NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(In thousands, except per share 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”), is a leading data analytics and digital 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 creates 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 drive improved business outcomes, and re-designing of operating models to integrate advanced technology into operational workflows. The Company embeds digital operations and solutions into clients’ businesses and 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, 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.
For purposes of comparability, certain prior period amounts have been reclassified to conform to the current year presentation in accordance with U.S. GAAP.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
(b)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, 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, and recoverability of long-lived assets, goodwill and intangibles.
(c)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 amortized cost. Interest earned on such investments is included in other income, net.
The Company’s mutual fund investments are in debt funds 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. 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, net. Gain or loss on the disposal of these investments is calculated using the weighted average cost of the investments sold and is included in other income, net.
(d)Derivative Financial Instruments
In the normal course of business, the Company uses derivative instruments to mitigate the exposure from risk of foreign currency and interest rate fluctuations. The Company enters into foreign currency forward contracts to hedge cash flow risks from forecasted transactions denominated in certain foreign currencies, and interest rate swaps to hedge cash flow risks from its revolving credit facility having variable interest rate obligations. These contracts adhere to the Company’s treasury operations’ objectives and policies to qualify as cash flow hedges, and are with counterparties that are highly rated financial institutions.
Changes in the fair value of these cash flow hedges are recorded as a component of accumulated other comprehensive income/(loss) (“AOCI”), net of tax. The resultant foreign exchange gain/(loss) upon settlement of cash flow hedges of a forecast transaction are recorded in the unaudited consolidated statements of income along with the underlying hedged item in the same line as part of “Cost of revenues,” “General and administrative expenses,” “Selling and marketing expenses,” and “Depreciation and amortization expense,” as applicable. The accumulated changes in the fair value of interest rate swaps recognized in AOCI are reclassed to the unaudited consolidated statements of income and are presented as a part of “Interest expense” over the term of the contract.
The Company evaluates hedge effectiveness of cash flow hedges at the time a contract is entered into as well as on an ongoing basis. For hedge relationships that are discontinued because the forecasted transaction is not expected to occur by the end of the originally specified period, any related derivative amounts recorded in AOCI are reclassified to earnings.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
The Company also uses derivatives instruments consisting of foreign currency forward contracts to economically hedge intercompany balances and other monetary assets or liabilities denominated in currencies other than the functional currency, 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 foreign exchange gain/(loss).
The Company also uses foreign currency forward contracts designated as net investment hedges to hedge the foreign currency risks related to the Company's investment in foreign subsidiaries. Gains and losses on these forward contracts are recognized in AOCI as part of the foreign currency translation adjustment. All of the assets and liabilities related to the Company’s 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. The Company has presented all of the assets and liabilities related to these contracts on a gross basis, with no offsets, in its consolidated statements of financial position. There is no financial collateral (including cash collateral) provided or received by the Company related to these contracts.
(e)Recent Accounting Pronouncements
In October 2021, FASB issued Accounting Standard Update (“ASU”) No. 2021-08, Business Combinations (Topic 805): Accounting for Contract 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 acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements, if the acquiree prepared financial statements in accordance with U.S. GAAP. The ASU is effective for fiscal years beginning after December 15, 2022. An entity may early adopt the ASU including adoption in an interim period, with retrospective application to all business combinations within the fiscal year that includes such interim period. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
(f)Recently adopted Accounting Pronouncements
In March 2020, FASB issued 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 adoption of this ASU did not have a material impact on the Company’s unaudited consolidated financial statements.
3. Segment and Geographical Information
The Company is a provider of data analytics and digital operations and solutions.
The Company manages and reports financial information through its four reportable segments: Insurance, Healthcare, Analytics and Emerging 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.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
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 10 - Business Combinations, Goodwill and Intangible Assets to the unaudited consolidated financial statements for further details.
Revenues and cost of revenues for the three months ended September 30, 2022 and 2021, respectively, for each of the reportable segments, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2022 |
Insurance | | Healthcare | | Emerging Business | | Analytics | | Total |
|
Revenues, net | $ | 116,198 | | | $ | 22,820 | | | $ | 56,035 | | | $ | 166,298 | | | $ | 361,351 | |
Cost of revenues(1) | 75,041 | | | 17,119 | | | 32,363 | | | 105,939 | | | 230,462 | |
Gross profit(1) | $ | 41,157 | | | $ | 5,701 | | | $ | 23,672 | | | $ | 60,359 | | | $ | 130,889 | |
Operating expenses | | | | | | | | | 80,778 | |
Foreign exchange gain, interest expense and other income, net | | | | | | | | | 1,323 | |
Income tax expense | | | | | | | | | 12,447 | |
Gain from equity-method investment | | | | | | | | | 108 | |
Net income | | | | | | | | | $ | 39,095 | |
(1) Exclusive of depreciation and amortization expense.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2021 |
Insurance | | Healthcare | | Emerging Business | | Analytics | | Total |
|
Revenues, net | $ | 98,008 | | | $ | 27,341 | | | $ | 44,513 | | | $ | 120,463 | | | $ | 290,325 | |
Cost of revenues(1) | 61,490 | | | 17,057 | | | 23,660 | | | 75,536 | | | 177,743 | |
Gross profit(1) | $ | 36,518 | | | $ | 10,284 | | | $ | 20,853 | | | $ | 44,927 | | | $ | 112,582 | |
Operating expenses | | | | | | | | | 70,144 | |
Loss on settlement of convertible notes, foreign exchange gain, interest expense and other income, net | | | | | | | | | (11,763) | |
Income tax expense | | | | | | | | | 4,196 | |
Gain from equity-method investment | | | | | | | | | 28 | |
Net income | | | | | | | | | $ | 26,507 | |
(1) Exclusive of depreciation and amortization expense.
Revenues and cost of revenues for the nine months ended September 30, 2022 and 2021, respectively, for each of the reportable segments, are as follows:
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2022 |
Insurance | | Healthcare | | Emerging Business | | Analytics | | Total |
|
Revenues, net | $ | 328,021 | | | $ | 72,027 | | | $ | 160,655 | | | $ | 476,638 | | | $ | 1,037,341 | |
Cost of revenues(1) | 210,768 | | | 52,464 | | | 92,790 | | | 303,163 | | | 659,185 | |
Gross profit(1) | $ | 117,253 | | | $ | 19,563 | | | $ | 67,865 | | | $ | 173,475 | | | $ | 378,156 | |
Operating expenses | | | | | | | | | 236,989 | |
Foreign exchange gain, interest expense and other income, net | | | | | | | | | 4,361 | |
Income tax expense | | | | | | | | | 34,774 | |
Gain from equity-method investment | | | | | | | | | 365 | |
Net income | | | | | | | | | $ | 111,119 | |
(1) Exclusive of depreciation and amortization expense.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2021 |
Insurance | | Healthcare | | Emerging Business | | Analytics | | Total |
|
Revenues, net | $ | 283,887 | | | $ | 85,856 | | | $ | 122,871 | | | $ | 334,190 | | | $ | 826,804 | |
Cost of revenues(1) | 176,942 | | | 52,133 | | | 66,850 | | | 211,340 | | | 507,265 | |
Gross profit(1) | $ | 106,945 | | | $ | 33,723 | | | $ | 56,021 | | | $ | 122,850 | | | $ | 319,539 | |
Operating expenses | | | | | | | | | 199,716 | |
Loss on settlement of convertible notes, foreign exchange gain, interest expense and other income, net | | | | | | | | | (11,345) | |
Income tax expense | | | | | | | | | 22,019 | |
| | | | | | | | | |
Net income | | | | | | | | | $ | 86,459 | |
(1) Exclusive of depreciation and amortization expense.
