NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(In thousands, except share and per share amounts)
1. Organization
ExlService Holdings, Inc. (“ExlService Holdings”) is organized as a corporation under the laws of the state of Delaware. ExlService Holdings, together with its subsidiaries and affiliates (collectively, the “Company”), operates in the Business Process Management (“BPM”) industry providing operations management services and analytics services that helps its clients build and grow sustainable businesses. By orchestrating its domain expertise, data, analytics and digital technology, the Company looks deeper to design and manage agile, customer-centric operating models to improve global operations, drive profitability, enhance customer satisfaction, increase data-driven insights, and manage risk and compliance. 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, 2019.
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 those 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 is recognized in the unaudited consolidated statements of income.
Effective January 1, 2020, the Company made certain operational and structural changes to more closely integrate the Company’s businesses and to simplify its organizational structure. Under the new structure, the Company reports its financial performance based on new segments described in Note 3 - Segment and Geographical Information to the unaudited consolidated financial statements. In conjunction with the new reporting structure, the Company has recast certain prior period amounts, wherever applicable, to conform to the way the Company internally manages and monitors segment performance. This change primarily impacted Note 3 - Segment and Geographical Information and Note 9 - Goodwill and Intangible Assets to the unaudited consolidated financial statements, with no impact on the unaudited consolidated balance sheets, statements of income, comprehensive (loss)/income, equity and cash flows.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
(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, allowance for expected credit losses, expected recoverability from customers with contingent fee arrangements, 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 lease cost, depreciation and amortization periods, purchase price allocation, recoverability of long-lived assets including goodwill and intangibles, and estimated costs to complete fixed price contracts.
As of June 30, 2020, the extent to which the global Coronavirus Disease 2019 pandemic (“COVID-19”) will ultimately impact the Company's business depends on numerous dynamic factors, which the Company still cannot reliably predict. As a result, many of the Company's estimates and assumptions herein required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve with respect to COVID-19, the Company’s estimates may materially change in future periods.
(c) Leases
The Company determines if an arrangement is a lease at inception of the contract. Operating leases are recorded in "operating lease right-of-use assets", "current portion of operating lease liabilities" and "operating lease liabilities, less current portion" in the Company's unaudited consolidated balance sheets. Finance leases are recorded in "property and equipment", and current and non-current portion of finance lease liabilities are presented within “accrued expenses and other current liabilities” and “other non-current liabilities,” respectively in the Company's unaudited consolidated balance sheets.
ROU assets represent the Company’s right to use an underlying asset during the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. For leases in which the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate based on the information available at commencement date for determining the present value of lease payments. Lease terms includes the effects of options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating lease arrangements is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for separately.
The Company accounts for lease-related concessions to mitigate the economic effects of COVID-19 on lessees in accordance with guidance in Topic 842, Leases, to determine, on a lease-by-lease basis, whether the concession provided by lessor should be accounted for as a lease modification.
The Company accounts for a modification as a separate contract when it grants an additional right of use not included in the original lease and the increase is commensurate with the standalone price for the additional right of use, adjusted for the circumstances of the particular contract. Modifications which are not accounted for as a separate contract are reassessed as of the effective date of the modification based on its modified terms and conditions and the facts and circumstances as of that date.
On January 1, 2019, the date of initial application, the Company adopted Topic 842, Leases, using the modified retrospective method. The modified retrospective method provides a method of recognizing those leases which had not expired as of the date of adoption of January 1, 2019.
The adoption resulted in the recognition of ROU assets of $80,328 (net of deferred rent of $8,626) and lease liabilities of $88,954 for operating leases as of January 1, 2019. The Company's accounting for finance leases remained substantially
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
unchanged. The adoption had no impact on opening balance of retained earnings. Refer to Note 20 - Leases to the unaudited consolidated financial statements for details.
(d) Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (("Subtopic 715-20")): Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this ASU remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The amendments in this ASU are effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. The adoption of this ASU is not expected to have any material effect on the Company’s consolidated financial statements.
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 LIBOR. The ASU provides practical expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments are elective and are effective upon issuance for all entities through December 31, 2022. The Company is currently evaluating the impact of this ASU.
(e) Recently Adopted Accounting Pronouncements
In June 2016, FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The new guidance replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. These changes will result in earlier recognition of credit losses. The allowance for credit losses is a valuation account that is to be deducted from the amortized cost of the financial asset(s) so as to present the net carrying value at the amount expected to be collected on the financial asset. The Company adopted Topic 326 as of January 1, 2020 using a modified retrospective approach through a cumulative-effect adjustment to its retained earnings. The adoption of the ASU had no impact to equity as of January 1, 2020 with a corresponding offset to accounts receivable. Further, the impact of adoption of this guidance did not have a material effect on the Company's accounting policies, processes, and systems. Refer to Note 4 - Revenues, net to the unaudited consolidated financial statements for details.
In August 2018, FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU modify the disclosure requirements on fair value measurements in Topic 820, by prescribing new disclosure requirements, and the elimination and modification of disclosure requirements based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. An entity was permitted to early adopt either the entire standard or only the provisions that eliminate or modify requirements. The early adoption of this ASU, effective January 1, 2020, did not have any material effect on the Company’s disclosures in the unaudited consolidated financial statements.
In August 2018, FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software ("Subtopic 350-40"): This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the ASU requires an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in FASB Accounting Standard Codification Subtopic 350-40 on internal-use software to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The ASU 2018-15 also provides guidance on amortization and impairment of any costs capitalized, along with new presentation and disclosure requirements. The new guidance is effective for fiscal years beginning after December 15, 2019 and adoption was allowed prospectively. The adoption of this ASU effective January 1, 2020 did not have any material effect on the Company’s unaudited consolidated financial statements.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
In April 2019, FASB issued ASU No. 2019-04, Codification Improvements to Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Financial Instruments: Targeted Transition Relief (Topic 825). The amendments clarify the scope of the credit losses standard and address issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among other things. With respect to hedge accounting, the amendments address partial-term fair value hedges, fair value hedge basis adjustments, and certain transition requirements, among other things. With respect to recognizing and measuring financial instruments, the amendment in the ASU address the scope of the guidance, the requirement for remeasurement under ASC 820 when using the measurement alternative, certain disclosure requirements and which equity securities have to be remeasured at historical exchange rates. This ASU is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Early adoption was permitted. The adoption of this ASU did not have any material effect on the Company’s unaudited consolidated financial statements.
In May 2019, FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief. This ASU provides entities with the option to irrevocably elect the fair value option, on an instrument-by-instrument basis in accordance with Subtopic 825-10, for certain financial instruments that are within the scope of Subtopic 326-20, upon adopting Topic 326. The fair value option election does not apply to held-to-maturity debt securities. The amendments in this ASU provide entities with targeted transition relief that is intended to increase comparability of financial statement information for some entities that otherwise would have measured similar financial instruments using different measurement methodologies. The Company adopted Topic 326 as of January 1, 2020, whereby no such fair value election was made, accordingly, the adoption of this ASU did not have any material effect on the Company’s unaudited consolidated financial statements.
