212022 and December 31, 2020,2021, 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 1 class of common stock outstanding.
The Company purchased shares of common stock from employees in connection with withholding tax payments related to the vesting of restricted stock units and performance-based restricted stock units, as below:
31 | | | | | | | | | | | | | | | | | |
| Shares repurchased | | Total consideration | | Weighted average purchase price per share (1) |
Three months ended June 30, 2022 | — | | $ | — | | | $ | — | |
Three months ended June 30, 2021 | — | | $ | — | | | $ | — | |
| | | | | |
Six months ended June 30, 2022 | 27,219 | | $ | 3,191 | | | $ | 117.23 | |
Six months ended June 30, 2021 | 25,450 | | $ | 2,015 | | | $ | 79.18 | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2021
(In thousands, except share and(1)The weighted average purchase price 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 | |
is based on the closing price of the Company’s common stock on the Nasdaq Global Select Market on the trading day prior to the applicable vesting date of the shares of restricted stock.
On December 16, 2019, the Company’s Board of Directors authorized a $200,000 common stock repurchase program beginning January 1, 2020 through December 31, 2022 (the "2019“2019 Repurchase Program"Program”).
On October 5, 2021, the Company’s Board of Directors authorized a $300,000 common stock repurchase program beginning January 1, 2022 (the “2022 Repurchase Program”), and terminated the 2019 Repurchase Program on December 31, 2021.
Under the 2022 Repurchase Program and 2019 Repurchase Program, shares may be purchased by the Company from time to time from the open market and through 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.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2022
(In thousands, except per share amount and share count)
The Company purchased shares of its common stock, including commissions, under the 2019 Repurchase Program,repurchase programs, 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 was the closing price of the Company'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. | | | | | | | | | | | | | | | | | |
| Shares repurchased | | Total consideration | | Weighted average purchase price per share |
Three months ended June 30, 2022 | 205,716 | | $ | 28,806 | | | $ | 140.03 | |
Three months ended June 30, 2021 | 287,044 | | $ | 28,409 | | | $ | 98.97 | |
| | | | | |
Six months ended June 30, 2022 | 427,049 | | $ | 57,000 | | | $ | 133.47 | |
Six months ended June 30, 2021 | 600,076 | | $ | 55,409 | | | $ | 92.34 | |
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.
19. Employee Benefit Plans
The Company’s Gratuity Plan in India (the "India Plan"“India Plan”) provides 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. 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"“Philippines Plan”). Liabilities 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 recognized and amortized over the remaining period of service of the employees.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2021
(In thousands, except share and per share amounts)
Components of net periodic benefit costs, were as follows:
| | | Three months ended June 30, | | Six months ended June 30, | | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Service cost | Service cost | $ | 885 | | | $ | 664 | | | $ | 1,774 | | | $ | 1,342 | | Service cost | $ | 958 | | | $ | 885 | | | $ | 1,948 | | | $ | 1,774 | |
Interest cost | Interest cost | 234 | | | 237 | | | 469 | | | 480 | | Interest cost | 313 | | | 234 | | | 636 | | | 469 | |
Expected return on plan assets | Expected return on plan assets | (200) | | | (157) | | | (401) | | | (318) | | Expected return on plan assets | (221) | | | (200) | | | (449) | | | (401) | |
Amortization of actuarial loss, gross of tax | Amortization of actuarial loss, gross of tax | 176 | | | 97 | | | 355 | | | 198 | | Amortization of actuarial loss, gross of tax | 149 | | | 176 | | | 304 | | | 355 | |
Net gratuity cost | Net gratuity cost | $ | 1,095 | | | $ | 841 | | | $ | 2,197 | | | $ | 1,702 | | Net gratuity cost | $ | 1,199 | | | $ | 1,095 | | | $ | 2,439 | | | $ | 2,197 | |
| Income tax benefit on amortization of actuarial loss | (71) | | | (55) | | | (122) | | | (64) | | |
Income tax effects on amortization of actuarial loss | | Income tax effects on amortization of actuarial loss | (45) | | | (71) | | | (92) | | | (122) | |
Amortization of actuarial loss, net of tax | Amortization of actuarial loss, net of tax | $ | 105 | | | $ | 42 | | | $ | 233 | | | $ | 134 | | Amortization of actuarial loss, net of tax | $ | 104 | | | $ | 105 | | | $ | 212 | | | $ | 233 | |
The India Plan is partially funded whereas the Philippines plan is unfunded. The Company makes annual contributions to the employees'employees’ gratuity fund of the India Plan established with Life Insurance Corporation of India and HDFC Standard Life Insurance Company. Fund managers manage these funds and calculate the annual contribution required to be made by the Company and manage the India Plan, including any required payouts. These funds are managed on a cash accumulation basis and interest is declared retrospectively on March 31 of each year. The Company expects to earn a return of approximately 7.0%7.2% per annum on the India Plan for the year ended December 31, 2021.2022.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2022
(In thousands, except per share amount and share count)
| | | | | | | | |
Change in Plan Assets | | |
Plan assets at January 1, 20212022 | | $ | 11,51213,605 | |
Actual return | | 394453 | |
Employer contribution | | 0— | |
Benefits paidpaid* | | (774)(877) | |
Effect of exchange rate changes | | (191)(785) | |
Plan assets at June 30, 20212022 | | $ | 10,94112,396 | |
* Benefits payments were substantially made through the plan assets during the six-months ended June 30, 2022.
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 social security contribution plan. The Company may make discretionary contributions of up to a maximum of 4.0% of employee compensation within certain limits.
The Company'sCompany’s accrual for contributions to the 401(k) Plans were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Contribution to the 401(k) Plans | $ | 1,026 | | | $ | 753 | | | $ | 3,043 | | | $ | 2,052 | |
The Company'sCompany’s contribution for various defined benefitsocial security contribution plans on behalf of employees in India, the Philippines, the Czech Republic, South Africa, Colombia, Mexico, Australia and 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)
June 30, 2021
(In thousands, except share and per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Contributions to the defined social security contribution plans | $ | 4,549 | | | $ | 3,418 | | | $ | 8,762 | | | $ | 6,712 | |
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. The lease agreements 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 the Company’s contracts contain a lease. In assessment of the lease term, the Company considers the extension option as 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, theThe Company changedrecognizes changes to the lease term for certain of its leases and recognized the resultant amountby remeasuring lease liabilities as of the remeasurementdate of such modification with the lease liability as anresultant adjustment to the ROU assets.
The impact 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 liabilities and ROU assets.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2022
(In thousands, except per share amount and share count)
Supplemental balance sheet information
| | | As of | | As of |
| | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
Operating Lease | Operating Lease | | | | Operating Lease | | | |
Operating lease right-of-use assets | Operating lease right-of-use assets | $ | 83,280 | | | $ | 91,918 | | Operating lease right-of-use assets | $ | 67,962 | | | $ | 76,692 | |
| Operating lease liabilities - Current | Operating lease liabilities - Current | $ | 18,039 | | | $ | 18,894 | | Operating lease liabilities - Current | $ | 18,548 | | | $ | 18,487 | |
Operating lease liabilities - Non-current | Operating lease liabilities - Non-current | 76,518 | | | 84,874 | | Operating lease liabilities - Non-current | 59,224 | | | 68,506 | |
Total operating lease liabilities | Total operating lease liabilities | $ | 94,557 | | | $ | 103,768 | | Total operating lease liabilities | $ | 77,772 | | | $ | 86,993 | |
| Finance Lease | Finance Lease | | Finance Lease | |
Property and equipment, gross | Property and equipment, gross | $ | 2,598 | | | $ | 1,853 | | Property and equipment, gross | $ | 2,432 | | | $ | 2,685 | |
Accumulated depreciation | Accumulated depreciation | (2,196) | | | (1,382) | | Accumulated depreciation | (2,063) | | | (2,339) | |
Property and equipment, net | Property and equipment, net | $ | 402 | | | $ | 471 | | Property and equipment, net | $ | 369 | | | $ | 346 | |
| Finance lease liabilities - Current | Finance lease liabilities - Current | $ | 194 | | | $ | 229 | | Finance lease liabilities - Current | $ | 127 | | | $ | 141 | |
Finance lease liabilities - Non-current | Finance lease liabilities - Non-current | 255 | | | 281 | | Finance lease liabilities - Non-current | 262 | | | 229 | |
Total finance lease liabilities | Total finance lease liabilities | $ | 449 | | | $ | 510 | | Total finance lease liabilities | $ | 389 | | | $ | 370 | |
Finance lease liabilities are presented as a part of “Accrued expenses and other current liabilities” and “Other non-current liabilities,” as applicable, in the Company’s unaudited consolidated balance sheets.
The components of lease cost, which are included in the Company'sCompany’s unaudited consolidated statements of income, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
Lease cost | Three months ended June 30, | | Six months ended June 30, |
Finance lease: | 2022 | | 2021 | | 2022 | | 2021 |
Amortization of right-of-use assets | $ | 50 | | | $ | 50 | | | $ | 88 | | | $ | 102 | |
Interest on lease liabilities | 14 | | | 22 | | | 28 | | | 39 | |
| 64 | | | 72 | | | 116 | | | 141 | |
Operating lease(a) | 5,962 | | | 6,871 | | | 12,005 | | | 13,632 | |
Variable lease costs | 1,408 | | | 2,053 | | | 2,529 | | | 3,893 | |
| $ | 7,370 | | | $ | 8,924 | | | $ | 14,534 | | | $ | 17,525 | |
Total lease cost | $ | 7,434 | | | $ | 8,996 | | | $ | 14,650 | | | $ | 17,666 | |
(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, |
| 2022 | | 2021 |
Cash payments for amounts included in the measurement of lease liabilities : | | | |
Operating cash outflows for operating leases | $ | 11,922 | | | $ | 13,327 | |
Operating cash outflows for finance leases | $ | 28 | | | $ | 39 | |
Financing cash outflows for finance leases | $ | 75 | | | $ | 107 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 3,540 | | | $ | 1,659 | |
Right-of-use assets obtained in exchange for new finance lease liabilities | $ | 118 | | | $ | 50 | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 20212022
(In thousands, except share and per share amounts)amount and share count)
| | | | | | | | | | | | | | | | | | | | | | | |
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 | |
(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 | % |
| | | | | | | | | | | |
Weighted-average remaining lease term (in years) | | | |
Finance lease | 2.5 years | | 1.8 years |
Operating lease | 5.5 years | | 5.8 years |
Weighted-average discount rate | | | |
Finance lease | 14.5 | % | | 14.1 | % |
Operating lease | 7.0 | % | | 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, theThe Company modified certain of its operating leases, resulting in a reductionan increase of its lease liabilities by $547$263 and $3,143a decrease of its lease liabilities by $226 during the six months ended June 30, 2022 and 2021, respectively, with a corresponding reduction inadjustment to ROU assets.
As of June 30, 2022 and December 31, 2021, the Company did not have any significant leases that have not yet commenced but that create significant rights and obligations for the Company.