Revenues, net by service type, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Digital operations and solutions(1) | $ | 195,053 | | | $ | 169,862 | | | $ | 560,703 | | | $ | 492,614 | |
Analytics services | 166,298 | | | 120,463 | | | 476,638 | | | 334,190 | |
Revenues, net | $ | 361,351 | | | $ | 290,325 | | | $ | 1,037,341 | | | $ | 826,804 | |
(1) Digital operations and solutions include revenues of the Company’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)
September 30, 2022
(In thousands, except per share amount and share count)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenues, net | | | | | | | |
United States | $ | 310,652 | | | $ | 249,726 | | | $ | 891,551 | | | $ | 709,382 | |
Non-United States | | | | | | | |
United Kingdom | 34,131 | | | 27,433 | | | 98,994 | | | 78,359 | |
Rest of World | 16,568 | | | 13,166 | | | 46,796 | | | 39,063 | |
Total Non-United States | 50,699 | | | 40,599 | | | 145,790 | | | 117,422 | |
Revenues, net | $ | 361,351 | | | $ | 290,325 | | | $ | 1,037,341 | | | $ | 826,804 | |
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 |
| September 30, 2022 | | December 31, 2021 |
Long-lived assets | | | |
India | $ | 58,969 | | | $ | 79,604 | |
United States | 55,825 | | | 50,095 | |
Philippines | 18,899 | | | 22,011 | |
Rest of World | 8,206 | | | 10,990 | |
Long-lived assets | $ | 141,899 | | | $ | 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 |
| September 30, 2022 | | December 31, 2021 |
| | | |
Accounts receivable, net | $ | 256,911 | | | $ | 194,232 | |
Contract assets | $ | 1,180 | | | $ | 2,524 | |
Contract liabilities: | | | |
Deferred revenue (consideration received in advance) | $ | 16,342 | | | $ | 18,247 | |
Consideration received for process transition activities | $ | 4,515 | | | $ | 2,203 | |
Accounts receivable includes $134,334 and $93,336 as of September 30, 2022 and December 31, 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)
September 30, 2022
(In thousands, except per share amount and share count)
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 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 nine months ended September 30, 2022 and 2021, which was included in the contract liabilities balance at the beginning of the respective periods:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Deferred revenue (consideration received in advance) | $ | 2,456 | | | $ | 1,778 | | | $ | 16,326 | | | $ | 28,731 | |
Consideration received for process transition activities | $ | 706 | | | $ | 411 | | | $ | 1,370 | | | $ | 1,598 | |
Contract acquisition and fulfillment costs
The following table provides details of the Company’s contract acquisition and fulfillment costs:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Contract Acquisition Costs |
| Three months ended | | Nine months ended | | Year ended |
| September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 | | December 31, 2021 |
| | | | | | | | | |
Opening Balance | $ | 983 | | | $ | 867 | | | $ | 511 | | | $ | 1,027 | | | $ | 1,027 | |
Additions / (reductions) | 78 | | | (97) | | | 805 | | | 277 | | | 277 | |
Amortization | (73) | | | (158) | | | (328) | | | (692) | | | (793) | |
Closing Balance | $ | 988 | | | $ | 612 | | | $ | 988 | | | $ | 612 | | | $ | 511 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Contract Fulfillment Costs |
| Three months ended | | Nine months ended | | Year ended |
| September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 | | December 31, 2021 |
| | | | | | | | | |
Opening Balance | $ | 10,167 | | | $ | 3,694 | | | $ | 5,795 | | | $ | 5,631 | | | $ | 5,631 | |
Additions | 2,964 | | | 279 | | | 8,449 | | | 443 | | | 3,742 | |
Amortization | (1,170) | | | (693) | | | (2,283) | | | (2,794) | | | (3,578) | |
Closing Balance | $ | 11,961 | | | $ | 3,280 | | | $ | 11,961 | | | $ | 3,280 | | | $ | 5,795 | |
There was no impairment for contract acquisition and contract fulfillment costs as of September 30, 2022 and December 31, 2021. The capitalized costs are amortized over the expected period of benefit of the contract.
Allowance for expected credit losses
The Company evaluates the credit risk of its customers based on a combination of various financial and qualitative factors that may affect the ability of each customer to pay. The Company considered current and anticipated future economic conditions relating to the industries of the Company’s customers and the countries where it operates. In calculating expected credit loss, the Company also considered past payment trends, credit rating and other related credit information for its significant customers to estimate the probability of default in the future and estimates relating to the possible effects resulting from COVID-19.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
| | | | | | | | | | | |
| As of |
| September 30, 2022 | | December 31, 2021 |
Accounts receivable, including unbilled receivables | $ | 257,766 | | | $ | 194,805 | |
Less: Allowance for expected credit losses | (855) | | | (573) | |
Accounts receivable, net | $ | 256,911 | | | $ | 194,232 | |
The movement in “Allowance for expected credit losses” on customer balances was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended | | Year ended |
| September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 | | December 31, 2021 |
Opening Balance | $ | 844 | | | $ | 730 | | | $ | 573 | | | $ | 1,189 | | | $ | 1,189 | |
Additions / (reductions) | 9 | | | (19) | | | 752 | | | (414) | | | (496) | |
Reductions due to write-off of Accounts Receivables | — | | | (41) | | | (472) | | | (114) | | | (129) | |
Translation adjustment | 2 | | | 1 | | | 2 | | | 10 | | | 9 | |
Closing Balance | $ | 855 | | | $ | 671 | | | $ | 855 | | | $ | 671 | | | $ | 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 (as discussed further in the subsequent paragraph). Common stock equivalents 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.