3. Segment and Geographical Information
The Company operates in the BPM industry and is a provider of operations management and analytics services.
Effective January 1, 2020, the Company made certain operational and structural changes to more closely integrate its businesses and to simplify its organizational structure. The Company now manages and reports financial information through its four strategic business units: Insurance, Healthcare, Analytics and Emerging Business, which reflects how management will review financial information and make operating decisions. These business units will develop client-specific solutions, build capabilities, maintain a unified go-to-market approach and be integrally responsible for service delivery, customer satisfaction, growth and profitability. In line with the Company’s strategy of vertical integration and focus on domain expertise, the Company has integrated its Finance & Accounting and Consulting operating segments within each of the Insurance and Healthcare operating segments based on the corresponding industry-specific clients to whom those services are provided. Finance & Accounting and Consulting services to clients outside of the Insurance and Healthcare industries will now be part of the Company’s newly formed business unit and reportable segment Emerging Business. In addition, the Company integrated its former Travel, Transportation and Logistics, Banking and Financial Services, and Utilities operating segments under the Emerging Business unit to further leverage and optimize the operating scale in providing operations management services.
The Company’s new reportable segments effective January 1, 2020 are as follows:
•Insurance,
•Healthcare,
•Emerging Business, and
•Analytics
In conjunction with the new reporting structure, the Company has recasted its segment disclosures for prior periods presented to conform to the way the Company internally manages and monitors segment performance.
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.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
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.
Revenues and cost of revenues for the three months ended June 30, 2020 and 2019, respectively, for each of the reportable segments, are as follows:
|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
Healthcare
|
|
Emerging Business
|
|
Analytics
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net
|
$
|
81,281
|
|
|
$
|
24,978
|
|
|
$
|
34,535
|
|
|
$
|
81,679
|
|
|
$
|
222,473
|
|
|
Cost of revenues(1)
|
59,113
|
|
|
19,640
|
|
|
22,416
|
|
|
57,232
|
|
|
158,401
|
|
|
Gross profit(1)
|
$
|
22,168
|
|
|
$
|
5,338
|
|
|
$
|
12,119
|
|
|
$
|
24,447
|
|
|
$
|
64,072
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
54,206
|
|
|
Foreign exchange gain, interest expense and other income, net
|
|
|
|
|
|
|
|
|
2,701
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|
|
Income tax expense
|
|
|
|
|
|
|
|
|
4,072
|
|
|
Loss from equity-method investment
|
|
|
|
|
|
|
|
|
66
|
|
|
Net income
|
|
|
|
|
|
|
|
|
$
|
8,429
|
|
(1) Exclusive of depreciation and amortization expense.
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|
|
|
|
|
|
|
|
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|
|
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|
|
Three months ended June 30, 2019
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|
|
|
|
|
|
|
|
|
|
Insurance
|
|
Healthcare
|
|
Emerging Business
|
|
Analytics
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net
|
$
|
85,581
|
|
|
$
|
21,730
|
|
|
$
|
48,327
|
|
|
$
|
87,871
|
|
|
$
|
243,509
|
|
|
Cost of revenues(1)
|
59,414
|
|
|
17,749
|
|
|
27,852
|
|
|
57,431
|
|
|
162,446
|
|
|
Gross profit(1)
|
$
|
26,167
|
|
|
$
|
3,981
|
|
|
$
|
20,475
|
|
|
$
|
30,440
|
|
|
$
|
81,063
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
67,207
|
|
|
Foreign exchange gain, interest expense and other income, net
|
|
|
|
|
|
|
|
|
1,440
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
2,670
|
|
|
Loss from equity-method investment
|
|
|
|
|
|
|
|
|
62
|
|
|
Net income
|
|
|
|
|
|
|
|
|
$
|
12,564
|
|
(1) Exclusive of depreciation and amortization expense.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
Revenues and cost of revenues for the six months ended June 30, 2020 and 2019, respectively, for each of the reportable
segments, are as follows:
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|
|
|
|
|
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|
|
|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
Healthcare
|
|
Emerging Business
|
|
Analytics
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net
|
$
|
165,020
|
|
|
$
|
52,007
|
|
|
$
|
77,326
|
|
|
$
|
174,110
|
|
|
$
|
468,463
|
|
|
Cost of revenues(1)
|
118,078
|
|
|
39,233
|
|
|
47,898
|
|
|
115,848
|
|
|
321,057
|
|
|
Gross profit(1)
|
$
|
46,942
|
|
|
$
|
12,774
|
|
|
$
|
29,428
|
|
|
$
|
58,262
|
|
|
$
|
147,406
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
110,053
|
|
|
Foreign exchange gain, interest expense and other income, net
|
|
|
|
|
|
|
|
|
3,535
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
9,927
|
|
|
Loss from equity-method investment
|
|
|
|
|
|
|
|
|
121
|
|
|
Net income
|
|
|
|
|
|
|
|
|
$
|
30,840
|
|
(1) Exclusive of depreciation and amortization expense.
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|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
Healthcare
|
|
Emerging Business
|
|
Analytics
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net
|
$
|
166,867
|
|
|
$
|
43,978
|
|
|
$
|
97,405
|
|
|
$
|
174,832
|
|
|
$
|
483,082
|
|
|
Cost of revenues(1)
|
114,657
|
|
|
35,551
|
|
|
55,145
|
|
|
114,333
|
|
|
319,686
|
|
|
Gross profit(1)
|
$
|
52,210
|
|
|
$
|
8,427
|
|
|
$
|
42,260
|
|
|
$
|
60,499
|
|
|
$
|
163,396
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
132,679
|
|
|
Foreign exchange gain, interest expense and other income, net
|
|
|
|
|
|
|
|
|
3,541
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
6,870
|
|
|
Loss from equity-method investment
|
|
|
|
|
|
|
|
|
129
|
|
|
Net income
|
|
|
|
|
|
|
|
|
$
|
27,259
|
|
(1) Exclusive of depreciation and amortization expense.