Maturities of lease liabilities as of June 30, 2022 were as follows: | | | | | | | | | | | |
| Operating Leases | | Finance Leases |
2022 (July 1 - December 31) | $ | 11,801 | | | $ | 94 | |
2023 | 22,246 | | | 175 | |
2024 | 17,659 | | | 106 | |
2025 | 11,172 | | | 62 | |
2026 | 8,986 | | | 35 | |
2027 and thereafter | 24,233 | | | 15 | |
Total lease payments | $ | 96,097 | | | $ | 487 | |
Less: Imputed interest | 18,325 | | | 98 | |
Present value of lease liabilities | $ | 77,772 | | | $ | 389 | |
Maturities of lease liabilities as of December 31, 2021 were as follows:
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
2022 | $ | 24,020 | | | $ | 185 | |
2023 | 22,666 | | | 147 | |
2024 | 17,745 | | | 72 | |
2025 | 10,741 | | | 34 | |
2026 | 8,395 | | | 17 | |
2027 and thereafter | 25,198 | | | — | |
Total lease payments | $ | 108,765 | | | $ | 455 | |
Less: Imputed interest | 21,772 | | | 85 | |
Present value of lease liabilities | $ | 86,993 | | | $ | 370 | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 20212022
(In thousands, except share and per share amounts)amount and share count)
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. 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'sCompany’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, 2021.2021 to 23.8% during the three months ended June 30, 2022. The Company recorded income tax expense of $8,865$11,125 and $4,072$8,865 for the three months ended June 30, 20212022 and 2020,2021, respectively. The increase in income tax expense was primarily as a result of higher profit during the three months ended June 30, 2021,2022, 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.2021.
The Company'sCompany’s effective tax rate decreasedincreased from 24.3% during the six months ended June 30, 2020 to 22.9% during the six months ended June 30, 2021.2021 to 23.7% during the six months ended June 30, 2022. The Company recorded income tax expense of $17,823$22,327 and $9,927$17,823 for the six months ended June 30, 20212022 and 2020,2021, respectively. The increase in the income tax expense was primarily as a result of higher profit during the six months ended June 30, 2021,2022, compared to the six months ended June 30, 2020, which was2021, and an increase in non-deductible expenses, partially offset by (i) recording of a one-timehigher excess tax expense of $1,320 due to election of a new tax regime,benefits 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 benefits related to stock awards of $1,822 pursuant to ASU No. 2016-09 during the six months ended June 30, 2020, compared to $1,028 during the six months ended June 30, 2021.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2021
(In thousands, except share and per share amounts)
2022.
DuringEffective for taxable years beginning after December 31, 2021, Internal Code Section 174, Amortization of Research and Experimental Expenditures, provides that research and experimentation expenses can no longer be currently deducted, and instead are required to be capitalized. Such capitalized expenses are to be amortized over a period of five and fifteen years for the three months ended June 30, 2021,U.S. and foreign research, respectively. Although this change has no impact on the Company repatriatedincome statement due to offsetting current tax expense with corresponding deferred tax benefit, the United States $49,000 (netchange has resulted in an increase of $2,586 withholding taxes) from India, $42,500 (net of $7,494 withholding taxes) from$13,929 in the Philippinescurrent tax liability and $17,000 (net of $908 withholding taxes) from Indiadeferred tax asset balances, presented under “Income taxes payable, net” and “Deferred tax assets, net,” respectively, in July 2021. Asthe unaudited consolidated balance sheets 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 Company’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 United States.
2022.
Income tax (deferred) recognized in “Other comprehensive income / (loss)”AOCI 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 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Deferred taxes benefit / (expense) recognized on: | | | | | | | |
Unrealized loss on cash flow hedges | $ | 2,801 | | | $ | 177 | | | $ | 2,798 | | | $ | (221) | |
Reclassification adjustment for cash flow hedges | 420 | | | 427 | | | 935 | | | 816 | |
Reclassification adjustment for retirement benefits | (45) | | | (71) | | | (92) | | | (122) | |
| | | | | | | |
Foreign currency translation loss | 480 | | | 945 | | | 979 | | | 1,229 | |
Total income tax benefit recognized in AOCI | $ | 3,656 | | | $ | 1,478 | | | $ | 4,620 | | | $ | 1,702 | |
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, | | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Cost of revenues | Cost of revenues | $ | 1,854 | | | $ | 1,624 | | | $ | 3,390 | | | $ | 3,042 | | Cost of revenues | $ | 3,131 | | | $ | 1,854 | | | $ | 5,772 | | | $ | 3,390 | |
General and administrative expenses | General and administrative expenses | 4,608 | | | 3,112 | | | 7,906 | | | 4,680 | | General and administrative expenses | 5,305 | | | 4,608 | | | 9,700 | | | 7,906 | |
Selling and marketing expenses | Selling and marketing expenses | 3,608 | | | 2,990 | | | 6,606 | | | 4,782 | | Selling and marketing expenses | 4,904 | | | 3,608 | | | 9,092 | | | 6,606 | |
Total | Total | $ | 10,070 | | | $ | 7,726 | | | $ | 17,902 | | | $ | 12,504 | | Total | $ | 13,340 | | | $ | 10,070 | | | $ | 24,564 | | | $ | 17,902 | |
| Income tax benefit related to share-based compensation, including excess tax benefits | | Income tax benefit related to share-based compensation, including excess tax benefits | $ | 3,216 | | | $ | 2,074 | | | $ | 6,022 | | | $ | 4,432 | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2022
(In thousands, except per share amount and share count)
As of June 30, 2021,2022, the Company had 1,892,7061,250,148 shares available for grant under the 2018 Omnibus Incentive Plan.
Stock Options
Stock option activity under the Company’s stock-based compensation plans is shown below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Options | | Weighted-Average Exercise Price | | Aggregate Intrinsic Value | | Weighted-Average Remaining Contractual Life (Years) |
Outstanding at December 31, 2021 | 3,093 | | | $ | 27.62 | | | $ | 362 | | | 2.0 |
Granted | — | | | — | | | — | | | — | |
Exercised | — | | | — | | | — | | | — | |
Forfeited | — | | | — | | | — | | | — | |
Outstanding at June 30, 2022 | 3,093 | | | $ | 27.62 | | | $ | 370 | | | 1.5 |
Vested and exercisable at June 30, 2022 | 3,093 | | | $ | 27.62 | | | $ | 370 | | | 1.5 |
Share Matching Program
Under the Company’s 2018 Omnibus Incentive Plan (the “2018 Plan”), the Company established a share matching program (“SMP”) for executive officers and other specified employees. Under the SMP, the Company agreed to issue a number of restricted stock units equal to the number of newly acquired shares of the Company's common stock. For purposes of the match, “newly acquired shares” includes the employee’s open market purchase of the common stock and crediting of equity awards vesting under any existing stock award plan of the Company as having been purchased by such employees, in an amount between $100 to $500 per such employee.
The matching restricted stock units granted under the SMP will vest in 2 installments, with one-third to vest on the second anniversary of the grant date and the remaining two-thirds to vest on the third anniversary of the grant date; the newly acquired shares for which the matching restricted stock units were granted must also be held by the employee until such vesting dates. The Company’s underlying common stock issued pursuant to the vesting of the matching restricted stock units will not be marketable or transferable for a period of two years following the vesting date. Certain forfeiture and other conditions apply.
During the six months ended June 30, 2022, the Company granted 52,636 matching restricted stock units under the SMP.
Restricted Stock Units
Restricted stock unit activity under the Company’s stock-based compensation plans is shown below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Restricted Stock Units (Others) | | Restricted Stock Units (SMP) |
| Number | | Weighted-Average Fair Value | | Number | | Weighted-Average Fair Value |
Outstanding at December 31, 2021* | 982,187 | | | $ | 81.61 | | | — | | | $ | — | |
Granted | 349,748 | | | 120.49 | | | 52,636 | | | 124.76 | |
Vested | (298,830) | | | 73.89 | | | — | | | — | |
Forfeited | (35,723) | | | 95.11 | | | — | | | — | |
Outstanding at June 30, 2022* | 997,382 | | | $ | 97.08 | | | 52,636 | | | $ | 124.76 | |
* As of June 30, 2022 and December 31, 2021 restricted stock units vested for which the underlying common stock is yet to be issued are 174,490 and 162,481 respectively.
As of June 30, 2022, unrecognized compensation cost of $85,851 is expected to be expensed over a weighted average period of 2.7 years.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 20212022
(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 |
Restricted Stock Units
Restricted stock unit activity under the Company’s stock-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 | |
* As of June 30, 2021amount and December 31, 2020 restricted stock units vested for which the underlying common stock is yet to be issued was 200,542 and 181,638 respectively.share count)
As of June 30, 2021, unrecognized compensation cost of $57,540 is expected to be expensed over a weighted average period of 2.8 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, 2021,2022, the Company granted 40% of each award recipient’s equity grants in the form of PRSUs that cliff vest at the end of a three-year period based on an aggregated revenue target for a three year periodperiod. The remaining 60% of each award recipient’s equity grants are PRSUs that are based on a market condition that is contingent on the Company'sCompany’s meeting the total shareholder return relative to a group of peer companies specified under the program measured over a three-year performance period. However, the features of the equity incentive compensation program are subject to change by the Compensation Committee of our Board of Directors. 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 | | Revenue Based PRSUs | | Market Condition Based PRSUs |
| | Number | | Weighted Average Fair Value | | Number | | Weighted Average Fair Value | | Number | | Weighted Average Fair Value | | Number | | Weighted Average Fair Value |
Outstanding at December 31, 2020 | 105,892 | | | $ | 72.32 | | | 105,868 | | | $ | 97.85 | | |
Outstanding at December 31, 2021 | | Outstanding at December 31, 2021 | 58,864 | | | $ | 78.29 | | | 172,042 | | | $ | 113.74 | |
Granted | Granted | 0 | | | 0 | | | 121,180 | | | 119.80 | | Granted | 52,702 | | | 119.98 | | | 79,001 | | | 155.67 | |
Vested | Vested | 0 | | | 0 | | | 0 | | | 0 | | Vested | — | | | — | | | — | | | — | |
Forfeited | Forfeited | (157) | | | 78.34 | | | (157) | | | 102.10 | | Forfeited | (352) | | | 119.98 | | | (528) | | | 155.67 | |
Outstanding at June 30, 2021 | 105,735 | | | $ | 72.31 | | | 226,891 | | | $ | 109.57 | | |
Outstanding at June 30, 2022 | | Outstanding at June 30, 2022 | 111,214 | | | $ | 97.91 | | | 250,515 | | | $ | 126.88 | |
As of June 30, 2021,2022, unrecognized compensation cost of $18,481$29,712 is expected to be expensed over a weighted average period of 2.12.2 years.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2021
(In thousands, except share and per share amounts)
The impact of COVID-19 on the economic environment is uncertain and has caused variability in the estimation of number of performance based restricted stock units that will eventually vest and the related compensation cost to be recognized in the unaudited consolidated statements of income.
Employee Stock Purchase Plan
On June 21, 2022, at the annual meeting of stockholders of the Company, the Company’s stockholders approved the ExlService Holdings, Inc. 2022 Employee Stock Purchase Plan (the “2022 ESPP”). The 2022 ESPP was approved, subject to stockholder approval, by the board of directors of the Company on April 13, 2022.
The 2022 ESPP allows eligible employees to purchase the Company’s shares of common stock through payroll deductions at a pre-specified discount to the lower of closing price of the Company’s common shares on the date of offering or the last business day of each purchase interval. The dollar amount of shares of common stock that can be purchased under the 2022 ESPP must not exceed 15% of the participating employee’s compensation during the offering period, subject to a cap of $25 per employee per calendar year. The first offering period under the 2022 ESPP is expected to occur in the fourth quarter of 2022. The Company has registered 800,000 shares of common stock to be reserved for issuance over the term of the 2022 ESPP.