In 2021, diluted weighted-average shares outstanding was affected by the treatment of the Company’s 3.5% per annum Convertible Senior Notes due October 1, 2024 (the “Notes”). The Company had a choice to settle the Notes in cash, shares or any combination of the two. The Company had the ability to settle the principal balance of the Notes in cash, and as such, the Company 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. During the third 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 the portion of the period outstanding.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
The following table sets forth the computation of basic and diluted earnings per share:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Numerators: | | | | | | | |
Net income | $ | 39,095 | | | $ | 26,507 | | | $ | 111,119 | | | $ | 86,459 | |
Denominators: | | | | | | | |
Basic weighted average common shares outstanding | 33,237,833 | | | 33,449,311 | | | 33,360,346 | | | 33,583,791 | |
Dilutive effect of share-based awards | 539,916 | | | 440,378 | | | 473,291 | | | 371,145 | |
Dilutive effect of conversion premium on the Notes | — | | | 416,204 | | | — | | | 382,014 | |
Diluted weighted average common shares outstanding | 33,777,749 | | | 34,305,893 | | | 33,833,637 | | | 34,336,950 | |
Earnings per share attributable to ExlService Holdings Inc. stockholders: | | | | | | | |
Basic | $ | 1.18 | | | $ | 0.79 | | | $ | 3.33 | | | $ | 2.57 | |
Diluted | $ | 1.16 | | | $ | 0.77 | | | $ | 3.28 | | | $ | 2.52 | |
Weighted average potentially dilutive shares considered anti-dilutive and not included in computing diluted earnings per share | 936 | | | 40,384 | | | 673 | | | 14,044 | |
6. Cash, Cash Equivalents and Restricted Cash
For the purposes of the unaudited statements of cash flows, cash, cash equivalents and restricted cash comprise of the following: | | | | | | | | | | | | | | | | | |
| As of |
| September 30, 2022 | | September 30, 2021 | | December 31, 2021 |
Cash and cash equivalents | $ | 89,262 | | | $ | 114,581 | | | $ | 135,337 | |
Restricted cash (current) | 7,013 | | | 6,810 | | | 6,174 | |
Restricted cash (non-current) | 1,996 | | | 2,302 | | | 2,299 | |
Cash, cash equivalents and restricted cash | $ | 98,271 | | | $ | 123,693 | | | $ | 143,810 | |
7. Investments
Investments consist of the following: | | | | | | | | | | | | |
| | As of |
| | September 30, 2022 | | December 31, 2021 |
Short-term investments | | | | |
Mutual funds | | $ | 99,435 | | $ | 127,551 |
Term deposits | | 73,454 | | 51,879 |
Total Short-term investments | | $ | 172,889 | | $ | 179,430 |
| | | | |
Long-term investments | | | | |
Term deposits | | $ | 31,355 | | $ | 186 |
Investment in equity affiliate | | 3,369 | | 3,004 |
Total Long-term investments | | $ | 34,724 | | $ | 3,190 |
| | | | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
8. Other Income, net
Other income, net consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Gain on sale and mark-to-market of mutual funds and money market funds | $ | 1,471 | | | $ | 1,233 | | | $ | 3,341 | | | $ | 3,991 | |
Interest and dividend income | 1,457 | | | 761 | | | 3,674 | | | 2,052 | |
Others, net | (667) | | | (273) | | | (2,517) | | | (697) | |
Other income, net | $ | 2,261 | | | $ | 1,721 | | | $ | 4,498 | | | $ | 5,346 | |
9. Property and Equipment, net
Property and equipment, net consists of the following:
| | | | | | | | | | | | | | | | | |
| Estimated useful lives | | As of |
| (Years) | | September 30, 2022 | | December 31, 2021 |
Owned Assets: | | | | | |
Network equipment and computers | 3-5 | | $ | 125,523 | | | $ | 116,023 | |
Software | 2-5 | | 106,738 | | | 101,884 | |
Leasehold improvements | 3-8 | | 43,326 | | | 46,401 | |
Office furniture and equipment | 3-8 | | 20,669 | | | 22,302 | |
Motor vehicles | 2-5 | | 573 | | | 693 | |
Buildings | 30 | | 978 | | | 1,070 | |
Land | — | | 640 | | | 700 | |
Capital work in progress | — | | 10,876 | | | 10,288 | |
| | | 309,323 | | | 299,361 | |
Less: Accumulated depreciation and amortization | | | (229,813) | | | (213,699) | |
| | | $ | 79,510 | | | $ | 85,662 | |
Right-of-use assets under finance leases*: | | | | | |
Network equipment and computers | | | $ | 84 | | | $ | 91 | |
Leasehold improvements | | | 1,030 | | | 1,229 | |
Office furniture and equipment | | | 666 | | | 787 | |
Motor vehicles | | | 636 | | | 578 | |
| | | 2,416 | | | 2,685 | |
Less: Accumulated depreciation and amortization | | | (1,993) | | | (2,339) | |
| | | 423 | | | 346 | |
Property and equipment, net | | | $ | 79,933 | | | $ | 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.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
During the three and nine months ended September 30, 2022, there were no changes in estimated useful lives of property and 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 September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Depreciation and amortization expense | $ | 10,137 | | | $ | 9,283 | | | $ | 29,182 | | | $ | 26,936 | |
The effect of foreign exchange gain/(loss) upon settlement of cash flow hedges recorded under depreciation and amortization, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Effect of foreign exchange gain/(loss) | | $ | (126) | | | $ | 120 | | | $ | (64) | | | $ | 443 | |
Internally developed software costs, included under Software, was as follows:
| | | | | | | | | | | |
| As of |
| September 30, 2022 | | December 31, 2021 |
Cost | $ | 29,015 | | | $ | 19,289 | |
Less : Accumulated amortization | (14,599) | | | (10,226) | |
Internally developed software, net | $ | 14,416 | | | $ | 9,063 | |
The amortization expense on internally developed software recognized in the unaudited consolidated statements of income was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Amortization expense | $ | 1,832 | | | $ | 1,086 | | | $ | 4,414 | | | $ | 3,165 | |
As of September 30, 2022 and December 31, 2021, the Company believes no 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 assurance 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, the asset’s residual value, if any, and estimates relating to the possible effects resulting from COVID-19. It is reasonably possible that the judgments and estimates described above could change in future periods.
10. Business Combinations, Goodwill and Intangible Assets
Clairvoyant 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.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
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 September 30, 2022 and December 31, 2021, of the total purchase consideration, the Company has paid $78,984 and $76,831, respectively, net of cash and cash equivalents acquired. The Purchase Agreement also allows sellers the ability to earn up to $20,000 of contingent consideration, based on the achievement of certain performance goals by Clairvoyant during the 2022 and 2023 calendar years. The contingent consideration had an estimated fair value of $10,000 and $9,000, as of September 30, 2022 and December 31, 2021, respectively, and has been presented as contingent consideration under “Accrued expenses and other current liabilities” and “Other non-current liabilities,” as applicable, in the consolidated balance sheets. Changes in the fair value of contingent consideration were recognized in the unaudited consolidated statements of income and presented as a part of “Other income, 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) | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
| | | | | | | |
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 nine months ended September 30, 2022, the Company recognized measurement period adjustments, which led to increase in goodwill in an amount of $nil 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.