Revenues, net by service type, were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
BPM and related services(1)
|
$
|
140,794
|
|
|
$
|
155,638
|
|
|
$
|
294,353
|
|
|
$
|
308,250
|
|
|
Analytics services
|
81,679
|
|
|
87,871
|
|
|
174,110
|
|
|
174,832
|
|
|
Revenues, net
|
$
|
222,473
|
|
|
$
|
243,509
|
|
|
$
|
468,463
|
|
|
$
|
483,082
|
|
(1) BPM and related services include revenues of the Company's Insurance, Healthcare and Emerging Business operating segments. Refer to the reportable segment disclosure above.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
The Company attributes the revenues to regions based upon the location of its customers.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Revenues, net
|
|
|
|
|
|
|
|
|
United States
|
$
|
189,032
|
|
|
$
|
197,901
|
|
|
$
|
396,912
|
|
|
$
|
394,005
|
|
|
Non-United States
|
|
|
|
|
|
|
|
|
United Kingdom
|
18,830
|
|
|
30,155
|
|
|
42,108
|
|
|
59,256
|
|
|
Rest of World
|
14,611
|
|
|
15,453
|
|
|
29,443
|
|
|
29,821
|
|
|
Total Non-United States
|
33,441
|
|
|
45,608
|
|
|
71,551
|
|
|
89,077
|
|
|
Revenues, net
|
$
|
222,473
|
|
|
$
|
243,509
|
|
|
$
|
468,463
|
|
|
$
|
483,082
|
|
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
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Long-lived assets
|
|
|
|
|
India
|
$
|
101,073
|
|
|
$
|
78,244
|
|
|
United States
|
50,121
|
|
|
52,375
|
|
|
Philippines
|
28,558
|
|
|
26,006
|
|
|
Rest of World
|
8,885
|
|
|
8,913
|
|
|
Long-lived assets
|
$
|
188,637
|
|
|
$
|
165,538
|
|
4. Revenues, net
Refer to Note 3 - Segment and Geographical Information to the unaudited consolidated financial statements for revenues disaggregated by reportable segments and geography.
Contract balances
The following table provides information about accounts receivable, contract assets and contract liabilities from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Accounts receivable, net
|
$
|
157,505
|
|
|
$
|
171,864
|
|
|
Contract assets
|
$
|
5,074
|
|
|
$
|
5,391
|
|
|
Contract liabilities
|
|
|
|
|
Deferred revenue (consideration received in advance)
|
$
|
14,739
|
|
|
$
|
11,259
|
|
|
Consideration received for process transition activities
|
$
|
2,579
|
|
|
$
|
3,036
|
|
Accounts receivable includes $71,489 and $73,920 as of June 30, 2020 and December 31, 2019, 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.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
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.
Contract liabilities represent that portion of deferred revenue for which payments have been received in advance from customers. This may also include revenues deferred for certain contracts where services have been rendered but other conditions for revenue recognition have not been met for example, where a legally enforceable contract is not executed. The Company also defers revenues attributable to certain process transition activities for which costs have been capitalized by the Company as contract fulfillment costs. Consideration received from customers, if any, relating to such transition activities are classified under contract liabilities and are included within “Deferred revenues” and “other non-current liabilities” in the unaudited consolidated balance sheets. The revenues are recognized as (or when) the performance obligation is fulfilled under the contract with customer.
Revenue recognized during the three and six months ended June 30, 2020 and 2019, which was included in the contract liabilities balance at the beginning of the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Revenue recognized
|
$
|
2,226
|
|
|
$
|
1,450
|
|
|
$
|
8,194
|
|
|
$
|
4,226
|
|
Contract acquisition and fulfillment costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Acquisition Costs
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
Six months ended
|
|
|
|
Year ended
|
|
|
June 30, 2020
|
|
June 30, 2019
|
|
June 30, 2020
|
|
June 30, 2019
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
(Audited)
|
|
Opening Balance
|
$
|
1,215
|
|
|
$
|
513
|
|
|
$
|
1,307
|
|
|
$
|
713
|
|
|
$
|
713
|
|
|
Addition
|
187
|
|
|
—
|
|
|
187
|
|
|
—
|
|
|
1,222
|
|
|
Amortization
|
(132)
|
|
|
(44)
|
|
|
(224)
|
|
|
(244)
|
|
|
(628)
|
|
|
Closing Balance
|
$
|
1,270
|
|
|
$
|
469
|
|
|
$
|
1,270
|
|
|
$
|
469
|
|
|
$
|
1,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Fulfillment Costs
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
Six months ended
|
|
|
|
Year ended
|
|
|
June 30, 2020
|
|
June 30, 2019
|
|
June 30, 2020
|
|
June 30, 2019
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
(Audited)
|
|
Opening Balance
|
$
|
6,916
|
|
|
$
|
4,472
|
|
|
$
|
7,255
|
|
|
$
|
4,051
|
|
|
$
|
4,051
|
|
|
Addition
|
363
|
|
|
1,441
|
|
|
647
|
|
|
2,167
|
|
|
4,652
|
|
|
Amortization
|
(499)
|
|
|
(305)
|
|
|
(1,122)
|
|
|
(610)
|
|
|
(1,448)
|
|
|
Closing Balance
|
$
|
6,780
|
|
|
$
|
5,608
|
|
|
$
|
6,780
|
|
|
$
|
5,608
|
|
|
$
|
7,255
|
|
There was no impairment for contract acquisition and contract fulfillment costs as of June 30, 2020 and December 31, 2019. The capitalized costs are amortized on a straight line basis over the life of the contract.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
Allowance for expected credit losses
On January 1, 2020, the Company adopted ASC Topic 326, Financial Instruments-Credit Losses. Accounts receivable and contract assets are in the scope for which assessment is made. The Company evaluates the credit risk of its customers based on a combination of various financial and qualitative factors that may affect the ability of each customer to pay. The Company considered current and anticipated future economic conditions relating to the industries of the Company’s customers and the countries where it operates. In calculating expected credit loss, the Company also considered past payment trends, credit rating and other related credit information for its significant customers to estimate the probability of default in the future and estimates relating to the possible effects resulting from COVID-19.
The duration and severity of COVID-19 and continued market volatility is highly uncertain and, as such, the impact on expected losses is subject to significant judgment, including but not limited to changes in customers’ credit rating, and may cause variability in the Company’s allowance for credit losses in future periods.