23. Related Party Disclosures
On October 1, 2018,In April 2022, the Company entered into the Investment Agreement with the Purchaser relatinga service contract for providing analytics services to the issuance to the Purchaser of $150,000 aggregate principal amountThe Vanguard Group Inc. which beneficially owns more than 10% of the Notes. In connection withCompany’s common stock as of June 30, 2022. During the investment, Vikram S. Pandit, Chairmanthree and CEOsix month periods ended June 30, 2022, the Company recognized revenues, net of The Orogen Group LLC (an affiliate of the Purchaser), was appointed$574 related to Company’s Board of Directors.
this service contract. The Company had outstanding Notes with a principal amountaccounts receivable, net of $150,000 each$574 related to this service contract 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 the Investment Agreement.
The Company recognized interest expense on the Notes related to 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 | |
2022.
0
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2022
(In thousands, except per share amount and share count)
24. Commitments and Contingencies
Capital Commitments
At June 30, 2021,2022, the Company had committed to spend approximately $7,100$5,600 under agreements to purchase property and equipment. This amount is net of capital advances paid which are recognized in the unaudited consolidated balance sheets as “Capital work in progress” under “Property and equipment, net”.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 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 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. 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 investment criteria and investment criteria.certain other criteria, including but not limited to work-from-office norms, etc. The Company believes that these centers have in the past satisfied and will continue to satisfycomplied with the required criteria.requirements.
Contingencies
Transfer pricing regulations generally require that any controlled intercompany transactions involving related entities be at an arm’s-length price. Accordingly, the Company determines the appropriate transfer prices for transactions among its related entities on the basis of a detailed functional and economic analysis involving benchmarking against transactions among entities that are unrelated.unrelated entities. Tax authorities have jurisdiction to review transfer pricing results, and in the event that they determine that the transfer price applied was not appropriate, the Company may incur additional tax, interest and penalties. The Company is currently involved in transfer pricing disputes with Indian tax authorities regarding transactions with some of its related entities.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2021
(In thousands, except share and per share amounts)
Further,addition, the Company and a U.S. subsidiary are engaged in tax litigation with Indian tax authorities regarding a permanent establishment matter. For the United States, the Philippines and India, tax year 2016 and subsequent tax years remain open for examination by the tax authorities as of June 30, 2021.
The aggregate amount demanded by Indian tax authorities (net of advance payments, if any)payments) from the Company related to its transfer pricing and other corporate tax issues for tax years 2003 to 2019 and its permanent establishment issues for tax years 2003 to 2006 as of June 30, 20212022 and December 31, 20202021 is $26,180$29,474 and $16,748,$34,276, respectively. The Company has made payments and/or provided bank guarantees against these demands in the amounts of $8,003$7,889 and $8,120,$7,954, respectively. Amounts paid as deposits in respect of such assessments aggregating to $6,221$6,212 and $6,307$6,172 as of June 30, 20212022 and December 31, 2020,2021, respectively, are included in “Other assets” and amounts deposited for bank guarantees aggregating to $1,782$1,677 and $1,813$1,782 as of June 30, 20212022 and December 31, 2020,2021, respectively, are included in “Restricted cash” in the non-current assets section of the Company’s unaudited consolidated balance sheets.
Based on 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 tax 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.
India’s Value Added Tax (“VAT”) regime ended in June 2017 and was replaced by the current Goods and Service Tax (“GST”) regime. Pursuant to reviewing the Company’s annual VAT filings, the Indian tax authorities raised aggregate VAT tax demands for tax years 2015 and 2017 in an amount of $5,788 and $6,387 as of June 30, 2022 and December 31, 2021, respectively. Beginning in the first quarter of 2020, the GST authorities rejected the Company’s refunds claims in an amount of $3,655 and $3,322 as of June 30, 2022 and December 31, 2021, respectively. The Company has filed appeals against these
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2022
(In February 2019, therethousands, except per share amount and share count)
matters and believes that it is more likely than not that upon final examination its position will be sustained based on its technical merits. Accordingly, no provision was a judicial pronouncementrecognized as of June 30, 2022 and December 31, 2021.
NaN of the Company’s subsidiaries in India is undergoing an assessment with the statutory authority with respect to defined social security contribution benefits payments interpreting certain statutory defined contribution obligations of employees and employers. Currently someplan. The Company believes that the amount demanded by such authority is not meaningful indicator of the Company's subsidiaries in India are undergoing assessment withpotential liabilities of the statutory authorities.Company, and that the matter is without merit, and the Company intends to vigorously defend against it. 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.make in this ongoing matter. The Company will continue to monitor and evaluate its position based on future events and developments in this matter for the implications on the Company’s financial statements, if any. The Company’s management does not believe that any ultimate assessment will have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows.
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 defendant 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, that these matters are without merit, and that the Company intends to vigorously defend each of them.
The outcomes of legal actions are unpredictable and subject to significant uncertainties, and thus it is inherently difficult to determine the likelihood of 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 the Company’s assessment of the facts underlying each matter and 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, 2020.2021. Some of the statements in the following discussion are forward looking statements. Dollar amounts within Item 2 are presented as actual, 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 monthsquarter ended June 30, 2021.2022. See "Cautionary“Cautionary Note Regarding Forward-Looking Statements"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, 20202021 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 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;industries and our ability to withstand the loss of a significant client;
•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;costs;
•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 or breaches, natural or other disasters, or medical epidemics or pandemics;
•our ability to withstand the losspandemics, or acts of a significant customer;violence or war;
•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;
•failure to protect our intellectual property;
•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;
•credit risk fluctuations in the market values of our investment and derivatives portfolios;
•legal liability arising out of customer contracts;
•technological innovation;
•our ability to meet our environmental, social and governance-related goals and targets;
•effects of political orand economic instabilityconditions globally, particularly in the geographies in whichwhere 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 customeremployee data; and
•adverse outcome of our disputes with the Indian tax authorities.authorities, in the geographies where we operate.
These and other factors are more fully discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.2021. 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 designoperations and manage agile, customer-centric operating modelssolutions company that partners with clients to improve globalbusiness outcomes and unlock growth. By bringing together deep domain expertise with robust data, powerful analytics, cloud, AI and ML, we create agile, scalable solutions and execute complex operations drive profitability, enhance customer satisfaction, increase data-driven insights, and manage risk and compliance. We serve customersfor the world’s leading corporations in multiple industries including insurance, healthcare, banking and financial services, utilities, travel, transportation and logistics, media, and retail, among others.
We operatedeliver data analytics and digital operations and solutions to our clients, driving enterprise-scale business transformation initiatives that leverage our deep expertise in the business process management (“BPM”) industryadvanced analytics, AI, ML and we provide operations management and analytics services.cloud. We manage and report financial information through our four strategic business units: Insurance, Healthcare, Analytics and Emerging Business, which reflects how management reviews financial information and makes operating decisions.
Our reportable segments are as follows:
•Insurance,
•Healthcare,
•Analytics, and
•Emerging Business.
Our global delivery network, which includes 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 United States, the United Kingdom, the Philippines, Bulgaria, Colombia, South Africa, Romania and the Czech Republic.
On December 16, 2021, we completed the acquisition of Clairvoyant, a global data, AI, ML, and cloud services firm that helps organizations in their business transformation by maximizing the value of data through actionable insights. It provides data engineering, analytics, AI, ML, product engineering, and cloud-based solutions. The acquisition strengthens our Analytics capabilities by adding additional expertise in data engineering and cloud enablement, further supporting our clients in the insurance, healthcare, banking and financial services, and retail industries.
On June 10, 2022, the Company, through its wholly owned subsidiary ExlService.com, LLC, entered into an Asset Purchase Agreement to acquire certain assets of Inbound, a digital marketing business focused primarily on lead generation in the insurance space. The acquisition expands our digital direct-to-consumer marketing services by adding proven performance marketing, lead generation and customer engagement capabilities to our suite of end-to-end marketing solutions, proprietary data sets and robust consumer analytics.
Continued impactImpact 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 2021, and continuing into 2021,first half of 2022, our customers,clients, contractors, suppliers, and other partners adapted in order to conduct business activities in a COVID-19 environment. The U.S.As the global 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 continuedadapt 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 conditionsenvironment, which has led to increased demand for digital capabilities.
Our remote working delivery capability steadily improved throughout 2021 and 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.
2022. 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 remote work from home model givenmodel. In 2022, we implemented a new work standard under which employees in many of our locations, where permitted by local laws and regulations, and where the current lockdown restrictions inrole and client requirements permit, will have the locations in which we operate and certain clients not authorizing usopportunity to perform the remaining processchoose between different work remotely duearrangements. Subject 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 uncertaintythese work arrangements include working 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,hybrid arrangement 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 Indiafully remote arrangement, 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, facilitatingoccasional work from home, implementing best practices for employees while working from home, periodic CEO messaging, various programs aimed at employee wellness, includingthe office when warranted. We have begun to re-open our operation centers and offices globally with a global wellness program, enhanced leave for employees affected by COVID-19, enhanced awareness towards information security,focus on safety 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 orconsistency 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.applicable local regulations.
We continue to incur additional costs in order to ensurefocus on effectively managing the continuityunprecedented challenges and uncertainties 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 protectthe pandemic on a global basis. Management has prioritized the health and safety of our employees as they gradually returnand their families: we have adopted numerous safety procedures at our global facilities, including hygiene and disinfection protocols, testing and contact tracing, social distancing and wearing personal protective equipment. We share best practices throughout our facilities globally in order to the office. We believe that these short-to-medium-term costs may benefit us in the long-term, as these steps have broadenedstandardize effective safety guidelines and procedures across our “remote working” capabilities, which we expect to becomeoperations. Our safety guidelines and procedures are updated on a permanent feature in our future delivery model, as well as our business continuity plans.regular basis.
In response to certain anticipated impacts fromthe COVID-19 we implemented a series of temporary cost reduction measures in 2020 which continuedrelated restrictions have been lifted in the first halfgeographies in which we operate, there have been periodic resurgences of 2021COVID-19 as a result of new strains and variants, which has led us to further preserve financial flexibility. These actions included the postponement of certain discretionary spending including travelmonitor our work model and marketing expenses, reevaluating the pace of our capital expenditures, rationalizing certain of our real estate and facilities, deferring non-critical hiring among others./ or implement additional safety procedures.
Certain impacts of COVID-19 onWe believe our actions have been successful and that the pandemic has not significantly affected our business, results of operations, financial position and cash flow during the first half of 2021 has been described above and below,2022, however the full extentimpact of the impactpandemic for the period beyond the first half of 2021 is currently uncertain and2022 will depend on many evolving and uncertain 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.control.
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, 2020.2021.
Revenues
For the three months ended June 30, 2021,2022, we had revenues of $275.1$346.8 million compared to revenues of $222.5$275.1 million for the three months ended June 30, 2020,2021, an increase of $52.6$71.7 million, or 23.6%26.1%. For the six months ended June 30, 2021,2022, we had revenues of $536.5$676.0 million compared to revenues of $468.5$536.5 million for the six months ended June 30, 2020,2021, an increase of $68.0$139.5 million, or 14.5%26.0%.
We serve clients mainly in the United States and the United Kingdom, with these two regions generatingwhich generated 86.1% and 9.3%, respectively, of our total revenues for the three months ended June 30, 2022, and 85.5% and 9.5%, respectively, of our total revenues for the three months ended June 30, 2021, and 85.0% and 8.5%, respectively, of our total revenues for the three months ended June 30, 2020.2021. For the six months ended June 30, 2021,2022, these two regions generated 85.7%85.9% and 9.5%9.6%,
respectively, of our total revenues and 84.7%85.7% and 9.0%9.5%, respectively, of our total revenues for the six months ended June 30, 2020.2021.