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 unaudited consolidated statements of income. The Company recognized acquisition-related costs of $nil and $134 during the three and nine months ended September 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.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
Goodwill
The following table sets forth details of changes in goodwill by reportable segment of the Company: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Insurance | | Healthcare | | Emerging Business | | Analytics | | Total |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Balance as of 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 | (654) | | | (57) | | | (1,630) | | | (1) | | | (2,342) | |
Balance as of September 30, 2022 | $ | 49,774 | | | $ | 21,885 | | | $ | 47,390 | | | $ | 286,732 | | | $ | 405,781 | |
As of September 30, 2022, the Company performed an assessment to determine whether events or circumstances exist that may lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company considered current and forecasted economic and market conditions and qualitative factors, such as the Company’s performance during nine months of the current fiscal year, business forecasts for the remainder of the year, stock price movements, generation and availability 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 September 30, 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 of 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 continues to monitor 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 September 30, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Finite-lived intangible assets: | | | | | |
Customer relationships | $ | 99,146 | | | $ | (36,999) | | | $ | 62,147 | |
Developed technology | 24,759 | | | (19,539) | | | 5,220 | |
Trade names and trademarks | 1,700 | | | (1,230) | | | 470 | |
Non-compete agreements | 336 | | | (65) | | | 271 | |
| $ | 125,941 | | | $ | (57,833) | | | $ | 68,108 | |
Indefinite-lived intangible assets: | | | | | |
Trade names and trademarks | $ | 900 | | | $ | — | | | $ | 900 | |
Total intangible assets | $ | 126,841 | | | $ | (57,833) | | | $ | 69,008 | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
| | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Finite-lived intangible assets: | | | | | |
Customer relationships | $ | 103,016 | | | $ | (33,018) | | | $ | 69,998 | |
Developed technology | 25,040 | | | (15,850) | | | 9,190 | |
Trade names and trademarks | 1,700 | | | (1,006) | | | 694 | |
Non-compete agreements | 300 | | | — | | | 300 | |
| $ | 130,056 | | | $ | (49,874) | | | $ | 80,182 | |
Indefinite-lived intangible assets: | | | | | |
Trade names and trademarks | $ | 900 | | | $ | — | | | $ | 900 | |
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 September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Amortization expense | $ | 4,243 | | | $ | 3,022 | | | $ | 12,875 | | | $ | 9,780 | |
The remaining weighted average life of intangible assets is as follows:
| | | | | |
| (in years) |
Customer relationships | 5.7 |
Developed technology | 1.5 |
Trade names and trademarks (Finite lived) | 1.7 |
Non-compete agreements | 3.0 |
| | | | | |
Estimated future amortization expense related to finite-lived intangible assets as of September 30, 2022 was as follows: |
2022 (October 1 - December 31) | $ | 4,228 | |
2023 | 14,634 | |
2024 | 12,123 | |
2025 | 10,686 | |
2026 | 10,357 | |
2027 and thereafter | 16,080 | |
Total | $ | 68,108 | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
11. Other Current Assets
Other current assets consist of the following:
| | | | | | | | | | | |
| As of |
| September 30, 2022 | | December 31, 2021 |
Advance income tax, net | $ | 19,040 | | | $ | 15,199 | |
Receivables from statutory authorities | 13,929 | | | 18,023 | |
Prepaid expenses | 13,723 | | | 14,655 | |
Advances to suppliers | 1,834 | | | 1,464 | |
Deferred contract fulfillment costs | 1,793 | | | 1,483 | |
Derivative instruments | 1,362 | | | 8,682 | |
Contract assets | 564 | | | 1,319 | |
Others | 2,264 | | | 2,146 | |
Other current assets | $ | 54,509 | | | $ | 62,971 | |
12. Other Assets
Other assets consist of the following:
| | | | | | | | | | | |
| As of |
| September 30, 2022 | | December 31, 2021 |
Deferred contract fulfillment costs | $ | 10,168 | | | $ | 4,312 | |
Lease deposits | 8,592 | | | 9,649 | |
Deposits with statutory authorities | 6,362 | | | 6,417 | |
Contract assets | 616 | | | 1,205 | |
Receivable from statutory authorities | 226 | | | 222 | |
Derivative instruments | 219 | | | 6,307 | |
Others | 3,655 | | | 2,071 | |
Other assets | $ | 29,838 | | | $ | 30,183 | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
13. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
| | | | | | | | | | | |
| As of |
| September 30, 2022 | | December 31, 2021 |
Accrued expenses | $ | 47,351 | | | $ | 44,405 | |
Payable to statutory authorities | 17,230 | | | 13,902 | |
Derivative instruments | 11,897 | | | 1,852 | |
Client liabilities | 6,593 | | | 6,097 | |
Contingent consideration | 5,280 | | | — | |
Accrued capital expenditures | 4,274 | | | 8,630 | |
Interest payable | 365 | | | 252 | |
Finance lease liabilities | 140 | | | 141 | |
Other current liabilities | 3,670 | | | 1,071 | |
Accrued expenses and other current liabilities | $ | 96,800 | | | $ | 76,350 | |
14. Other Non-Current Liabilities
Other non-current liabilities consist of the following:
| | | | | | | | | | | |
| As of |
| September 30, 2022 | | December 31, 2021 |
Retirement benefits | $ | 14,506 | | | $ | 9,604 | |
Derivative instruments | 8,114 | | | 1,785 | |
Contingent consideration | 6,159 | | | 9,000 | |
Deferred transition revenue | 3,272 | | | 995 | |
Unrecognized tax benefits | 2,186 | | | 1,068 | |
Income taxes payable | 1,790 | | | 1,790 | |
Finance lease liabilities | 300 | | | 229 | |
Others | 916 | | | 120 | |
Other non-current liabilities | $ | 37,243 | | | $ | 24,591 | |
15. Accumulated Other Comprehensive Income/(Loss)
Accumulated other comprehensive income/(loss) (“AOCI”) consists of actuarial gain/(loss) on retirement benefits and foreign currency translation adjustments. In addition, the Company enters into foreign currency forward contracts and interest rate swaps, which are designated as cash flow hedges and net investment hedges, as applicable, in accordance with ASC 815. Cumulative changes in the fair values of cash flow hedges are recognized in AOCI on the Company’s consolidated balance sheets. The fair value changes are reclassified from AOCI to unaudited consolidated statements of income upon settlement of foreign currency forward contracts designated as cash flow hedges of a forecast transaction, whereas such changes are for interest rate swaps are reclassified over the term of the contract. Fair value changes related to net investment hedges are included in AOCI and are reclassified to unaudited consolidated statements of income when a foreign operation is disposed or partially disposed. The following table sets forth the changes in AOCI for the nine months ended September 30, 2022 and 2021:
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | (49,371) | | | (28,638) | | | — | | | (78,009) | |
| | | | | | | |
Reclassification to net income (1) | — | | | (1,881) | | | 451 | | | (1,430) | |
Income tax effects (2) | 8,898 | | | 5,948 | | | (136) | | | 14,710 | |
Accumulated other comprehensive income/(loss) as of September 30, 2022 | $ | (135,910) | | | $ | (16,151) | | | $ | (2,142) | | | $ | (154,203) | |
| | | | | | | |
Balance as of January 1, 2021 | $ | (86,185) | | | $ | 13,799 | | | $ | (2,598) | | | $ | (74,984) | |
Losses recognized during the period | (10,475) | | | (42) | | | — | | | (10,517) | |
Losses on net investment hedges | (1,134) | | | — | | | — | | | (1,134) | |
Reclassification to net income (1) | — | | | (7,845) | | | 533 | | | (7,312) | |
Income tax effects (2) | 1,859 | | | (15) | | | (154) | | | 1,690 | |
Accumulated other comprehensive income/(loss) as of September 30, 2021 | $ | (95,935) | | | $ | 5,897 | | | $ | (2,219) | | | $ | (92,257) | |
(1) Refer to Note 17 - Derivatives and Hedge Accounting and Note 20 - 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 loss. Refer to Note 22 - Income Taxes to the unaudited consolidated financial statements.