As of January 1, 2020 the Company’s provision for doubtful receivables was $1,163, which was based on previous U.S. GAAP standards. There was no material impact on provision when calculated by applying the Topic 326 guidance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
June 30, 2020
|
|
January 1, 2020
|
|
Accounts receivable, including unbilled receivables
|
$
|
158,939
|
|
|
$
|
173,027
|
|
|
Less: Allowance for lifetime expected credit loss
|
(1,434)
|
|
|
(1,163)
|
|
|
Accounts receivable, net
|
$
|
157,505
|
|
|
$
|
171,864
|
|
The movement in allowance for current expected credit loss on customer balances for the three and six months ended June 30, 2020 and 2019 and year ended December 31, 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
Six months ended
|
|
|
|
Year ended
|
|
|
June 30, 2020
|
|
June 30, 2019
|
|
June 30, 2020
|
|
June 30, 2019
|
|
December 31, 2019
|
|
Balance at the beginning of the period
|
$
|
1,346
|
|
|
$
|
1,255
|
|
|
$
|
1,163
|
|
|
$
|
956
|
|
|
$
|
956
|
|
|
Additions during the period, net
|
186
|
|
|
(33)
|
|
|
381
|
|
|
265
|
|
|
354
|
|
|
Charged against allowance
|
(100)
|
|
|
(53)
|
|
|
(100)
|
|
|
(54)
|
|
|
(156)
|
|
|
Translation adjustment, if any
|
2
|
|
|
(1)
|
|
|
(10)
|
|
|
1
|
|
|
9
|
|
|
Balance at the end of the period
|
$
|
1,434
|
|
|
$
|
1,168
|
|
|
$
|
1,434
|
|
|
$
|
1,168
|
|
|
$
|
1,163
|
|
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, using the treasury stock method. 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.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Numerators:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
8,429
|
|
|
$
|
12,564
|
|
|
$
|
30,840
|
|
|
$
|
27,259
|
|
|
Denominators:
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
34,486,202
|
|
|
34,451,671
|
|
|
34,443,884
|
|
|
34,413,455
|
|
|
Dilutive effect of share-based awards
|
111,486
|
|
|
250,876
|
|
|
215,262
|
|
|
354,748
|
|
|
Diluted weighted average common shares outstanding
|
34,597,688
|
|
|
34,702,547
|
|
|
34,659,146
|
|
|
34,768,203
|
|
|
Earnings per share attributable to ExlService Holdings Inc. stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.24
|
|
|
$
|
0.36
|
|
|
$
|
0.90
|
|
|
$
|
0.79
|
|
|
Diluted
|
$
|
0.24
|
|
|
$
|
0.36
|
|
|
$
|
0.89
|
|
|
$
|
0.78
|
|
|
Weighted average potentially dilutive shares considered anti-dilutive and not included in computing diluted earnings per share
|
638,318
|
|
|
69
|
|
|
404,315
|
|
|
212,751
|
|
6. Cash, Cash Equivalents and Restricted Cash
For the purpose of unaudited statements of cash flows, cash, cash equivalents and restricted cash comprise of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
June 30, 2020
|
|
June 30, 2019
|
|
Cash and cash equivalents
|
$
|
163,619
|
|
|
$
|
84,842
|
|
|
Restricted cash (current)
|
4,858
|
|
|
4,098
|
|
|
Restricted cash (non-current)
|
2,298
|
|
|
2,507
|
|
|
Cash, cash equivalents and restricted cash
|
$
|
170,775
|
|
|
$
|
91,447
|
|
7. Other Income, net
Other income, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Gain on sale and mark-to-market of mutual funds, net
|
$
|
3,109
|
|
|
$
|
3,318
|
|
|
$
|
5,166
|
|
|
$
|
6,844
|
|
|
Interest income
|
632
|
|
|
697
|
|
|
1,164
|
|
|
1,493
|
|
|
Others, net
|
484
|
|
|
87
|
|
|
424
|
|
|
188
|
|
|
Other income, net
|
$
|
4,225
|
|
|
$
|
4,102
|
|
|
$
|
6,754
|
|
|
$
|
8,525
|
|
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
8. Property and Equipment, net
Property and equipment, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated useful lives
|
|
As of
|
|
|
|
|
(Years)
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Owned Assets:
|
|
|
|
|
|
|
Network equipment and computers
|
3-5
|
|
$
|
96,759
|
|
|
$
|
98,309
|
|
|
Software
|
3-5
|
|
90,746
|
|
|
79,746
|
|
|
Leasehold improvements
|
3-8
|
|
44,328
|
|
|
44,982
|
|
|
Office furniture and equipment
|
3-8
|
|
20,675
|
|
|
22,046
|
|
|
Motor vehicles
|
2-5
|
|
578
|
|
|
601
|
|
|
Buildings
|
30
|
|
1,053
|
|
|
1,114
|
|
|
Land
|
—
|
|
689
|
|
|
729
|
|
|
Capital work in progress
|
—
|
|
10,784
|
|
|
10,309
|
|
|
|
|
|
265,612
|
|
|
257,836
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(174,333)
|
|
|
(179,331)
|
|
|
|
|
|
$
|
91,279
|
|
|
$
|
78,505
|
|
|
Right-of-use assets under finance leases:
|
|
|
|
|
|
|
Leasehold improvements
|
|
|
$
|
644
|
|
|
$
|
738
|
|
|
Office furniture and equipment
|
|
|
210
|
|
|
308
|
|
|
Motor vehicles
|
|
|
710
|
|
|
711
|
|
|
|
|
|
1,564
|
|
|
1,757
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(995)
|
|
|
(1,120)
|
|
|
|
|
|
$
|
569
|
|
|
$
|
637
|
|
|
Property and equipment, net
|
|
|
$
|
91,848
|
|
|
$
|
79,142
|
|
Capital work in progress represents advances paid towards acquisition of property and equipment and costs incurred on internally developed software not yet ready to be placed in service.
During the three and six months ended June 30, 2020, there were no changes in estimated useful lives of property and equipment.
The depreciation and amortization expense, excluding amortization of acquisition-related intangibles, recognized in the unaudited consolidated statements of income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Depreciation and amortization expense
|
$
|
8,975
|
|
|
$
|
7,198
|
|
|
$
|
17,271
|
|
|
$
|
15,337
|
|
The effect of foreign exchange (loss)/gain upon settlement of cash flow hedges recorded under depreciation and amortization, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Effect of foreign exchange (loss)/gain
|
|
$
|
(71)
|
|
|
$
|
56
|
|
|
$
|
(49)
|
|
|
$
|
113
|
|
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
Internally developed software costs, included under Software, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Cost
|
$
|
14,891
|
|
|
$
|
15,784
|
|
|
Less : Accumulated amortization
|
(4,477)
|
|
|
(4,989)
|
|
|
Internally developed software, net
|
$
|
10,414
|
|
|
$
|
10,795
|
|
The amortization expense on internally developed software recognized in the unaudited consolidated statements of income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Amortization expense
|
$
|
1,846
|
|
|
$
|
559
|
|
|
$
|
2,677
|
|
|
$
|
1,206
|
|
During the three and six months ended June 30, 2019, the Company performed an impairment test of its long-lived assets related to its Health Integrated business. Based on the results, the long-lived assets carrying value exceeded its fair value. The primary factor contributing to a reduction in the fair value is the wind-down of the Health Integrated business, due to reduction to the Company's estimated future cash flows. As a result of this analysis, the Company recognized impairment charges of $951 and $2,178 during the three and six months ended June 30, 2019, respectively, to write down the carrying value of property and equipment to its fair value. This impairment charge was recorded in the unaudited consolidated statements of income under "Impairment and restructuring charges".