For the three months ended June 30, 20212022 and 2020,2021, our total revenues from our top ten clients accounted for 37.8%36.2% and 38.7%37.8% of our total revenues, respectively. For the six months ended June 30, 20212022 and 2020,2021, our total revenues from our top ten clients accounted for 38.5%36.2% and 37.1%38.5% of our total revenues, respectively. Our 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 could have a material adverse effect on our financial performance.
Our Business
We provide data analytics and digital operations management and analytics services.solutions to our clients. 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 primarily from the United States, Europe and Australia.
Digital Operations Management Services:and Solutions: We provide our clients with a range of digital operations management servicesand solutions from our Insurance, Healthcare and Emerging Business operating segments,strategic business units, which are focused on solving complex industry problems such as the insurance claims lifecycle and financial transactions processing, and typically involve the transfer by our clientsuse of agile delivery models to EXL of certain of theirimplement digital technologies and interventions like hyper-automation, customer experience transformation, advanced automation, robotics, enterprise architecture, end-to-end business operations, such as claims processing, clinical operations, or financial transaction processing, after which wefunction management and transformations. We either administer and manage those operationsthese functions on an ongoing basis. As partbasis via longer-term arrangements or project work. For a portion of this transfer,our digital operations and solutions, 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 digital operations managementand solutions that include industry-specific digital transformational services as well as cross-industry finance and accounting services as part of the Emerging Business operating segment.strategic business unit.
We provide our services under contracts with our clients, which typically have terms 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 digital operations managementand solutions 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 use such alternative pricing models with some of our current clients and are seeking to move certain other clients from a full-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.
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 analytics services focus on driving improved business outcomes for our customersclients by unlocking deep insights from data and create data-drivendata driven solutions across all parts of our customers’clients’ 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”)ML and Artificial Intelligence (“AI”)AI capabilities to create insights and improve decision making for our clients. Our acquisition of Clairvoyant in December 2021 strengthens our analytics capabilities by adding additional expertise in data engineering and cloud enablement, further supporting our clients in the insurance, healthcare, banking and financial services, and retail industries. We actively cross-sell and, where appropriate, integrate our Analyticsanalytics services with other digital operations management servicesand solutions as part of a comprehensive offering 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 analytics services will grow as we expand our service offerings and client base, both organically and through acquisitions.
Critical Accounting Policies and Estimates
There have been no significant changes in our critical accounting policies and estimates during the three and six months ended June 30, 2021,2022, 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” under “Critical Accounting Policies and Estimates” and Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.2021.
Results of Operations
The following table summarizes our results of operations for the three months and six months ended June 30, 20212022 and 2020:2021:
| | | Three months ended June 30, | | Six months ended June 30, | | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| | (dollars in millions) | | (dollars in millions) | | (dollars in millions) | | (dollars in millions) |
Revenues, net | Revenues, net | $ | 275.1 | | | $ | 222.5 | | | $ | 536.5 | | | $ | 468.5 | | Revenues, net | $ | 346.8 | | | $ | 275.1 | | | $ | 676.0 | | | $ | 536.5 | |
Cost of revenues(1) | Cost of revenues(1) | 170.7 | | | 158.4 | | | 329.5 | | | 321.1 | | Cost of revenues(1) | 221.2 | | | 170.7 | | | 428.7 | | | 329.5 | |
Gross profit(1) | Gross profit(1) | 104.4 | | | 64.1 | | | 207.0 | | | 147.4 | | Gross profit(1) | 125.6 | | | 104.4 | | | 247.3 | | | 207.0 | |
Operating expenses: | Operating expenses: | | | | | | | | Operating expenses: | | | | | | | |
General and administrative expenses | General and administrative expenses | 36.5 | | | 28.8 | | | 67.2 | | | 57.7 | | General and administrative expenses | 40.5 | | 36.5 | | | 80.4 | | 67.2 | |
Selling and marketing expenses | Selling and marketing expenses | 19.8 | | | 13.0 | | | 38.0 | | | 27.5 | | Selling and marketing expenses | 24.0 | | 19.8 | | | 48.2 | | 38.0 | |
Depreciation and amortization expense | Depreciation and amortization expense | 12.3 | | | 12.4 | | | 24.4 | | | 24.9 | | Depreciation and amortization expense | 14.1 | | 12.3 | | | 27.7 | | 24.4 | |
| Total operating expenses | Total operating expenses | 68.6 | | | 54.2 | | | 129.6 | | | 110.1 | | Total operating expenses | 78.6 | | | 68.6 | | | 156.3 | | | 129.6 | |
Income from operations | Income from operations | 35.8 | | | 9.9 | | | 77.4 | | | 37.3 | | Income from operations | 47.0 | | | 35.8 | | | 91.0 | | | 77.4 | |
Foreign exchange gain, net | Foreign exchange gain, net | 1.4 | | | 1.4 | | | 1.8 | | | 2.7 | | Foreign exchange gain, net | 1.4 | | | 1.4 | | | 3.2 | | | 1.8 | |
Interest expense | Interest expense | (2.5) | | | (2.9) | | | (5.0) | | | (6.0) | | Interest expense | (1.5) | | | (2.5) | | | (2.4) | | | (5.0) | |
Other income, net | 2.2 | | | 4.2 | | | 3.6 | | | 6.8 | | |
Other income/(loss), net | | Other income/(loss), net | (0.2) | | | 2.2 | | | 2.2 | | | 3.6 | |
| Income before income tax expense and earnings from equity affiliates | Income before income tax expense and earnings from equity affiliates | 36.9 | | | 12.6 | | | 77.8 | | | 40.8 | | Income before income tax expense and earnings from equity affiliates | 46.7 | | | 36.9 | | | 94.0 | | | 77.8 | |
Income tax expense | Income tax expense | 8.9 | | | 4.1 | | | 17.9 | | | 9.9 | | Income tax expense | 11.1 | | | 8.9 | | | 22.3 | | | 17.9 | |
Income before earnings from equity affiliates | Income before earnings from equity affiliates | 28.0 | | | 8.5 | | | 59.9 | | | 30.9 | | Income before earnings from equity affiliates | 35.6 | | | 28.0 | | | 71.7 | | | 59.9 | |
Loss from equity-method investment | — | | | 0.1 | | | — | | | 0.1 | | |
Gain from equity-method investment | | Gain from equity-method investment | 0.2 | | | — | | | 0.3 | | | — | |
Net income attributable to ExlService Holdings, Inc. stockholders | Net income attributable to ExlService Holdings, Inc. stockholders | $ | 28.0 | | | $ | 8.4 | | | $ | 59.9 | | | $ | 30.8 | | Net income attributable to ExlService Holdings, Inc. stockholders | $ | 35.8 | | | $ | 28.0 | | | $ | 72.0 | | | $ | 59.9 | |
(1) Exclusive of depreciation and amortization expense.
Due to rounding, the numbers presented in the tables included in this Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” may not add up precisely to the totals provided.
Three Months Ended June 30, 20212022 Compared to Three Months Ended June 30, 20202021
Revenues.
The following table summarizes our revenues by reportable segments for the three months ended June 30, 2021 and 2020:segments:
| | | Three months ended June 30, | | | | Percentage change | | Three months ended June 30, | | | | Percentage change |
| | 2021 | | 2020 | | Change | | | 2022 | | 2021 | | Change | |
| | (dollars in millions) | | | | | | (dollars in millions) | | | | |
Insurance | Insurance | $ | 94.7 | | | $ | 81.3 | | | $ | 13.4 | | | 16.5 | % | Insurance | $ | 108.5 | | | $ | 94.7 | | | $ | 13.8 | | | 14.6 | % |
Healthcare | Healthcare | 28.3 | | | 25.0 | | | 3.3 | | | 13.1 | % | Healthcare | 23.1 | | | 28.3 | | | (5.2) | | | (18.4) | % |
Emerging Business | Emerging Business | 40.7 | | | 34.5 | | | 6.2 | | | 17.8 | % | Emerging Business | 53.9 | | | 40.7 | | | 13.2 | | | 32.4 | % |
Analytics | Analytics | 111.4 | | | 81.7 | | | 29.7 | | | 36.4 | % | Analytics | 161.3 | | | 111.4 | | | 49.9 | | | 44.8 | % |
Total revenues, net | Total revenues, net | $ | 275.1 | | | $ | 222.5 | | | $ | 52.6 | | | 23.6 | % | Total revenues, net | $ | 346.8 | | | $ | 275.1 | | | $ | 71.7 | | | 26.1 | % |
Revenues for the three months ended June 30, 20212022 were $275.1$346.8 million, up $52.6$71.7 million, or 23.6%26.1%, compared to the three months ended June 30, 2020.2021, driven primarily by revenue growth in Analytics.
Revenue growth in Insurance of $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$13.8 million was primarily driven by expansion of business from our new and existing clients aggregating to $3.3$15.1 million. This was partially offset by a loss of $1.3 million mainly attributable to the depreciation of the Australian dollar, the U.K. pound sterling and the Indian rupee against the U.S. dollar during the three months ended June 30, 2022, compared to the three months ended June 30, 2021. Insurance revenues were 31.3% and 34.4% of our total revenues during the three months ended June 30, 2022 and June 30, 2021, respectively.
Revenue decline in Healthcare of $5.2 million was driven by the ramp-down in certain existing clients aggregating to $5.2 million during the three months ended June 30, 2021.2022. Healthcare revenues were 10.3%6.7% and 11.2%10.3% of our total revenues induring the three months ended June 30, 20212022 and June 30, 2020,2021, respectively.
Revenue growth in Emerging Business of $6.2$13.2 million was primarily driven by expansion of business from our new and existing clients aggregating to $5.6$14.7 million. This was partially offset by a loss of $1.5 million and an increase in revenues of $0.6 million that was mainly attributable to the appreciationdepreciation of the U.K. pound sterling, the Indian rupee and the U.K. pound sterlingEuro against the U.S. dollar during the three months ended June 30, 2021,2022, compared to the three months ended June 30, 2020.2021. Emerging Business revenues were 14.8%15.5% and 15.5%14.8% of our total revenues induring the three months ended June 30, 20212022 and June 30, 2020,2021, respectively.
Revenue growth in Analytics of $29.7$49.9 million was attributable to the higher volumes in our annuity and project-based engagements from our new and existing clients of $28.7$40.2 million, and an increasecontributions from our acquisition of Clairvoyant in revenuesDecember 2021 of $1.0$11.0 million. This was partially offset by a loss of $1.3 million mainly attributable to the appreciationdepreciation of the U.K. pound sterling against the U.S. dollar during the three months ended June 30, 2021,2022, compared to the three months ended June 30, 2020.2021. Analytics revenues were 40.5%46.5% and 36.7%40.5% of our total revenues induring the three months ended June 30, 20212022 and June 30, 2020,2021, respectively.