16. Fair Value Measurements
Assets and Liabilities Measured at Fair Value
The following table sets forth the Company’s assets and liabilities that were recognized at fair value:
| | | | | | | | | | | | | | | | | | | | | | | |
| Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Other Unobservable Inputs | | |
As of September 30, 2022 | (Level 1) | | (Level 2) | | (Level 3) | | Total |
Assets | | | | | | | |
Cash equivalents - Money market funds* | $ | 2,085 | | | $ | — | | | $ | — | | | $ | 2,085 | |
Mutual funds** | 99,435 | | | — | | | — | | | 99,435 | |
Derivative financial instruments | — | | | 1,581 | | | — | | | 1,581 | |
Total | $ | 101,520 | | | $ | 1,581 | | | $ | — | | | $ | 103,101 | |
Liabilities | | | | | | | |
Derivative financial instruments | $ | — | | | $ | 20,011 | | | $ | — | | | $ | 20,011 | |
Contingent consideration*** | — | | | — | | | 11,439 | | | 11,439 | |
Total | $ | — | | | $ | 20,011 | | | $ | 11,439 | | | $ | 31,450 | |
| | | | | | | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
| | | | | | | | | | | | | | | | | | | | | | | |
| Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Other Unobservable Inputs | | |
As of December 31, 2021 | (Level 1) | | (Level 2) | | (Level 3) | | Total |
Assets | | | | | | | |
Cash equivalents - Money market funds* | $ | 5,374 | | | $ | — | | | $ | — | | | $ | 5,374 | |
Mutual funds** | 127,551 | | | — | | | — | | | 127,551 | |
Derivative financial instruments | — | | | 14,989 | | | — | | | 14,989 | |
Total | $ | 132,925 | | | $ | 14,989 | | | $ | — | | | $ | 147,914 | |
Liabilities | | | | | | | |
Derivative financial instruments | $ | — | | | $ | 3,637 | | | $ | — | | | $ | 3,637 | |
Contingent consideration*** | — | | | — | | | 9,000 | | | 9,000 | |
Total | $ | — | | | $ | 3,637 | | | $ | 9,000 | | | $ | 12,637 | |
* Represents money market funds which are carried at the fair value option under ASC Topic 825 “Financial Instruments”.
** Represents those short-term investments which are carried at the fair value option under ASC Topic 825 “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 contracts and interest rate swaps. 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 17 - 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 based on the Monte Carlo simulation model and scenario-based method. Refer to Note 10 - Business Combinations, Goodwill and Intangible Assets to the unaudited consolidated financial statements for further details.
The following table summarizes the changes in the fair value of contingent consideration:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Opening balance | $ | 11,439 | | | $ | — | | | $ | 9,000 | | | $ | — | |
Acquisitions | — | | | — | | | 1,439 | | | — | |
Fair value changes | — | | | — | | | 1,000 | | | — | |
Closing balance
| $ | 11,439 | | | $ | — | | | $ | 11,439 | | | $ | — | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
During the three months and nine months ended September 30, 2022 and 2021 there were no transfers among Level 1, Level 2 and Level 3.
Financial Instruments Not Carried at Fair Value:
The Company’s other financial instruments not carried at fair value consist primarily of cash and cash equivalents (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, long-term investments, accrued capital expenditures, accrued expenses, client liabilities and interest payable on borrowings for which fair values approximate their carrying 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.
17. Derivatives and Hedge Accounting
The Company uses derivative instruments to mitigate cash flow volatility from risk of fluctuations in foreign currency exchange rates and interest rates. The Company enters into foreign currency forward contracts to hedge cash flow risks from forecasted transactions denominated in certain foreign currencies, and interest rate swaps to hedge cash flow risks from its revolving credit facility having variable interest rate obligations. These contracts qualify as cash flow hedges under ASC Topic 815 and are with counterparties that are highly rated financial institutions. As of September 30, 2022 and December 31, 2021, the Company had outstanding foreign currency forward contracts totaling $604,560 and $514,580, respectively and interest rate swaps totaling $75,000 and $nil, respectively.
The Company estimates that approximately $10,757 of derivative losses, net, excluding tax effects, included in AOCI, representing changes in the value of cash flow hedges based on exchange rates prevailing as of September 30, 2022, could be reclassified into earnings within the next twelve months. As of September 30, 2022, the maximum outstanding term of the cash flow hedges was approximately 45 months.
The Company also enters into foreign currency forward contracts to economically hedge its intercompany balances and other monetary assets and liabilities denominated in currencies other than functional currencies, against the risk of fluctuations in foreign currency exchange rates associated with remeasurement of such assets and liabilities to functional currency. These foreign currency forward contracts do not qualify as fair value hedges under ASC Topic 815. Changes in the fair value of these financial instruments 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 162,473, GBP 9,254, EUR 1,906 and COP 3,619,127 as of September 30, 2022 and USD 134,612, GBP 6,763, EUR 1,343 and COP 2,541,902 as of December 31, 2021.