As of June 30, 2020, 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 assurances that long-lived assets will not be impaired in future periods. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which undiscounted cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount, and the asset’s residual value, if any. It is reasonably possible that the judgments and estimates described above could change in future periods. The duration and severity of COVID-19 and continued market volatility is highly uncertain and, as such, the impact on undiscounted cash flows is subject to significant judgment and may cause variability in the Company’s assessment of the existence of any impairment.
9. Goodwill and Intangible Assets
Goodwill
The Company transitioned to new segment reporting structure effective January 1, 2020, which resulted in certain changes to its operating segments and reporting units. The Company reallocated goodwill to its reporting units using a relative fair value approach. In addition, the Company completed an assessment of any potential goodwill impairment for all its reporting units immediately prior to the reallocation and determined that no impairment existed.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
The following table sets forth details of changes in goodwill by reportable segment of the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
Healthcare
|
|
Emerging Business
|
|
TT&L
|
|
F&A
|
|
All Other
|
|
Analytics
|
|
Total
|
|
Balance at January 1, 2019
|
$
|
38,203
|
|
|
$
|
19,276
|
|
|
$
|
—
|
|
|
$
|
12,697
|
|
|
$
|
47,193
|
|
|
$
|
5,326
|
|
|
$
|
227,289
|
|
|
$
|
349,984
|
|
|
Currency translation adjustments
|
73
|
|
|
—
|
|
|
—
|
|
|
(240)
|
|
|
(288)
|
|
|
—
|
|
|
—
|
|
|
(455)
|
|
|
Balance at December 31, 2019
|
$
|
38,276
|
|
|
$
|
19,276
|
|
|
$
|
—
|
|
|
$
|
12,457
|
|
|
$
|
46,905
|
|
|
$
|
5,326
|
|
|
$
|
227,289
|
|
|
$
|
349,529
|
|
|
Goodwill reallocation(1)
|
12,192
|
|
|
2,693
|
|
|
49,803
|
|
|
(12,457)
|
|
|
(46,905)
|
|
|
(5,326)
|
|
|
—
|
|
|
—
|
|
|
Currency translation adjustments
|
(303)
|
|
|
(38)
|
|
|
(1,076)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2)
|
|
|
(1,419)
|
|
|
Balance at June 30, 2020
|
$
|
50,165
|
|
|
$
|
21,931
|
|
|
$
|
48,727
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
227,287
|
|
|
$
|
348,110
|
|
(1) Represents the reallocation of goodwill as a result of the Company reorganizing its operating segments as described in Note 3 - Segment and Geographical Information to the unaudited consolidated financial statements.
As of March 31, 2020, due to the deteriorating macroeconomic conditions arising from the COVID-19 pandemic, the Company performed a goodwill impairment test for its reporting units. The Company considered the effects of the COVID-19 pandemic on its significant inputs used in determining the fair value of the Company’s reporting units. Based on the results, the fair value of each of the Company’s reporting units exceeded their carrying value and the Company’s goodwill was not impaired.
During the second quarter of 2020, the Company evaluated the continuing effects of COVID-19 and its impact on the global economy on each of the Company’s reporting units to assess whether there was a triggering event during the quarter requiring the Company to perform a goodwill impairment test. The Company considered certain improvements in current and forecasted economic and market conditions and qualitative factors, such as, the Company’s performance and business forecasts, stock price movements and expansion plans. The Company reviewed key assumptions, including revisions of projected future revenues for reporting units against the results of the interim impairment quantitative test performed during the first quarter of 2020. The Company did not identify any triggers or indications of potential impairment for its reporting units as of June 30, 2020. The Company will continue to monitor the impacts of COVID-19 on the Company and significant changes in key assumptions that could result in future period impairment charges.
The recoverability of goodwill is dependent upon the continued growth of cash flows from our business activities. There can be no assurances that goodwill will not be impaired in future periods. Estimating the fair value of reporting units requires the use of estimates and significant judgments that are based on a number of factors including actual operating results. These estimates and judgements may not be within the control of the Company and accordingly it is reasonably possible that the judgments and estimates described above could change in future periods. The duration and severity of COVID-19 and continued market volatility is highly uncertain and, as such, the impact on cash flows, long-term debt-free net cash flow growth rate in the terminal year and discount rates are subject to significant judgments and may cause variability in the Company’s assessment of existence of any impairment.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
Intangible Assets
Information regarding the Company’s intangible assets is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020
|
|
|
|
|
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
Customer relationships
|
$
|
73,160
|
|
|
$
|
(23,440)
|
|
|
$
|
49,720
|
|
|
Developed technology
|
23,348
|
|
|
(9,511)
|
|
|
13,837
|
|
|
Trade names and trademarks
|
5,100
|
|
|
(3,261)
|
|
|
1,839
|
|
|
|
$
|
101,608
|
|
|
$
|
(36,212)
|
|
|
$
|
65,396
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
Trade names and trademarks
|
900
|
|
|
—
|
|
|
900
|
|
|
Total intangible assets
|
$
|
102,508
|
|
|
$
|
(36,212)
|
|
|
$
|
66,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying
Amount
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
Customer relationships
|
$
|
97,602
|
|
|
$
|
(43,330)
|
|
|
$
|
54,272
|
|
|
Developed technology
|
26,976
|
|
|
(10,687)
|
|
|
16,289
|
|
|
Trade names and trademarks
|
5,100
|
|
|
(2,579)
|
|
|
2,521
|
|
|
|
$
|
129,678
|
|
|
$
|
(56,596)
|
|
|
$
|
73,082
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
Trade names and trademarks
|
900
|
|
|
—
|
|
|
900
|
|
|
Total intangible assets
|
$
|
130,578
|
|
|
$
|
(56,596)
|
|
|
$
|
73,982
|
|
The amortization expense for the period is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Amortization expense
|
$
|
3,430
|
|
|
$
|
5,554
|
|
|
$
|
7,584
|
|
|
$
|
11,082
|
|
The remaining weighted average life of intangible assets is as follows:
|
|
|
|
|
|
|
|
|
(in years)
|
|
Customer relationships
|
7.33
|
|
Developed technology
|
3.17
|
|
Trade names and trademarks (Finite lived)
|
2.09
|
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
Estimated future amortization expense related to intangible assets as of June 30, 2020 is as follows:
|
|
|
2020 (July 1 - December 31)
|
$
|
6,822
|
|
|
2021
|
12,730
|
|
|
2022
|
11,325
|
|
|
2023
|
9,036
|
|
|
2024
|
6,694