Cost of Revenues and Gross Margin: The following table sets forth cost of revenues and gross margin of our reportable segments.segments:
| | | Cost of Revenues | | Gross Margin | | Cost of Revenues | | Gross Margin |
| | Three months ended June 30, | | Change | | Percentage change | | Three months ended June 30, | | Change | | Three months ended June 30, | | Change | | Percentage change | | Three months ended June 30, | | Change |
| | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2022 | | 2021 | |
| | (dollars in millions) | | | | | | | | | | | | (dollars in millions) | | | | | | | | | | |
Insurance | Insurance | $ | 59.4 | | | $ | 59.1 | | | $ | 0.3 | | | 0.5 | % | | 37.3 | % | | 27.3 | % | | 10.0 | % | Insurance | $ | 70.6 | | | $ | 59.4 | | | $ | 11.2 | | | 19.0 | % | | 34.9 | % | | 37.3 | % | | (2.4) | % |
Healthcare | Healthcare | 17.7 | | | 19.6 | | | (1.9) | | | (9.7) | % | | 37.4 | % | | 21.4 | % | | 16.0 | % | Healthcare | 17.7 | | | 17.7 | | | — | | | — | % | | 23.2 | % | | 37.4 | % | | (14.2) | % |
Emerging Business | Emerging Business | 22.3 | | | 22.5 | | | (0.2) | | | (0.9) | % | | 45.1 | % | | 35.1 | % | | 10.0 | % | Emerging Business | 31.2 | | | 22.3 | | | 8.9 | | | 39.7 | % | | 42.1 | % | | 45.1 | % | | (3.0) | % |
Analytics | Analytics | 71.3 | | | 57.2 | | | 14.1 | | | 24.7 | % | | 36.0 | % | | 29.9 | % | | 6.1 | % | Analytics | 101.7 | | | 71.3 | | | 30.4 | | | 42.6 | % | | 37.0 | % | | 36.0 | % | | 1.0 | % |
Total | Total | $ | 170.7 | | | $ | 158.4 | | | $ | 12.3 | | | 7.8 | % | | 37.9 | % | | 28.8 | % | | 9.1 | % | Total | $ | 221.2 | | | $ | 170.7 | | | $ | 50.5 | | | 29.6 | % | | 36.2 | % | | 37.9 | % | | (1.7) | % |
For the three months ended June 30, 2021,2022, cost of revenues was $170.7$221.2 million compared to $158.4$170.7 million for the three months ended June 30, 2020,2021, an increase of $12.3$50.5 million, or 7.8%29.6%. Our gross margin for the three months ended June 30, 20212022 was 37.9%36.2%, compared to 28.8%37.9% for the three months ended June 30, 2020, an increase2021, a decrease of 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, 2020.170 basis points (“bps”).
The increase in cost of revenues in Insurance of $0.3$11.2 million forduring the three months ended June 30, 20212022 was primarily due to increases in employee-related costs of $11.3 million on account of higher headcount, performance incentives and wage inflation, and higher technology costs of $1.6 million on account of increased leverage of the remote work model, partially offset by lower COVID-19 related expenses.foreign exchange gain, net of hedging of $1.7 million. Gross margin in Insurance increaseddecreased by 10.0%240 bps during the three months ended June 30, 2021,2022, compared to the three months ended June 30, 2020,2021, primarily due to higher revenuesincreases in employee-related costs and operational efficiencieslower margins in certain new clients due to ramp-ups 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 Healthcare of $1.9 million for the three months ended June 30, 2021 was primarily due to decreases in employee-related costs of $1.9 million. Gross margin in Healthcare increased by 16.0% during the three months ended June 30, 2021,2022, compared to the three months ended June 30, 2020,2021.
The cost of revenues in Healthcare remained unchanged at $17.7 million during the three months ended June 30, 2022 and 2021. This was driven by increases in employee-related costs of $0.4 million on account of higher headcount, performance incentives and wage inflation, offset by lower travel costs and optimization of office space aggregating to $0.4 million. Gross margin in Healthcare decreased by 1,420 bps during the three months ended June 30, 2022, compared to the three months ended June 30, 2021, primarily due to lower revenues.
The increase in cost of revenues in Emerging Business of $8.9 million during the three months ended June 30, 2022 was primarily due to increases in employee-related costs of $9.2 million on account of higher headcount, performance incentives and wage inflation, and higher technology costs of $1.0 million on account of increased leverage of the remote work model, partially offset by foreign exchange gain, net of hedging of $1.3 million. Gross margin in Emerging Business decreased by 300 bps during the three months ended June 30, 2022, compared to the three months ended June 30, 2021, primarily due to lower margins associated with ramp-ups in certain new clients during the three months ended June 30, 2022, compared to the three months ended June 30, 2021.
The increase in cost of revenues in Analytics of $30.4 million during the three months ended June 30, 2022 was primarily due to increases in employee-related costs of $27.7 million on account of higher headcount, performance incentives and wage inflation, including incremental cost related to our acquisition of Clairvoyant in December 2021. The remaining increase was attributable to higher travel costs of $1.1 million, higher technology costs of $0.7 million on account of increased leverage of the remote work model, and higher other operating costs of $3.2 million. This was partially offset by foreign exchange gain, net of hedging of $2.3 million. Gross margin in Analytics increased by 100 bps during the three months ended June 30, 2022, compared to the three months ended June 30, 2021, primarily due to higher revenues 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 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, 2021,2022, compared to the three months ended June 30, 2020, primarily due to higher revenues, decrease in employee-related costs 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 Analytics of $14.1 million for the three months ended June 30, 2021 was primarily due to increases in employee-related costs of $8.5 million, higher other operating costs of $5.2 million and higher technology costs of $0.4 million. Gross margin in Analytics increased by 6.1% during the three months ended June 30, 2021, compared to the three months ended June 30, 2020, primarily due to higher revenues during the three months ended June 30, 2021, compared to the impact of COVID-19 related expenses during the three months ended June 30, 2020.2021.
Selling, General and Administrative (“SG&A”) Expenses.
| | | Three months ended June 30, | | Change | | Percentage change | | Three months ended June 30, | | Change | | Percentage change |
| | 2021 | | 2020 | | | 2022 | | 2021 | |
| | (dollars in millions) | | | | | | (dollars in millions) | | | | |
General and administrative expenses | General and administrative expenses | $ | 36.5 | | | $ | 28.8 | | | $ | 7.7 | | | 26.7 | % | General and administrative expenses | $ | 40.5 | | | $ | 36.5 | | | $ | 4.0 | | | 10.8 | % |
Selling and marketing expenses | Selling and marketing expenses | 19.8 | | | 13.0 | | | 6.8 | | | 52.3 | % | Selling and marketing expenses | 24.0 | | | 19.8 | | | 4.2 | | | 21.6 | % |
Selling, general and administrative expenses | Selling, general and administrative expenses | $ | 56.3 | | | $ | 41.8 | | | $ | 14.5 | | | 34.7 | % | Selling, general and administrative expenses | $ | 64.5 | | | $ | 56.3 | | | $ | 8.2 | | | 14.6 | % |
As a percentage of revenues | As a percentage of revenues | 20.4 | % | | 18.8 | % | | | | | As a percentage of revenues | 18.6 | % | | 20.4 | % | | | | |
The increase in SG&A expenses of $14.5$8.2 million was primarily due to higher employee-related costs of $13.0$6.8 million COVID-19-relatedon account of a higher headcount, performance incentives and wage inflation, including incremental costs related to our acquisition of Clairvoyant in December 2021, increase in technology cost of $1.9 million on account of continued investments in digital capabilities, higher travel costs $1.0 million and other operating costs of $1.8 million, partially offset by higher COVID-19 related expenses of $2.2 million primarily related to 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 optimization of office space and increased reliance on the work from home model, due to the impact of COVID-19 during the three months ended June 30, 2021 and foreign exchange gain, net of hedging of $1.1 million, during the three months ended June 30, 2022.
Depreciation and Amortization.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Change | | Percentage change |
| 2022 | | 2021 | | |
| (dollars in millions) | | | | |
Depreciation expense | $ | 10.0 | | | $ | 8.9 | | | $ | 1.1 | | | 11.4 | % |
Intangible amortization expense | 4.1 | | | 3.4 | | | 0.7 | | | 22.0 | % |
Depreciation and amortization expense | $ | 14.1 | | | $ | 12.3 | | | $ | 1.8 | | | 14.3 | % |
As a percentage of revenues | 4.1 | % | | 4.5 | % | | | | |
The increase in intangibles amortization expense of $0.7 million was primarily due to amortization of intangibles associated with our acquisition of Clairvoyant in December 2021, during the three months ended June 30, 2022, compared to the three months ended June 30, 2020.2021. The increase in depreciation expense of $1.1 million was primarily due to depreciation related to our investments in digital capabilities and computer and networking equipment of $1.3 million, partially offset by foreign exchange gain, net of hedging of $0.2 million during the three months ended June 30, 2022, compared to the three months ended June 30, 2021.
Income from Operations. Income from operations increased by $25.9$11.2 million, or 261.6%31.4%, from $9.9 million for the three months ended June 30, 2020 to $35.8 million for the three months ended June 30, 2021 to $47.0 million for the three months ended June 30, 2022, primarily due to higher revenues, partially offset by higher cost of revenues and higher SG&A expenses during the three months ended June 30, 2021.2022. As a percentage of revenues, income from operations increased from 4.4% for the three months ended June 30, 2020 to 13.0% for the three months ended June 30, 2021.2021 to 13.6% for the three months ended June 30, 2022.
Foreign Exchange Gain/(Loss). Net foreignForeign exchange gains and losses are primarily attributable to the movement of the U.S. dollar against the Indian rupee, the U.K. pound sterling, the Philippine peso and the South African ZAR during the three months ended June 30, 2021.2022. The average exchange rate of the U.S. dollar against the Indian rupee decreasedincreased from 75.41 during the three months ended June 30, 2020 to 73.67 during the three months ended June 30, 2021.2021 to 77.68 during the three months ended June 30, 2022. The average exchange rate of the U.K. pound sterling against the U.S. dollar increaseddecreased from 1.40 during the three months ended June 30, 2021 to 1.24 during the three months ended June 30, 2020 to 1.40 during the three months ended June 30, 2021.2022. The average exchange rate of the U.S. dollar against the Philippine peso decreasedincreased from 50.28 during the three months ended June 30, 2020 to 48.20 during the three months ended June 30, 2021.2021 to 53.18 during the three months ended June 30, 2022. The average exchange rate of the U.S. dollar against the South African ZAR decreasedincreased from 17.66 during the three months ended June 30, 2020 to 14.15 during the three months ended June 30, 2021.2021 to 15.94 during the three months ended June 30, 2022.
We recorded a net foreign exchange gain of $1.4 million, each, for the three months ended June 30, 20212022 and 2020.2021.
Interest expense. Interest expense decreased from $2.9 million for the three months ended June 30, 2020 to $2.5 million for the three months ended June 30, 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.
Other 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 $4.2$1.5 million for the three months ended June 30, 20202022, primarily due to the settlement of outstanding obligations under the Notes (as defined under Note 17 – Borrowings-Convertible Senior Notes to our unaudited consolidated financial statements”) on August 27, 2021, partially offset by higher outstanding obligations under our Credit Facility bearing a relatively lower effective interest rate as compared to the Notes during the three months ended June 30, 2022, compared to the three months ended June 30, 2021.
Other Income/(Loss), net.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | | | Percentage change |
| 2022 | | 2021 | | Change | |
| (dollars in millions) | | | | |
Gain on sale and mark-to-market of mutual funds and money market funds | $ | 0.7 | | | $ | 1.6 | | | $ | (0.9) | | | (61.7) | % |
Interest income | 0.8 | | | 0.7 | | | 0.1 | | | 22.9 | % |
Other, net | (1.7) | | | (0.1) | | | (1.6) | | | 1,182.9 | % |
Other income/(loss), net | $ | (0.2) | | | $ | 2.2 | | | $ | (2.4) | | | (107.9) | % |
Other income/(loss), net decreased by $2.4 million, from an income of $2.2 million for the three months ended June 30, 2021 to an expense of $0.2 million for the three months ended June 30, 2022. The decrease is primarily due to a fair value adjustment to recognize an increase in contingent consideration liability of $1.0 million related to our acquisition of Clairvoyant in December 2021, and lower return on mutual fund investments of $1.5 million, partially offset by increase in interest income of $0.1$0.9 million during the three months ended June 30, 2021,2022, compared to the three months ended June 30, 2020.2021.