The following table sets forth the fair value of the foreign currency forward contracts and interest rate swaps and their location on the consolidated balance sheets:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Derivatives in cash flow hedging relationships | | Derivatives not designated as hedging instruments |
| | As of | | As of |
Derivative financial instruments | | September 30, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
Other current assets | | $ | 995 | | | $ | 8,669 | | | $ | 367 | | | $ | 13 | |
Other assets | | $ | 219 | | | $ | 6,307 | | | $ | — | | | $ | — | |
Accrued expenses and other current liabilities | | $ | 11,752 | | | $ | 1,324 | | | $ | 145 | | | $ | 528 | |
Other non-current liabilities | | $ | 8,114 | | | $ | 1,785 | | | $ | — | | | $ | — | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
The following tables set forth the effect of foreign currency forward contracts and interest rate swaps on AOCI and the unaudited consolidated statements of income:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
Derivative financial instruments: | | 2022 | | 2021 | | 2022 | | 2021 |
Unrealized gain/(loss) recognized in AOCI | | | | | | | | |
Derivatives in cash flow hedging relationships | | $ | (13,489) | | | $ | 261 | | | $ | (28,638) | | | $ | (42) | |
| | | | | | | | |
Loss recognized in unaudited consolidated statements of income | | | | | | | | |
Derivatives not designated as hedging instruments | | $ | (4,889) | | | $ | (464) | | | $ | (11,245) | | | $ | (1,054) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Location and amount of gain/(loss) recognized in unaudited consolidated statements of income for derivatives in cash flow hedging relationships and derivatives not designated as hedging instruments |
| | Three months ended September 30, |
| | 2022 | | 2021 |
| | As per unaudited consolidated statements of income | | Loss on derivative financial instruments | | As per unaudited consolidated statements of income | | Gain/(loss) on derivative financial instruments |
Cash flow hedging relationships | | | | | | | | |
Location in unaudited consolidated statements of income where gain was reclassified from AOCI | | | | | | | | |
| | | | | | | | |
Cost of revenues | | $ | 230,462 | | | $ | (1,381) | | | $ | 177,743 | | | $ | 1,801 | |
General and administrative expenses | | $ | 42,519 | | | (109) | | | $ | 36,167 | | | 223 | |
Selling and marketing expenses | | $ | 23,879 | | | (6) | | | $ | 21,672 | | | 11 | |
Depreciation and amortization expense | | $ | 14,380 | | | (71) | | | $ | 12,305 | | | 115 | |
Interest expense | | $ | 2,442 | | | — | | | $ | 1,810 | | | — | |
Total before tax | | | | (1,567) | | | | | 2,150 | |
Income tax effects on above | | | | 133 | | | | | (370) | |
Net of tax | | | | $ | (1,434) | | | | | $ | 1,780 | |
| | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | |
Location in unaudited consolidated statements of income where gain/(loss) was recognized | | | | | | | | |
| | | | | | | | |
Foreign exchange gain, net | | $ | 1,504 | | | $ | (4,889) | | | $ | 1,171 | | | $ | (464) | |
| | $ | 1,504 | | | $ | (4,889) | | | $ | 1,171 | | | $ | (464) | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Location and amount of gain/(loss) recognized in unaudited consolidated statements of income for derivatives in cash flow hedging relationships and derivatives not designated as hedging instruments |
| | Nine months ended September 30, |
| | 2022 | | 2021 |
| | As per unaudited consolidated statements of income | | Gain/(loss) on derivative financial instruments | | As per unaudited consolidated statements of income | | Gain/(loss) on derivative financial instruments |
Cash flow hedging relationships | | | | | | | | |
Location in unaudited consolidated statements of income where gain was reclassified from AOCI | | | | | | | | |
| | | | | | | | |
Cost of revenues | | $ | 659,185 | | | $ | 1,396 | | | $ | 507,265 | | | $ | 6,643 | |
General and administrative expenses | | $ | 122,898 | | | 366 | | | $ | 103,369 | | | 769 | |
Selling and marketing expenses | | $ | 72,034 | | | 23 | | | $ | 59,631 | | | 39 | |
Depreciation and amortization expense | | $ | 42,057 | | | 96 | | | $ | 36,716 | | | 394 | |
Interest expense | | $ | 4,820 | | | — | | | $ | 6,804 | | | — | |
Total before tax | | | | 1,881 | | | | | 7,845 | |
Income tax effects on above | | | | (802) | | | | | (1,186) | |
Net of tax | | | | $ | 1,079 | | | | | $ | 6,659 | |
| | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | |
Location in unaudited consolidated statements of income where gain/(loss) was recognized | | | | | | | | |
| | | | | | | | |
Foreign exchange gain, net | | $ | 4,683 | | | $ | (11,245) | | | $ | 2,958 | | | $ | (1,054) | |
| | $ | 4,683 | | | $ | (11,245) | | | $ | 2,958 | | | $ | (1,054) | |
Effect of net investment hedges on accumulated other comprehensive income/(loss):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | Amount of loss recognized in AOCI | | Amount of loss recognized in AOCI |
Net investment hedging relationships | | 2022 | | 2021 | | 2022 | | 2021 |
Foreign currency forward contracts | | $ | — | | | $ | — | | | $ | — | | | $ | 1,134 | |
18. Borrowings
The following tables summarizes the Company’s debt position: | | | | | | | | | | | |
| As of September 30, 2022 | | As of December 31, 2021 |
| Credit Facility |
Current portion of long-term borrowings | $ | 35,000 | | | $ | 260,016 | |
| | | |
| | | |
| | | |
| | | |
Long-term borrowings | 235,000 | | | — | |
Total borrowings | $ | 270,000 | | | $ | 260,016 | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
Unamortized debt issuance costs for the Company’s revolving Credit Facility of $1,245 and $232 as of September 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 September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Effective Interest Rate | 3.4 | % | | 2.3 | % | | 2.3 | % | | 2.0 | % |
As of September 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 (the “Notes”). The Notes carried 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. The Notes were convertible at an initial conversion rate of 13.3333 shares of the common stock per 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 more 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 the date of the notice of redemption).
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
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
shares of the Company’s common stock. During the three and nine months ended September 30, 2021, the Company recognized interest expense and amortization of debt discount of $1,248 and $5,237, respectively, on the Notes.
Expected payments for all of the Company’s borrowings as of September 30, 2022 were as follows:
| | | | | | | | | | | |
| Credit Facility | | Interest Payments* |
2022 (October 1 - December 31) | $ | 20,000 | | | $ | 2,809 | |
2023 | 15,000 | | | 10,505 | |
2024 | — | | | 10,154 | |
2025 | — | | | 10,154 | |
2026 | — | | | 10,154 | |
2027 and thereafter | 235,000 | | | 3,808 | |
Total | $ | 270,000 | | | $ | 47,584 | |
* Interest payments are based on effective interest rate as of September 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 September 30, 2022 and December 31, 2021, the Company had outstanding letters of credit of $461, each, that were not recognized in the consolidated balance sheets.
19. Capital Structure
Common Stock
The Company has one class of common stock outstanding.
The Company purchased shares of its 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:
| | | | | | | | | | | | | | | | | |
| Shares repurchased | | Total consideration | | Weighted average purchase price per share (1) |
Three months ended September 30, 2022 | — | | $ | — | | | $ | — | |
Three months ended September 30, 2021 | — | | $ | — | | | $ | — | |
| | | | | |
Nine months ended September 30, 2022 | 27,219 | | $ | 3,191 | | | $ | 117.23 | |
Nine months ended September 30, 2021 | 25,450 | | $ | 2,015 | | | $ | 79.18 | |
(1)The weighted average purchase price per share 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 Repurchase 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.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
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.
The Company purchased shares of its common stock, for a total consideration including commissions, under repurchase programs, as below:
| | | | | | | | | | | | | | | | | |
| Shares repurchased | | Total consideration | | Weighted average purchase price per share |
Three months ended September 30, 2022 | 76,809 | | $ | 11,521 | | | $ | 150.00 | |
Three months ended September 30, 2021 | 244,580 | | $ | 28,196 | | | $ | 115.28 | |
| | | | | |
Nine months ended September 30, 2022 | 503,858 | | $ | 68,521 | | | $ | 135.99 | |
Nine months ended September 30, 2021 | 844,656 | | $ | 83,605 | | | $ | 98.98 | |
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.
20. Employee Benefit Plans
The Company’s Gratuity Plan in India (the “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”). 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.