|
|
|
2025 and thereafter
|
18,789
|
|
|
Total
|
$
|
65,396
|
|
10. Other Current Assets
Other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Derivative instruments
|
$
|
4,128
|
|
|
$
|
4,076
|
|
|
Advances to suppliers
|
1,837
|
|
|
1,581
|
|
|
Receivables from statutory authorities
|
13,827
|
|
|
12,608
|
|
|
Contract assets
|
1,744
|
|
|
1,414
|
|
|
Deferred contract fulfillment costs
|
2,208
|
|
|
1,673
|
|
|
Interest accrued on fixed deposits
|
344
|
|
|
439
|
|
|
Others
|
3,384
|
|
|
2,803
|
|
|
Other current assets
|
$
|
27,472
|
|
|
$
|
24,594
|
|
11. Other Assets
Other assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Lease deposits
|
$
|
9,738
|
|
|
$
|
9,983
|
|
|
Derivative instruments
|
1,734
|
|
|
3,433
|
|
|
Deposits with statutory authorities
|
7,423
|
|
|
7,540
|
|
|
Term deposits
|
1,829
|
|
|
1,983
|
|
|
Contract assets
|
3,330
|
|
|
3,977
|
|
|
Deferred contract fulfillment costs
|
4,572
|
|
|
5,582
|
|
|
Others
|
2,973
|
|
|
3,518
|
|
|
Other assets
|
$
|
31,599
|
|
|
$
|
36,016
|
|
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
12. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Accrued expenses
|
$
|
41,724
|
|
|
$
|
50,097
|
|
|
Payable to statutory authorities
|
9,360
|
|
|
9,247
|
|
|
Accrued capital expenditure
|
9,043
|
|
|
3,035
|
|
|
Derivative instruments
|
4,749
|
|
|
1,783
|
|
|
Client liabilities
|
5,070
|
|
|
6,378
|
|
|
Interest payable
|
1,416
|
|
|
1,492
|
|
|
Other current liabilities
|
3,157
|
|
|
1,732
|
|
|
Finance lease liabilities
|
253
|
|
|
253
|
|
|
Accrued expenses and other current liabilities
|
$
|
74,772
|
|
|
$
|
74,017
|
|
13. Other Non-Current Liabilities
Other non-current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Derivative instruments
|
$
|
3,496
|
|
|
$
|
1,250
|
|
|
Unrecognized tax benefits
|
1,047
|
|
|
1,047
|
|
|
Retirement benefits
|
6,803
|
|
|
6,517
|
|
|
Deferred transition revenue
|
1,586
|
|
|
1,911
|
|
|
Accrued capital expenditure
|
3,373
|
|
|
—
|
|
|
Others
|
2,904
|
|
|
987
|
|
|
Finance lease liabilities
|
357
|
|
|
430
|
|
|
Other non-current liabilities
|
$
|
19,566
|
|
|
$
|
12,142
|
|
14. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss (“AOCI”), consists of actuarial gain/(loss) on retirement benefits and changes in the cumulative foreign currency translation adjustments. In addition, the Company enters into foreign currency exchange contracts, which are designated as cash flow hedges in accordance with ASC 815. Changes in the fair values of these foreign currency exchange contracts are recognized in AOCI on the Company's unaudited consolidated balance sheets until the settlement of those contracts. The balances as of June 30, 2020 and December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Cumulative foreign currency translation loss
|
$
|
(97,766)
|
|
|
$
|
(86,963)
|
|
|
Unrealized (loss)/gain on cash flow hedges
|
(2,323)
|
|
|
4,604
|
|
|
Retirement benefits
|
(1,582)
|
|
|
(1,780)
|
|
|
Income tax expense relating to above (1)
|
(2,603)
|
|
|
(753)
|
|
|
Accumulated other comprehensive loss
|
$
|
(104,274)
|
|
|
$
|
(84,892)
|
|
(1) These are income tax (expenses)/benefits recognized on cash flow hedges, retirement benefits and foreign currency translation losses. Refer to Note 21 - Income Taxes to the unaudited consolidated financial statements.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
15. Fair Value Measurements
Assets and Liabilities Measured at Fair Value
The following table sets forth the Company’s assets and liabilities that were accounted for at fair value as of June 30, 2020 and December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
Mutual funds*
|
$
|
117,490
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
117,490
|
|
|
Derivative financial instruments
|
—
|
|
|
5,862
|
|
|
—
|
|
|
5,862
|
|
|
Total
|
$
|
117,490
|
|
|
$
|
5,862
|
|
|
$
|
—
|
|
|
$
|
123,352
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
$
|
—
|
|
|
$
|
8,245
|
|
|
$
|
—
|
|
|
$
|
8,245
|
|
|
Total
|
$
|
—
|
|
|
$
|
8,245
|
|
|
$
|
—
|
|
|
$
|
8,245
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
Mutual funds*
|
$
|
166,330
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
166,330
|
|
|
Derivative financial instruments
|
—
|
|
|
7,509
|
|
|
—
|
|
|
7,509
|
|
|
Total
|
$
|
166,330
|
|
|
$
|
7,509
|
|
|
$
|
—
|
|
|
$
|
173,839
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
$
|
—
|
|
|
$
|
3,033
|
|
|
$
|
—
|
|
|
$
|
3,033
|
|
|
Total
|
$
|
—
|
|
|
$
|
3,033
|
|
|
$
|
—
|
|
|
$
|
3,033
|
|
* Represents those short-term investments, which are carried at the fair value option under ASC 825 "Financial Instruments” as of June 30, 2020 and December 31, 2019.
Derivative Financial Instruments: The Company’s derivative financial instruments consist of foreign currency forward exchange contracts. Fair values for derivative financial instruments are based on independent sources including highly rated financial institutions and are classified as Level 2. Refer to Note 16 - Derivatives and Hedge Accounting to the unaudited consolidated financial statements for further details.
Financial instruments not carried at fair value:
The Company’s other financial instruments not carried at fair value consist primarily of cash and cash equivalents, short-term investments (except investment in mutual funds, as disclosed above), restricted cash, accrued interest on term deposits, accrued capital expenditure, accrued expenses and interest payable on borrowings for which fair values approximate their carrying amounts due to their short-term nature. The carrying value of the Company’s outstanding revolving credit facility approximates its fair value because the Company’s interest rate yield is near current market rates for comparable debt instruments.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
Convertible Senior Notes:
The total estimated fair value of the convertible senior notes as of June 30, 2020 and December 31, 2019 was $141,023 and $149,934, respectively. The fair value was determined based on the market yields for similar Notes as of the June 30, 2020 and December 31, 2019, respectively. The Company considers the fair value of the Notes to be a Level 2 measurement due to the limited inputs available for its fair valuation.
Nonrecurring fair value measurements of assets:
Nonrecurring fair value measurements include impairment tests conducted by the Company during the six months ended June 30, 2020 of its goodwill related to its Healthcare Analytics and Healthcare BPM reporting units. The fair value determination for goodwill was based on Company’s internal assessment, which are Level 3 inputs. During the six months ended June 30, 2020, the Company did not recognize any impairment charges on goodwill as the fair values exceeded their carrying value. Refer to Note 9 - Goodwill and Intangible Assets to the unaudited consolidated financial statements for further details.