Income Tax Expense. The 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, 2021.2021 to 23.8% during the three months ended June 30, 2022. We recorded income tax expense of $8.9$11.1 million and $4.1$8.9 million for the three months ended June 30, 20212022 and 2020,2021, respectively. The increase in income tax expense was primarily as a result of higher profit during the three months ended June 30, 2021,2022, compared to the 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.2021.
Net Income. Net income increased from $8.4 million for the three months ended June 30, 2020 to $28.0 million for the three months ended June 30, 2021 to $35.8 million for the three months ended June 30, 2022, primarily due to increase in income from operations of $25.9$11.2 million, lower interest expense of $0.4$1.0 million and lower losshigher gain from equity-method investment of $0.1$0.2 million, partially offset by lower other income/(loss), net of $2.4 million and higher income tax expense of $4.8 million and lower other income, net of $2.0$2.2 million. As a percentage of revenues, net income increased marginally from 3.8% for the three months ended June 30, 2020 to 10.2% for the three months ended June 30, 2021.2021 to 10.3% for the three months ended June 30, 2022.
Six Months Ended June 30, 20212022 Compared to Six Months Ended June 30, 20202021
Revenues.
The following table summarizes our revenues by reportable segments for the six months ended June 30, 2021 and 2020:segments:
| | | Six months ended June 30, | | Percentage change | | Six months ended June 30, | | Percentage change |
| | 2021 | | 2020 | | Change | | | 2022 | | 2021 | | Change | |
| | (dollars in millions) | | | | | | (dollars in millions) | | | | |
Insurance | Insurance | $ | 185.8 | | | $ | 165.0 | | | $ | 20.8 | | | 12.6 | % | Insurance | $ | 211.8 | | | $ | 185.8 | | | $ | 26.0 | | | 14.0 | % |
Healthcare | Healthcare | 58.6 | | | 52.0 | | | 6.6 | | | 12.5 | % | Healthcare | 49.3 | | | 58.6 | | | (9.3) | | | (15.9) | % |
Emerging Business | Emerging Business | 78.4 | | | 77.4 | | | 1.0 | | | 1.3 | % | Emerging Business | 104.6 | | | 78.4 | | | 26.2 | | | 33.5 | % |
Analytics | Analytics | 213.7 | | | 174.1 | | | 39.6 | | | 22.8 | % | Analytics | 310.3 | | | 213.7 | | | 96.6 | | | 45.2 | % |
Total revenues, net | Total revenues, net | $ | 536.5 | | | $ | 468.5 | | | $ | 68.0 | | | 14.5 | % | Total revenues, net | $ | 676.0 | | | $ | 536.5 | | | $ | 139.5 | | | 26.0 | % |
Revenues for the six months ended June 30, 20212022 were $536.5$676.0 million, up $68.0$139.5 million, or 14.5%26.0%, compared to the six months ended June 30, 2020.2021, driven primarily by revenue growth in Analytics.
Revenue growth in Insurance of $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$26.0 million was primarily driven by expansion of business from our new and existing clients aggregating to $6.6$27.8 million. This was partially offset by a loss of $1.8 million mainly attributable to the depreciation of the Australian dollar, U.K. pound sterling and the Indian rupee against the U.S. dollar during the six months ended June 30, 2022, compared to the six months ended June 30, 2021. Insurance revenues were 31.3% and 34.7% of our total revenues during the six months ended June 30, 2022 and June 30, 2021, respectively.
Revenue decline in Healthcare of $9.3 million was driven by the ramp-down in certain existing clients aggregating to $9.3 million during the six months ended June 30, 2021.2022. Healthcare revenues were 10.9%7.3% and 11.1%10.9% of our total revenues induring the six months ended June 30, 20212022 and June 30, 2020,2021, respectively.
Revenue growth in Emerging Business of $1.0$26.2 million was primarily driven by expansion of business from our new clients and existing clients aggregating to $0.3of $28.3 million. This was partially offset by a loss of $2.1 million and an increase in revenues of $0.7 million that was mainly attributable to the appreciationdepreciation of the U.K. pound sterling, the Indian rupee and the U.K. pound sterlingEuro against the U.S. dollar during the six months ended June 30, 20212022, compared to the six months ended June 30, 2020.2021. Emerging Business revenues were 14.6%15.5% and 16.5%14.6% of our total revenues induring the six months ended June 30, 20212022 and June 30, 2020,2021, respectively.
Revenue growth in Analytics of $39.6$96.6 million was attributable to the higher volumes in our annuity and project based engagements from our new and existing clients of $37.9$77.1 million, and an increasecontributions from our acquisition of Clairvoyant in revenuesDecember 2021 of $21.2 million. This was partially offset by a loss of $1.7 million mainly attributable to the appreciationdepreciation of the U.K. pound sterling and the South African ZAR against the U.S. dollar during the six months ended June 30, 2021,2022, compared to the six months ended June 30, 2020.2021. Analytics revenues were 39.8%45.9% and 37.2%39.8% of our total revenues induring the six months ended June 30, 20212022 and June 30, 2020,2021, respectively.
Cost of Revenues and Gross Margin: The following table sets forth cost of revenues and gross margin of our reportable segments.segments:
| | | Cost of Revenues | | Gross Margin | | Cost of Revenues | | Gross Margin |
| | Six months ended June 30, | | Percentage change | | Six months ended June 30, | | Change | | Six months ended June 30, | | Percentage change | | Six months ended June 30, | | Change |
| | 2021 | | 2020 | | Change | | 2021 | | 2020 | | | 2022 | | 2021 | | Change | | 2022 | | 2021 | |
| | (dollars in millions) | | | | | | | | | | | | (dollars in millions) | | | | | | | | | | |
Insurance | Insurance | $ | 115.5 | | | $ | 118.1 | | | $ | (2.6) | | | (2.2) | % | | 37.9 | % | | 28.4 | % | | 9.5 | % | Insurance | $ | 135.7 | | | $ | 115.5 | | | $ | 20.2 | | | 17.6 | % | | 35.9 | % | | 37.9 | % | | (2.0) | % |
Healthcare | Healthcare | 35.1 | | | 39.2 | | | (4.1) | | | (10.5) | % | | 40.1 | % | | 24.6 | % | | 15.5 | % | Healthcare | 35.3 | | | 35.1 | | | 0.2 | | | 0.8 | % | | 28.2 | % | | 40.1 | % | | (11.9) | % |
Emerging Business | Emerging Business | 43.1 | | | 48.0 | | | (4.9) | | | (10.2) | % | | 44.9 | % | | 38.1 | % | | 6.8 | % | Emerging Business | 60.4 | | | 43.1 | | | 17.3 | | | 39.9 | % | | 42.2 | % | | 44.9 | % | | (2.7) | % |
Analytics | Analytics | 135.8 | | | 115.8 | | | 20.0 | | | 17.3 | % | | 36.5 | % | | 33.5 | % | | 3.0 | % | Analytics | 197.3 | | | 135.8 | | | 61.5 | | | 45.2 | % | | 36.5 | % | | 36.5 | % | | 0.0 | % |
Total | Total | $ | 329.5 | | | $ | 321.1 | | | $ | 8.4 | | | 2.6 | % | | 38.6 | % | | 31.5 | % | | 7.1 | % | Total | $ | 428.7 | | | $ | 329.5 | | | $ | 99.2 | | | 30.1 | % | | 36.6 | % | | 38.6 | % | | (2.0) | % |
For the six months ended June 30, 2021,2022, cost of revenues was $329.5$428.7 million compared to $321.1$329.5 million for the six months ended June 30, 2020,2021, an increase of $8.4$99.2 million, or 2.6%30.1%. Our gross margin for the six months ended June 30, 20212022 was 38.6%36.6% compared to 31.5%38.6% for six months ended June 30, 2020, an increase2021, a decrease of 7.1% primarily driven by higher revenues 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 cost of revenues in Insurance of $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 cost of revenues 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. Gross margin in Healthcare increased by 15.5% during the six months ended June 30, 2021, compared to the six months ended June 30, 2020, primarily due to higher 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.
The decrease in cost of revenues in Emerging Business of $4.9 million for the six months ended June 30, 2021 was primarily due to decreases in employee-related costs of $3.8 million, lower other operating costs of $0.9 million and foreign exchange gain, net of hedging $0.2 million. Gross margin in Emerging Business increased by 6.8% during the six months ended June 30, 2021, compared to the six months ended June 30, 2020, primarily due to higher revenues, decrease in employee-related costs and higher 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, 2020.200 bps.
The increase in cost of revenues in AnalyticsInsurance of $20.0$20.2 million forduring the six months ended June 30, 20212022 was primarily due to increases in employee-related costs of $13.3$19.1 million on account of higher other operating costs of $7.4 millionheadcount, performance incentives and wage inflation, and higher technology costs of $1.2$3.0 million on account of increased leverage of the remote work model, partially offset by foreign exchange gain, net of hedging of $1.9 million. Gross margin in Insurance decreased by 200 bps during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily due to increased usageincreases in employee-related costs during the six months ended June 30, 2022, compared to the six months ended June 30, 2021.
The increase in cost of revenues in Healthcare of $0.2 million during the work from home model. Thissix months ended June 30, 2022 was primarily due to increases in employee-related costs of $1.1 million on account of wage inflation, partially offset by lower travel costs of $1.5$0.5 million and foreign exchange gain, net of hedging of $0.4 million. Gross margin in Analytics increasedHealthcare decreased by 3.0%1,190 bps during the six months ended June 30, 2021,2022, compared to the six months ended June 30, 2020,2021, primarily due to lower revenues and higher revenuesoperating expenses associated with the ramp-down of certain existing clients during the six months ended June 30, 2021,2022, compared to the impactsix months ended June 30, 2021.
The increase in cost of COVID-19 related expensesrevenues in Emerging Business of $17.3 million during the six months ended June 30, 2020.2022 was primarily due to increases in employee-related costs of $16.2 million on account of higher headcount, performance incentives and wage inflation, higher technology costs of $2.2 million on account of increased leverage of the remote work model and higher travel costs of $0.9 million, partially offset by foreign exchange gain, net of hedging of $2.0 million. Gross margin in Emerging Business decreased by 270 bps during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily due to lower margins associated with ramp-ups in certain new clients during the six months ended June 30, 2022, compared to the six months ended June 30, 2021.
The increase in cost of revenues in Analytics of $61.5 million during the six months ended June 30, 2022 was primarily due to increases in employee-related costs of $56.1 million on account of higher headcount, performance incentives and wage inflation, including incremental cost related to our acquisition of Clairvoyant in December 2021. The remaining increase was attributable to higher travel costs of $2.1 million, higher technology costs of $1.2 million on account of increased leverage of the remote work model and higher other operating costs of $5.3 million. This was partially offset by foreign exchange gain, net of hedging of $3.2 million. Gross margin in Analytics remained unchanged during the six months ended June 30, 2022, compared to the six months ended June 30, 2021.