Components of net periodic benefit costs and actuarial loss reclassified from AOCI, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Service cost | $ | 921 | | | $ | 874 | | | $ | 2,869 | | | $ | 2,648 | |
Interest cost | 302 | | | 231 | | | 938 | | | 700 | |
Expected return on plan assets | (215) | | | (199) | | | (664) | | | (600) | |
Amortization of actuarial loss, gross of tax | 147 | | | 178 | | | 451 | | | 533 | |
Net gratuity cost | $ | 1,155 | | | $ | 1,084 | | | $ | 3,594 | | | $ | 3,281 | |
| | | | | | | |
Amortization of actuarial loss, gross of tax | $ | 147 | | | $ | 178 | | | $ | 451 | | | $ | 533 | |
Income tax effects on amortization of actuarial loss | (44) | | | (32) | | | (136) | | | (154) | |
Amortization of actuarial loss, net of tax | $ | 103 | | | $ | 146 | | | $ | 315 | | | $ | 379 | |
The India Plan is partially funded whereas the Philippines plan is unfunded. The Company makes annual contributions to the employees’ gratuity fund of the India Plan established with leading insurance companies. 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
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
each year. The Company expects to earn a return of approximately 7.2% per annum on the India Plan for the year ended December 31, 2022.
| | | | | | | | |
Change in Plan Assets | | |
Plan assets as of January 1, 2022 | | $ | 13,605 | |
Actual return | | 656 | |
Employer contribution | | 1,431 | |
Benefits paid* | | (1,347) | |
Effect of exchange rate changes | | (1,206) | |
Plan assets as of September 30, 2022 | | $ | 13,139 | |
* Benefits payments were substantially made through the plan assets during the nine months ended September 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 3.0% of employee compensation within certain limits.
The Company’s accrual for contributions to the 401(k) Plans were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Contribution to the 401(k) Plans | $ | 1,097 | | | $ | 789 | | | $ | 4,140 | | | $ | 2,841 | |
The Company’s contribution for various defined social 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 September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Contributions to the defined social security contribution plans | $ | 4,660 | | | $ | 3,580 | | | $ | 13,422 | | | $ | 10,617 | |
21. 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. As part of the Company’s efforts to optimize its existing network of operations centers, the Company continued to evaluate its office facilities to determine where it can exit or consolidate its use of office space.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
Supplemental balance sheet information
| | | | | | | | | | | |
| As of |
| September 30, 2022 | | December 31, 2021 |
Operating Lease | | | |
Operating lease right-of-use assets | $ | 61,966 | | | $ | 76,692 | |
| | | |
Operating lease liabilities - Current | $ | 16,740 | | | $ | 18,487 | |
Operating lease liabilities - Non-current | 54,174 | | | 68,506 | |
Total operating lease liabilities | $ | 70,914 | | | $ | 86,993 | |
| | | |
Finance Lease | | | |
Property and equipment, gross | $ | 2,416 | | | $ | 2,685 | |
Accumulated depreciation | (1,993) | | | (2,339) | |
Property and equipment, net | $ | 423 | | | $ | 346 | |
| | | |
Finance lease liabilities - Current | $ | 140 | | | $ | 141 | |
Finance lease liabilities - Non-current | 300 | | | 229 | |
Total finance lease liabilities | $ | 440 | | | $ | 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 consolidated balance sheets.
The components of lease cost, which are included in the Company’s unaudited consolidated statements of income, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
Lease cost | Three months ended September 30, | | Nine months ended September 30, |
Finance lease: | 2022 | | 2021 | | 2022 | | 2021 |
Amortization of right-of-use assets | $ | 28 | | | $ | 47 | | | $ | 116 | | | $ | 149 | |
Interest on lease liabilities | 14 | | | 10 | | | 42 | | | 49 | |
| 42 | | | 57 | | | 158 | | | 198 | |
Operating lease(a) | 5,360 | | | 6,380 | | | 17,365 | | | 20,012 | |
Variable lease costs | 1,298 | | | 1,779 | | | 3,827 | | | 5,672 | |
Total lease cost | $ | 6,700 | | | $ | 8,216 | | | $ | 21,350 | | | $ | 25,882 | |
(a) Includes short-term leases, which are immaterial.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
Supplemental cash flow and other information related to leases are as follows:
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2022 | | 2021 |
Cash payments for amounts included in the measurement of lease liabilities : | | | |
Operating cash outflows for operating leases | $ | 17,831 | | | $ | 19,654 | |
Operating cash outflows for finance leases | $ | 42 | | | $ | 49 | |
Financing cash outflows for finance leases | $ | 108 | | | $ | 157 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 3,519 | | | $ | 4,647 | |
Right-of-use assets obtained in exchange for new finance lease liabilities | $ | 218 | | | $ | 79 | |
Weighted-average remaining lease term (in years) | | | |
Finance lease | 2.7 years | | 1.9 years |
Operating lease | 5.5 years | | 5.9 years |
Weighted-average discount rate | | | |
Finance lease | 14.4 | % | | 14.3 | % |
Operating lease | 7.0 | % | | 7.3 | % |
The Company modified certain of its operating leases, resulting in an increase of its lease liabilities by $209 and a decrease of its lease liabilities by $1,022 during the nine months ended September 30, 2022 and 2021, respectively, with a corresponding adjustment to ROU assets.
As of September 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 September 30, 2022 were as follows: | | | | | | | | | | | |
| Operating Leases | | Finance Leases |
2022 (October 1 - December 31) | $ | 5,347 | | | $ | 46 | |
2023 | 20,723 | | | 197 | |
2024 | 17,322 | | | 129 | |
2025 | 11,153 | | | 84 | |
2026 | 9,030 | | | 59 | |
2027 and thereafter | 24,087 | | | 50 | |
Total lease payments | 87,662 | | | 565 | |
Less: Imputed interest | 16,748 | | | 125 | |
Present value of lease liabilities | $ | 70,914 | | | $ | 440 | |
Maturities of lease liabilities as of December 31, 2021 were as follows:
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
| | | | | | | | | | | |
| 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 | |
22. 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 continued impact of COVID-19 on the economic environment is uncertain and may change the annual effective tax rate, which could impact tax expense.
The Company’s effective tax rate increased from 13.7% during the three months ended September 30, 2021 to 24.2% during the three months ended September 30, 2022. The Company recorded income tax expense of $12,447 and $4,196 for the three months ended September 30, 2022 and 2021, respectively. The increase in income tax expense was primarily as a result of higher profit during the three months ended September 30, 2022, compared to the three months ended September 30, 2021, the recording of a one-time deferred tax benefit of $2,400 on settlement of the Notes during the three months ended September 30, 2021, and higher excess tax benefits during the three months ended September 30, 2021.
The Company’s effective tax rate increased from 20.3% during the nine months ended September 30, 2021 to 23.9% during the nine months ended September 30, 2022. The Company recorded income tax expense of $34,774 and $22,019 for the nine months ended September 30, 2022 and 2021, respectively. The increase in income tax expense was primarily as a result of higher profit during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, the recording of a one-time deferred tax benefit of $2,400 on settlement of the Notes during the nine months ended September 30, 2021, and an increase in non-deductible expenses, partially offset by higher excess tax benefits during the nine months ended September 30, 2022.