During the year ended December 31, 2019, the Company conducted impairment tests of its long-lived assets and ROU assets related to its Health Integrated business. The fair value determination for ROU assets was based on third party quotes, which are Level 2 inputs, and for other long-lived assets, it was based on Company’s internal assessment, which are Level 3 inputs. During the year ended December 31, 2019, the Company recognized impairment charges on long-lived assets and ROU assets to write down the carrying value to their fair values.
16. Derivatives and Hedge Accounting
The Company uses derivative instruments and hedging transactions to mitigate exposure to foreign currency fluctuation risks associated with forecasted transactions denominated in certain foreign currencies so as to minimize earnings and cash flow volatility associated with changes in foreign currency exchange rates. The Company’s derivative financial instruments are largely forward foreign exchange contracts that are designated as effective hedges and that qualify as cash flow hedges under ASC 815. The Company had outstanding cash flow hedges totaling $421,630 (including $750 of range forward contracts) as of June 30, 2020 and $410,390 (including $4,300 of range forward contracts) as of December 31, 2019.
Changes in the fair value of these cash flow hedges are recorded as a component of accumulated other comprehensive income/(loss), net of tax, until the hedged transactions occurs. The resultant foreign exchange gain/(loss) upon settlement of these cash flow hedges is recorded along with the underlying hedged item in the same line of unaudited consolidated statements of income as either a part of “Cost of revenues”, “General and administrative expenses”, “Selling and marketing expenses”, “Depreciation and amortization expense”, as applicable. The impact of COVID-19 on the economic environment is uncertain and may cause variability in determination of fair value of these cash flow hedges, which could impact the effects of change in fair value that get recorded as a component of accumulated other comprehensive income/(loss) and also resultant exchange gain/(loss) upon settlement of derivative financial instruments.
The Company evaluates hedge effectiveness at the time a contract is entered into as well as on an ongoing basis. For hedging positions that are discontinued because the forecasted transaction is not expected to occur by the end of the originally specified period, any related amounts recorded in equity are reclassified to earnings.
The Company estimates that approximately $561 of net derivative losses, excluding tax effects, included in AOCI, representing changes in the fair value of cash flow hedges, could be reclassified into earnings within the next twelve months based on exchange rates prevailing as of June 30, 2020. At June 30, 2020, the maximum outstanding term of the cash flow hedges was 45 months.
The Company also enters into foreign currency forward contracts to economically hedge its intercompany balances and other monetary assets and liabilities denominated in currencies other than functional currencies, 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
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
consolidated statements of income and are included in the foreign exchange gain/(loss) line item. The impact of COVID-19 on the economic environment is uncertain and may cause variability in determination of fair value of these derivatives, which could impact the effects of change in fair value that get recorded 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 and the Philippine peso. The Company also has exposure to Colombian pesos, Czech Koruna, the Euro, South African ZAR and other local currencies in which it operates. Outstanding foreign currency forward contracts amounted to $106,988, GBP 9,487 and EUR 1,453 as of June 30, 2020 and $124,045, GBP 10,843 and EUR 1,289 as of December 31, 2019.
The following tables set forth the fair value of the foreign currency exchange contracts and their location on the unaudited consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
As of
|
|
|
|
Foreign currency exchange contracts
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Other current assets
|
|
$
|
4,070
|
|
|
$
|
3,945
|
|
|
Other assets
|
|
$
|
1,734
|
|
|
$
|
3,433
|
|
|
Accrued expenses and other current liabilities
|
|
$
|
4,631
|
|
|
$
|
1,524
|
|
|
Other non-current liabilities
|
|
$
|
3,496
|
|
|
$
|
1,250
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
As of
|
|
|
|
Foreign currency exchange contracts
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Other current assets
|
|
$
|
58
|
|
|
$
|
131
|
|
|
Accrued expenses and other current liabilities
|
|
$
|
118
|
|
|
$
|
259
|
|
The following tables set forth the effect of foreign currency exchange contracts on the unaudited consolidated statements of income and accumulated other comprehensive loss for the three and six months ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
Forward Exchange Contracts:
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Unrealized gain/(loss) recognized in AOCI
|
|
|
|
|
|
|
|
|
|
Derivatives in cash flow hedging relationships
|
|
$
|
7,721
|
|
|
$
|
3,268
|
|
|
$
|
(7,125)
|
|
|
$
|
9,205
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(loss) recognized in consolidated statements of income
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
$
|
3,204
|
|
|
$
|
2,923
|
|
|
$
|
(1,011)
|
|
|
$
|
4,319
|
|
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location and amount of gain/(loss) recognized in unaudited consolidated statements of income for cash flow hedging relationships and derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
|
|
As per unaudited consolidated statements of income
|
|
(Loss)/Gain on foreign currency exchange contracts
|
|
As per unaudited consolidated statements of income
|
|
Gain on foreign currency exchange contracts
|
|
Cash flow hedging relationships
|
|
|
|
|
|
|
|
|
|
Location in unaudited consolidated statements of income where gain/(loss) was reclassed from AOCI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
158,401
|
|
|
$
|
(851)
|
|
|
$
|
162,446
|
|
|
$
|
719
|
|
|
General and administrative expenses
|
|
$
|
28,750
|
|
|
(187)
|
|
|
$
|
31,228
|
|
|
106
|
|
|
Selling & marketing expenses
|
|
$
|
13,051
|
|
|
(9)
|
|
|
$
|
17,647
|
|
|
12
|
|
|
Depreciation & amortization expense
|
|
$
|
12,405
|
|
|
(80)
|
|
|
$
|
12,752
|
|
|
47
|
|
|
|
|
|
|
$
|
(1,127)
|
|
|
|
|
$
|
884
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
Location in unaudited consolidated statements of income where gain/(loss) was recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange gain, net
|
|
$
|
1,359
|
|
|
$
|
3,204
|
|
|
$
|
1,202
|
|
|
$
|
2,923
|
|
|
|
|
$
|
1,359
|
|
|
$
|
3,204
|
|
|
$
|