Selling, General and Administrative (“SG&A”) Expenses.
| | | Six months ended June 30, | | Percentage change | | Six months ended June 30, | | Percentage change |
| | 2021 | | 2020 | | Change | | | 2022 | | 2021 | | Change | |
| | (dollars in millions) | | | | | | (dollars in millions) | | | | |
General and administrative expenses | General and administrative expenses | $ | 67.2 | | | $ | 57.7 | | | $ | 9.5 | | | 16.5 | % | General and administrative expenses | $ | 80.4 | | | $ | 67.2 | | | $ | 13.2 | | | 19.6 | % |
Selling and marketing expenses | Selling and marketing expenses | 38.0 | | | 27.5 | | | 10.5 | | | 38.2 | % | Selling and marketing expenses | 48.2 | | | 38.0 | | | 10.2 | | | 26.9 | % |
Selling, general and administrative expenses | Selling, general and administrative expenses | $ | 105.2 | | | $ | 85.2 | | | $ | 20.0 | | | 23.5 | % | Selling, general and administrative expenses | $ | 128.6 | | | $ | 105.2 | | | $ | 23.4 | | | 22.2 | % |
As a percentage of revenues | As a percentage of revenues | 19.6 | % | | 18.2 | % | | | | | As a percentage of revenues | 19.0 | % | | 19.6 | % | | | | |
The increase in SG&A expenses of $20.0$23.4 million was primarily due to higher employee-related costs of $19.7$17.4 million COVID-19-related expenseson account of $2.2 million primarilya higher headcount, performance incentives and wage inflation, including incremental costs related to financial support to family membersour acquisition of deceased employees,Clairvoyant in December 2021, increase in technology cost of $5.3 million on account of continued investments in digital capabilities, higher other operating costs of $2.0$3.2 million and travel costs of $1.3 million, partially offset by lower facilities costshigher COVID-19 related expenses of $2.8$2.2 million due to optimizationduring the six months ended June 30, 2021 and foreign exchange gain, net of office space and lower travel costshedging of $1.1$1.6 million, due to COVID-19 cost reduction measures.during the six months ended June 30, 2022.
Depreciation and Amortization.
| | | Six months ended June 30, | | Percentage change | | Six months ended June 30, | | Percentage change |
| | 2021 | | 2020 | | Change | | | 2022 | | 2021 | | Change | |
| | (dollars in millions) | | | | | | (dollars in millions) | | | | |
Depreciation expense | Depreciation expense | $ | 17.6 | | | $ | 17.3 | | | $ | 0.3 | | | 1.7 | % | Depreciation expense | $ | 19.1 | | | $ | 17.6 | | | $ | 1.5 | | | 7.9 | % |
Intangible amortization expense | Intangible amortization expense | 6.8 | | | 7.6 | | | (0.8) | | | (10.5) | % | Intangible amortization expense | 8.6 | | | 6.8 | | | 1.8 | | | 27.7 | % |
Depreciation and amortization expense | Depreciation and amortization expense | $ | 24.4 | | | $ | 24.9 | | | $ | (0.5) | | | (2.0) | % | Depreciation and amortization expense | $ | 27.7 | | | $ | 24.4 | | | $ | 3.3 | | | 13.4 | % |
As a percentage of revenues | As a percentage of revenues | 4.6 | % | | 5.3 | % | | | | | As a percentage of revenues | 4.1 | % | | 4.6 | % | | | | |
The decreaseincrease in intangibles amortization expense of $0.8$1.8 million was primarily due to amortization of intangibles associated with our acquisition of Clairvoyant in December 2021, partially offset by decrease in intangibles amortization expense due to end of useful lives for certain intangible assets during the six months ended June 30, 2021,2022, compared to the six months ended June 30, 2020.2021. The increase in depreciation expense of $0.3$1.5 million was primarily due to depreciation related to our investments in new operating centers, internally developed softwaredigital capabilities and accelerated depreciation resulting from a reduction in useful lives related to certain operating centers, due to the impactcomputer and networking equipment of COVID-19$1.8 million, partially offset by foreign exchange gain, net of hedging of $0.3 million during the six months ended June 30, 2021,2022, compared to the six months ended June 30, 2020.2021.
Income from Operations. Income from operations increased by $40.1$13.6 million, or 107.5%17.7%, from $37.3 million for the six months ended June 30, 2020 to $77.4 million for the six months ended June 30, 2021 to $91.0 million for the six months ended June 30, 2022, primarily due to higher revenues, partially offset by higher cost of revenues and higher SG&A expenses during the six months ended June 30, 2021.2022. As a percentage of revenues, income from operations increaseddecreased from 8.0% for the six months ended June 30, 2020 to 14.4% for the six months ended June 30, 2021.2021 to 13.5% for the six months ended June 30, 2022.
Foreign Exchange Gain/(Loss). Net foreignForeign exchange gains and losses are primarily attributable to the movement of the U.S. dollar against the Indian rupee, the U.K. pound sterling, the Philippine peso and the South African ZAR during the six months ended June 30, 2021.2022. The average exchange rate of the U.S. dollar against the Indian rupee decreasedincreased from 74.25 during the six months ended June 30, 2020 to 73.42 during the six months ended June 30, 2021.2021 to 76.46 during the six months ended June 30, 2022. The average exchange rate of the U.K. pound sterling against the U.S. dollar increaseddecreased from 1.26 during the six months ended June 30, 2020 to 1.39 during the six months ended June 30, 2021.2021 to 1.29 during the six months ended June 30, 2022. The average exchange rate of the U.S. dollar against the Philippine peso decreasedincreased from 50.55 during the six months ended June 30, 2020 to 48.29 during the six months ended June 30, 2021.2021 to 52.25 during the six months ended June 30, 2022. The average exchange rate of the U.S. dollar against the South African ZAR decreasedincreased from 16.90 during the six months ended June 30, 2020 to 14.58 during the six months ended June 30, 2021.2021 to 15.54 during the six months ended June 30, 2022.
We recorded a net foreign exchange gain of $3.2 million for the six months ended June 30, 2022, compared to the net foreign exchange gain of $1.8 million for the six months ended June 30, 2021, 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%2021.
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) | % |
Interest expense.
Other income, netInterest expense decreased by $3.2 million, from $6.8$5.0 million for the six months ended June 30, 20202021 to $2.4 million for the six months ended June 30, 2022, primarily due to the settlement of outstanding obligations under the Notes (as defined under Note 17 – Borrowings-Convertible Senior Notes to our unaudited consolidated financial statements”) on August 27, 2021, partially offset by higher outstanding obligations under our Credit Facility bearing a relatively lower effective interest rate as compared to the Notes during the six months ended June 30, 2022, compared to the six months ended June 30, 2021.
Other Income/(Loss), net.
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, | | | | Percentage change |
| 2022 | | 2021 | | Change | |
Gain on sale and mark-to-market of mutual funds and money market funds | $ | 1.9 | | | $ | 2.7 | | | $ | (0.8) | | | (32.2) | % |
Interest and dividend income | 2.2 | | | 1.3 | | | 0.9 | | | 71.7 | % |
Other, net | (1.9) | | | (0.4) | | | (1.5) | | | 336.3 | % |
Other income/(loss), net | $ | 2.2 | | | $ | 3.6 | | | $ | (1.4) | | | (38.3) | % |
Other income/(loss), net decreased by $1.4 million, from $3.6 million for the six months ended June 30, 2021 to $2.2 million for the six months ended June 30, 2022. The decrease is primarily due to a fair value adjustment to recognize an increase in contingent consideration liability of $1.0 million related to our acquisition of Clairvoyant in December 2021, and lower return on mutual fund investments of $2.5$0.8 million, partially offset by interest on income tax refunds of $0.7 million during the six months ended June 30, 2021,2022, compared to the six months ended June 30, 2020.2021.
Income Tax Expense. The effective tax rate decreasedincreased from 24.3% during the six months ended June 30, 2020 to 22.9% during the six months ended June 30, 2021.2021 to 23.7% during the six months ended June 30, 2022. We recorded income tax expense of $17.9$22.3 million and $9.9$17.9 million for the six months ended June 30, 20212022 and 2020,2021, respectively. The increase in income tax expense was primarily as a result of higher profit during the six months ended June 30, 2021,2022, compared to the six months ended June 30, 2020, which was2021, and an increase in non-deductible expenses, partially offset by (i) recording of a one-timehigher excess tax expense of $1.3 million due to the election of a new tax regime,benefits 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 benefits related to stock awards of $1.8 million pursuant to ASU No. 2016-09 during the six months ended June 30, 2020 compared to $1.0 million during the six months ended June 30, 2021.2022.
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 to $72.0 million for the six months ended June 30, 2022, primarily due to increase in income from operations of $40.1$13.6 million, lower interest expense of $1.0$2.6 million, higher foreign exchange gain, net of $1.4 million and lower losshigher gain from equity-method investment of $0.1$0.3 million, partially offset by higher income tax expense of $8.0$4.4 million and lower other income,income/(loss), net of $3.2 million and foreign exchange gain, net of $0.9$1.4 million. As a percentage of revenues, net income increaseddecreased from 6.6% for the six months ended June 30, 2020 to 11.2% for the six months ended June 30, 2021.2021 to 10.7% for the six months ended June 30, 2022.
Liquidity and Capital Resources
| | | Six months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| | (dollars in millions) | | (dollars in millions) |
Opening cash, cash equivalents and restricted cash | Opening cash, cash equivalents and restricted cash | $ | 225.5 | | | $ | 127.0 | | Opening cash, cash equivalents and restricted cash | $ | 143.8 | | | $ | 225.5 | |
Net cash provided by operating activities | Net cash provided by operating activities | 53.9 | | | 58.9 | | Net cash provided by operating activities | 53.1 | | | 53.9 | |
Net cash provided by investing activities | 11.7 | | | 1.1 | | |
Net cash (used for)/provided by investing activities | | Net cash (used for)/provided by investing activities | (41.0) | | | 11.7 | |
Net cash used for financing activities | Net cash used for financing activities | (131.4) | | | (13.4) | | Net cash used for financing activities | (35.3) | | | (131.4) | |
Effect of exchange rate changes | Effect of exchange rate changes | (2.2) | | | (2.8) | | Effect of exchange rate changes | (5.4) | | | (2.2) | |
Closing cash, cash equivalents and restricted cash | Closing cash, cash equivalents and restricted cash | $ | 157.5 | | | $ | 170.8 | | Closing cash, cash equivalents and restricted cash | $ | 115.2 | | | $ | 157.5 | |
As of June 30, 20212022 and 2020,2021, we had $294.7$265.2 million and $335.6$294.7 million, respectively, in cash, cash equivalents and short-term investments, of which $254.2$241.1 million and $275.5$254.2 million, respectively, is 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 entitiesregarding distribution 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 jurisdictions. 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 constitute a change in our permanent reinvestment assertion. We base our decision to continue to indefinitely reinvest earnings in India and the Philippines on our estimate of the working 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 Philippines as compared to those made in the United States.
Operating Activities: Net cash provided by operating activities was $53.1 million for the six months ended June 30, 2022 as compared to net cash provided by operating activities of $53.9 million for the six months ended June 30, 2021, as compared to netreflecting our cash provided by operating activitiesearnings and effective management of $58.9 million for the six months ended June 30, 2020, reflecting higher working capital needs, offset by cash earnings.needs. The major drivers contributing to the decrease of $5.0$0.8 million year-over-year included the following:
•A decrease in accrued employee costs, offset by an increase in accrued expenses and other liabilities contributed to a lower cash flow of $33.0 million in the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The decrease was primarily due to higher payments (net of accruals) of annual performance incentives of $39.7 million, offset by higher employee costs accruals of $3.2 million and higher accrued expenses due to an increase in our cost base to support revenue growth of $3.5 million.