Effective for taxable years beginning after December 31, 2021, Internal Revenue Code Section 174, Amortization of Research and Experimental Expenditures, provides that research and experimentation expenses can no longer be currently deducted, instead such expenses are required to be capitalized. Such capitalized expenses are to be amortized over a period of five and fifteen years for the U.S. and foreign research, respectively. Although this change has no impact on the income statement due to offsetting current tax expense with corresponding deferred tax benefit, the change has resulted in an aggregate increase of $17,640 in the current tax liability and deferred tax asset balances, presented under “Income taxes payable, net” and “Deferred tax assets, net,” respectively, in the unaudited consolidated balance sheets as of September 30, 2022.
Income tax (deferred) recognized in AOCI were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Deferred taxes benefit / (expense) recognized on: | | | | | | | |
Unrealized gain/(loss) on cash flow hedges | $ | 2,348 | | | $ | (980) | | | $ | 5,146 | | | $ | (1,201) | |
Reclassification adjustment for cash flow hedges | (133) | | | 370 | | | 802 | | | 1,186 | |
Reclassification adjustment for retirement benefits | (44) | | | (32) | | | (136) | | | (154) | |
| | | | | | | |
Foreign currency translation loss | 7,919 | | | 630 | | | 8,898 | | | 1,859 | |
Total income tax benefit / (expense) recognized in AOCI | $ | 10,090 | | | $ | (12) | | | $ | 14,710 | | | $ | 1,690 | |
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
23. 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 September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Cost of revenues | $ | 2,713 | | | $ | 2,198 | | | $ | 8,485 | | | $ | 5,588 | |
General and administrative expenses | 5,237 | | | 4,431 | | | 14,937 | | | 12,337 | |
Selling and marketing expenses | 4,236 | | | 4,265 | | | 13,328 | | | 10,871 | |
Total | $ | 12,186 | | | $ | 10,894 | | | $ | 36,750 | | | $ | 28,796 | |
| | | | | | | |
Income tax benefit related to share-based compensation, including excess tax benefits | $ | 2,833 | | | $ | 2,697 | | | $ | 8,855 | | | $ | 7,129 | |
As of September 30, 2022, the Company had 1,308,384 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 as of December 31, 2021 | 3,093 | | | $ | 27.62 | | | $ | 362 | | | 2.0 |
Granted | — | | | — | | | — | | | — | |
Exercised | — | | | — | | | — | | | — | |
Forfeited | — | | | — | | | — | | | — | |
Outstanding as of September 30, 2022 | 3,093 | | | $ | 27.62 | | | $ | 370 | | | 1.3 |
Vested and exercisable as of September 30, 2022 | 3,093 | | | $ | 27.62 | | | $ | 370 | | | 1.3 |
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 first quarter 2022 open market purchase of the common stock, and
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
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 two 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 nine months ended September 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 as of December 31, 2021* | 982,187 | | | $ | 81.61 | | | — | | | $ | — | |
Granted | 356,983 | | | 121.15 | | | 52,636 | | | 124.76 | |
Vested | (302,625) | | | 73.86 | | | — | | | — | |
Forfeited | (77,894) | | | 94.48 | | | (4,177) | | | 124.76 | |
Outstanding as of September 30, 2022* | 958,651 | | | $ | 97.74 | | | 48,459 | | | $ | 124.76 | |
* As of September 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 September 30, 2022, unrecognized compensation cost of $73,569 is expected to be expensed over a weighted average period of 2.5 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 nine months ended September 30, 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 period. 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’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:
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
| | | | | | | | | | | | | | | | | | | | | | | |
| Revenue Based PRSUs | | Market Condition Based PRSUs |
| Number | | Weighted Average Fair Value | | Number | | Weighted Average Fair Value |
Outstanding as of December 31, 2021 | 58,864 | | | $ | 78.29 | | | 172,042 | | | $ | 113.74 | |
Granted | 53,122 | | | 119.98 | | | 79,631 | | | 155.67 | |
Vested | — | | | — | | | — | | | — | |
Forfeited | (6,113) | | | 97.62 | | | (14,940) | | | 126.10 | |
Outstanding as of September 30, 2022 | 105,873 | | | $ | 98.09 | | | 236,733 | | | $ | 127.07 | |
As of September 30, 2022, unrecognized compensation cost of $24,273 is expected to be expensed over a weighted average period of 2.0 years.
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 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 commenced on October 1, 2022 with a term of three months. The Company has registered 800,000 shares of common stock to be reserved for issuance over the term of the 2022 ESPP.
24. Related Party Disclosures
In April 2022, the Company entered into a service contract for providing analytics services to The Vanguard Group Inc., which beneficially owns more than 10% of the Company’s common stock as of September 30, 2022. During the three and nine months ended September 30, 2022, the Company recognized revenues, net of $814 and $1,388, respectively related to this service contract. The Company had outstanding accounts receivable, net of $804 related to this service contract as of September 30, 2022.
25. Commitments and Contingencies
Capital Commitments
As of September 30, 2022, the Company had committed to spend approximately $6,200 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.”
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 certain other
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
criteria, including but not limited to work-from-office norms, etc. The Company believes that these centers have in the past complied with the 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 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. In addition, the Company and a U.S. subsidiary are engaged in tax litigation with Indian tax authorities regarding a permanent establishment matter.
The aggregate amount demanded by Indian tax authorities (net of advance 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 September 30, 2022 and December 31, 2021 is $37,717 and $34,276, respectively. The Company has made payments and/or provided bank guarantees against these demands in the amounts of $7,659 and $7,954, respectively. Amounts paid as deposits in respect of such assessments aggregating to $6,030 and $6,172 as of September 30, 2022 and December 31, 2021, respectively, are included in “Other assets” and amounts deposited for bank guarantees aggregating to $1,629 and $1,782 as of September 30, 2022 and December 31, 2021, respectively, are included in “Restricted cash” in the non-current assets section of the Company’s 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 consolidated financial statements. 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 $5,619 and $6,387 as of September 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 $3,548 and $3,322 as of September 30, 2022 and December 31, 2021, respectively. The Company has filed appeals against these 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 recognized as of September 30, 2022 and December 31, 2021.
One of the Company’s subsidiaries in India has undergone an assessment with the statutory authority with respect to defined social security contribution plan. Except for some components of the assessment for which the Company has recognized a provision in the financial statements, the Company believes that the amount demanded by such authority is not a meaningful indicator of the potential liabilities of the Company, and that the matter is without merit. The Company is defending against the assessment order and has accordingly instituted an appeal against the order before the relevant tribunal while also making a payment under protest of the amount demanded, being a prerequisite for the appeal to be admitted. As of the reporting date, the Company’s management does not believe that the ultimate assessment will have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows. The Company will continue to monitor and evaluate its position based on future events and developments in this matter.
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
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2022
(In thousands, except per share amount and share count)
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.