•Changes in accounts receivable, including advance billings, contributed lowerhigher cash flow of $71.9$15.5 million in the six months ended June 30, 20212022 compared to the six months ended June 30, 2020.2021. The decreaseincrease was a result of higher accounts receivable resulting from revenue growth, change in credit terms for certain clientslower cash flows during the six months ended June 30, 2021, and due to higher advance collections during the three months ended December 31, 2020. This was partially offset by higher accounts receivable resulting from revenue growth during the six months ended June 30, 2022 and increase in our accounts receivable days sales outstanding which improvedwas 60 days as of June 30, 2022 as compared to 58 days as of June 30, 2021 from 63 days as of June 30, 2020.2021.
•IncreaseAn increase in net income of $29.1$12.1 million in the six months ended June 30, 20212022 compared to the six months ended June 30, 2020,2021, primarily due to an increase in income from operations of $40.1$13.6 million driven by higher revenues, lower interest expense of $2.6 million and higher gain from equity-method investment of $0.3 million, partially offset by higher income tax expense of $8.0 million and lower other income, net of interest expense of $3.1$4.4 million.
•Increase in accrued employee costs, accrued expenses and other liabilities contributed higher cash flow of $51.6 million in the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The increase was primarily due to lower payment and higher provisions of annual performance incentives of $23.3 million, higher other employee cost accruals of $4.0 million and higher accrued expenses and other liabilities of $24.3 million, during the six months ended June 30, 2021 compared to the six months ended June 30, 2020.
•Other drivers decreasingincreasing cash flows during the six months ended June 30, 20212022 compared to the six months ended June 30, 20202021 included: lower income tax payments, net of refunds, of $13.8$4.4 million, primarily due to withholding tax payments during the six months ended June 30, 2021, offset by higher advance income tax payments on account of higher net income.income during the six months ended June 30, 2022.
Investing Activities: Cash flows provided byused for investing activities were $11.7$41.0 million for the six months ended June 30, 20212022 as compared to cash flows provided by investing activities of $1.1$11.7 million for the six months ended June 30, 2020.2021. The increase in cash flows used for investing activities of $52.7 million is mainly due to higher net purchase of investments of $13.5 million during six months ended June 30, 2022 as compared to net redemption of investments of $31.0 million during the six months ended June 30, 2021 as compared2021. The increase is also due to higher capital expenditures in infrastructure, technology assets, software and product developments of $5.5 million and acquisitions related payouts of $2.6 million during the six months ended June 30, 2022.
net redemption of investments of $23.8 million during the six months ended June 30, 2020, 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 during the six months ended June 30, 2020.
Financing Activities: Cash flows used for financing activities were $131.4$35.3 million during the six months ended June 30, 20212022 as compared to cash flows used for financing activities of $13.4$131.4 million during the six months ended June 30, 2020.2021. The increase in cash flows used for financing activitiesdecrease of $96.1 million was primarily due to higher net repaymentproceeds of $73.8 millionour borrowings under our revolving Credit Facility higher purchases of treasury stock by $43.4 million under our share repurchase program and lower proceeds from the exercise of stock options of $0.8$25.0 million during the six months ended June 30, 20212022 as compared to net repayment of our borrowings of $74.0 million during the six months ended June 30, 2021. This was partially offset by higher purchases of treasury stock by $2.8 million under our share repurchase program during the six months ended June 30, 2022 as compared to the six months ended June 30, 2020.2021.
We expect to use cash from operating activities to maintain and expand our business by making investments, primarily related to new facilities and capital expenditures associated with leasehold improvements to build our facilities, digital capabilities and purchase telecommunications equipment and computer hardware and software in connection with managing client operations.
We incurred $19.9$25.1 million of capital expenditures in the six months ended June 30, 2021.2022. We expect to incur total capital expenditures of between $35.0 million and $40.0 million to $45.0 million in 2021,2022, 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.
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 (see Note 24 - Commitments and Contingencies to our unaudited consolidated financial statements herein for further details). We anticipate that we will continue to rely upon cash from operating activities to finance our working capital needs, capital expenditures and smaller acquisitions. If we have significant growth through acquisitions, we may need to obtain additional financing.
We believe that our existing cash, cash equivalents and short-term investments and sources of liquidity will be sufficient to satisfy our cash requirements over the next 12 months. Our future cash requirements will depend on many factors, including our rate of revenue growth, our investments in strategic initiatives, applications or technologies, operation centers and acquisition of complementary businesses, continued purchases under our board-authorized stock repurchase program, which may require the use of significant cash resources and/or additional financing. Although we anticipate that we will continue to rely upon cash from operating activities to finance most of our above mentioned requirements, if we have significant growth through acquisitions, we may need to obtain additional financing.
In the ordinary course of business, we enter into contracts and commitments that obligate us to make payments in the future. These obligations include borrowings, including interest obligations, purchase commitments, operating and finance lease commitments, employee benefit payments under Gratuity plans and uncertain tax positions. See Note 17 - Borrowings, Note 20 - Leases, and Note 24 - Commitments and Contingencies to our unaudited consolidated financial statements herein for further information on material cash requirements from known contractual and other obligations.
In the ordinary course of business, we provide standby letters of credit to third parties primarily for facility leases. As of June 30, 2022 and December 31, 2021, we had outstanding letters of credit of $0.5 million, each, that were not recognized in our consolidated balance sheets. 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.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) allows employers to defer the payment of 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 beis payable as follows: (1) 50% of the deferred amount will bewas 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 and Notes)
The following tables summarizes our Debt balances Our deferred contributions, net of payments to FICA was $3.1 million as of June 30, 20212022 and December 31, 2020.2021, each, which will be paid on or before December 31, 2022.
| | | | | | | | | | | | | | | | | | | | |
| | 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 | |
Financing Arrangements (Debt Facility)
| | | | | | | | | | | | | | | | | | | | |
| | 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 | |
The following tables summarizes our debt position:
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of June 30,2022 | | As of December 31, 2021 |
| | (dollars in millions) | | (dollars in millions) |
| | Revolving Credit Facility | Total | | Revolving Credit Facility | | Total |
Current portion of long-term borrowings | | $ | 35.0 | | $ | 35.0 | | | $ | 260.0 | | | $ | 260.0 | |
| | | | | | | |
Long-term borrowings | | 250.0 | | 250.0 | | | — | | | — | |
| | | | | | | |
| | | | | | | |
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Total borrowings | | $ | 285.0 | | $ | 285.0 | | | $ | 260.0 | | | $ | 260.0 | |
*Unamortized debt issuance costs for our revolving Credit Facility of $0.4$1.3 million and $0.5$0.2 million as of June 30, 20212022 and December 31, 2020,2021, respectively, is presented under “Other current assets” and “Other assets”assets,” as applicable in our consolidated balance sheets.
See Note 17 - Borrowings to our unaudited consolidated financial statements herein for further details on 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 June 30, 2021 and December 31, 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 June 30, 2021:
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| | 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 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 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 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.details.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, see Note 2—“Recent Accounting Pronouncements” to theour unaudited consolidated financial statements contained herein.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
During the three months ended June 30, 2021,2022, 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 About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.2021.
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 its 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 June 30, 2021.2022. Based upon that evaluation, the CEO and CFO have concluded that our disclosure controls and procedures, as of June 30, 2021,2022, were effective.
Changes in Internal Control over Financial Reporting
During the three months ended June 30, 2021,2022, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
In making its assessment of the changes in internal control over financial reporting during the six months ended June 30, 2022, our management excluded an evaluation of the disclosure controls and procedures of Clairvoyant and Inbound which we acquired on December 16, 2021 and June 10, 2022, respectively. See Note 9 - Business Combination, Goodwill and Intangible Assets to our unaudited consolidated financial statements contained herein for details of our acquisition.
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. Although 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. See Note 24 - Commitments and Contingencies to our unaudited consolidated financial statements contained herein for details.
ITEM 1A. Risk Factors
We have discusseddisclosed below, as well as under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 20202021 (the “2020“2021 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 these Risk Factors and 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,Our results of operations and financial condition have been adversely affected, and could in the future be materially adversely affected by economic and political conditions globally and the coronavirus pandemic.”effects of these conditions on our clients’ businesses and levels of business activity.
In late March 2021, a new serious outbreakThe Russian invasion of COVID-19 virus began affecting India. The outbreak resulted in an exorbitant spike inUkraine and the number of COVID patients, which overwhelmedresulting economic sanctions imposed by the healthcare infrastructure in India. The Indian government reinstated lockdowns limiting inUnited States and other countries, along with certain casesinternational organizations, have impacted the movement of our employeesglobal economy and given rise 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 possiblepotential global security issues that any further developments, including the emergence of new variants of the COVID-19 virus, couldmay adversely affect ourinternational business and results of operations.economic conditions. Additional sanctions could further damage or
disrupt international commerce. Although we have no operations in Russia or Ukraine, certain of our customers and suppliers may have been or may in the future be impacted by these events. Moreover, the ongoing effects of the hostilities and sanctions may not be limited to Russia and Russian companies and may spill over to and negatively impact other regional and global economic markets. A prolonged conflict may result in increased inflation, rising energy prices and constrained supply chain, and thus may lead to inflationary global economic environment. At this time, the extent and duration of the military action, resulting sanctions and future economic and market disruptions, and resulting effects on the Company, are impossible to predict.
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 June 30, 2021,2022, purchases of common stock were as follows:
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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. | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 |
April 1, 2022 through April 30, 2022 | | 46,778 | | | $ | 145.50 | | | 46,778 | | | $ | 265,000,088 | |
May 1, 2022 through May 31, 2022 | | 75,089 | | | $ | 132.59 | | | 75,089 | | | $ | 255,044,097 | |
June 1, 2022 through June 30, 2022 | | 83,849 | | | $ | 143.64 | | | 83,849 | | | $ | 243,000,163 | |
Total | | 205,716 | | | $ | 140.03 | | | 205,716 | | | $ | — | |
On December 16, 2019, ourOctober 5, 2021, the Company’s Board of Directors authorized a $200.0$300 million common stock repurchase program beginning January 1, 2020 through December 31, 2022 (the “2019“2022 Repurchase Program”). The
Under the 2022 Repurchase Program, shares may be purchased by usthe Company from time to time from the open market and through private transactions, or otherwise, as determined by usthe Company’s management as market conditions warrant. The 2019Company has structured open market purchases under the Repurchase Program to comply with Rule 10b-18 under the Exchange Act. Repurchases may be suspended or discontinued at any time.
time by management.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
The following exhibits are being filed as part of this Quarterly Report on Form 10-Q:
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3.1 | | | | |
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3.2 | | | | |
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3.3 | | | | |
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10.1 | | | | |
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10.2 | | | | |
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31.1 | | | | |
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31.2 | | | | |
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32.1 | | | | |
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32.2 | | | | |
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101.INS | | XBRL Instance Document | | |
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101.SCH | | XBRL Taxonomy Extension Scheme | | |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase | | |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase | | |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase | | |
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101.PRE | | XBRL Extension Presentation Linkbase | | |
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104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | | |
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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.
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Date: July 29, 202128, 2022 | EXLSERVICE HOLDINGS, INC. |
| | | |
| By: | | /S/ MAURIZIO NICOLELLI |
| | | MAURIZIO NICOLELLI Chief Financial Officer (Duly Authorized Signatory, Principal Financial and Accounting Officer) |