1,202
|
|
|
$
|
2,923
|
|
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location and amount of gain/(loss) recognized in unaudited consolidated statements of income for cash flow hedging relationships and derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
|
|
As per unaudited consolidated statements of income
|
|
Loss on foreign currency exchange contracts
|
|
As per unaudited consolidated statements of income
|
|
Gain on foreign currency exchange contracts
|
|
Cash flow hedging relationships
|
|
|
|
|
|
|
|
|
|
Location in unaudited consolidated statements of income where gain/(loss) was reclassed from AOCI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
321,057
|
|
|
$
|
(39)
|
|
|
$
|
319,686
|
|
|
$
|
1,250
|
|
|
General and administrative expenses
|
|
$
|
57,691
|
|
|
(114)
|
|
|
$
|
63,759
|
|
|
186
|
|
|
Selling & marketing expenses
|
|
$
|
27,507
|
|
|
(5)
|
|
|
$
|
35,694
|
|
|
19
|
|
|
Depreciation & amortization expense
|
|
$
|
24,855
|
|
|
(40)
|
|
|
$
|
26,419
|
|
|
100
|
|
|
|
|
|
|
$
|
(198)
|
|
|
|
|
$
|
1,555
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
Location in unaudited consolidated statements of income where gain/(loss) was recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange gain/(loss), net
|
|
$
|
2,736
|
|
|
$
|
(1,011)
|
|
|
$
|
2,462
|
|
|
$
|
4,319
|
|
|
|
|
$
|
2,736
|
|
|
$
|
(1,011)
|
|
|
$
|
2,462
|
|
|
$
|
4,319
|
|
17. Borrowings
The following tables summarizes the Company’s debt position as of June 30, 2020 and December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020
|
|
|
|
|
|
|
|
|
Revolver Credit Facility
|
|
Structured Payables
|
|
Notes
|
|
Total
|
|
Current portion of long-term borrowings
|
$
|
20,000
|
|
|
$
|
657
|
|
|
$
|
—
|
|
|
$
|
20,657
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings
|
79,000
|
|
|
—
|
|
|
150,000
|
|
|
229,000
|
|
|
Unamortized debt discount
|
—
|
|
|
—
|
|
|
(12,562)
|
|
|
(12,562)
|
|
|
Unamortized debt issuance costs*
|
—
|
|
|
—
|
|
|
(911)
|
|
|
(911)
|
|
|
Long-term borrowings
|
79,000
|
|
|
—
|
|
|
136,527
|
|
|
215,527
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
$
|
99,000
|
|
|
$
|
657
|
|
|
$
|
136,527
|
|
|
$
|
236,184
|
|
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
Revolver Credit Facility
|
|
Structured Payables
|
|
Notes
|
|
Total
|
|
Current portion of long-term borrowings
|
$
|
40,000
|
|
|
$
|
867
|
|
|
$
|
—
|
|
|
$
|
40,867
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings
|
59,000
|
|
|
—
|
|
|
150,000
|
|
|
209,000
|
|
|
Unamortized debt discount
|
—
|
|
|
—
|
|
|
(13,851)
|
|
|
(13,851)
|
|
|
Unamortized debt issuance costs*
|
—
|
|
|
—
|
|
|
(1,018)
|
|
|
(1,018)
|
|
|
Long-term borrowings
|
59,000
|
|
|
—
|
|
|
135,131
|
|
|
194,131
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
$
|
99,000
|
|
|
$
|
867
|
|
|
$
|
135,131
|
|
|
$
|
234,998
|
|
*Unamortized debt issuance costs for the Company’s revolver Credit Facility of $619 and $748 as of June 30, 2020 and December 31, 2019, respectively, is presented under “Other current assets” and “Other assets” in the consolidated balance sheets.
Revolver Credit Agreement
The Company’s $300,000 revolving credit facility pursuant to its credit agreement (the “Credit Agreement”) with certain lenders and Citibank N.A. as Administrative Agent (the “Credit Facility”) carried an effective interest rate as shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
|
|
Six months ended
June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Effective interest rate
|
|
2.2
|
%
|
|
4.2
|
%
|
|
2.6
|
%
|
|
4.0
|
%
|
As of June 30, 2020 and December 31, 2019, the Company was in compliance with all financial and non-financial covenants listed under the Credit Agreement.
Convertible Senior Notes
On October 1, 2018, the Company entered into an investment agreement (the “Investment Agreement”) with Orogen Echo LLC (the “Purchaser”), an affiliate of The Orogen Group LLC, relating to the issuance to the Purchaser of $150,000 in an aggregate principal amount of 3.50% Convertible Senior Notes due October 1, 2024 (the “Notes”). The transactions contemplated by the Investment Agreement, including the issuance of the Notes, closed on October 4, 2018. The Notes bear interest at a rate of 3.50% per annum, payable semi-annually in arrears in cash on April 1 and October 1 of each year.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
During the three and six months ended June 30, 2020 and 2019, the Company recognized interest expense and amortization of debt discount, on the Notes as below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
|
|
Six months ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Interest expense on Notes
|
$
|
1,313
|
|
|
$
|
1,269
|
|
|
$
|
2,625
|
|
|
$
|
2,581
|
|
|
Amortization of debt discount on Notes
|
$
|
654
|
|
|
$
|
618
|
|
|
$
|
1,289
|
|
|
$
|
1,218
|
|
Future principal payments/maturities for all of the Company's borrowings as of June 30, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
Revolver Credit Facility
|
|
Structured Payables
|
|
Total
|
|
2020 (July - December)
|
|
$
|
—
|
|
|
$
|
20,000
|
|
|
$
|
657
|
|
|
$
|
20,657
|
|
|
2021
|
|
—
|
|
|
20,000
|
|
|
—
|
|
|
20,000
|
|
|
2022
|
|
—
|
|
|
59,000
|
|
|
—
|
|
|
59,000
|
|
|
2023
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2024
|
|
150,000
|
|
|
—
|
|
|
—
|
|
|
150,000
|
|
|
Total
|
|
$
|
150,000
|
|
|
$
|
99,000
|
|
|
$
|
657
|
|
|
$
|
249,657
|
|
Letters of Credit
In the ordinary course of business, the Company provides standby letters of credit to third parties primarily for facility leases. As of June 30, 2020 and December 31, 2019, the Company had outstanding letters of credit of $461 each, that were not recognized in the consolidated balance sheets.
18. Capital Structure
Common Stock
The Company has one class of common stock outstanding.
During the three and six months ended June 30, 2020 and 2019, the Company purchased shares of common stock from employees in connection with withholding tax payments related to the vesting of restricted stock, as below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased
|
|
Total consideration
|
|
Weighted average purchase price per share (1)
|
|
Three months ended June 30, 2020
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Three months ended June 30, 2019
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2020
|
26,601
|
|
$
|
2,012
|
|
|
$
|
75.63
|
|
|
Six months ended June 30, 2019
|
22,666
|
|
$
|
1,408
|
|
|
$
|
62.11
|
|
(1) The weighted average purchase price per share was the closing price of the Company's share of common stock on the Nasdaq Global Select Market on the trading day prior to the vesting date of the shares of restricted stock.
On February 28, 2017, the Company’s Board of Directors authorized an additional common stock repurchase program (the “2017 Repurchase Program”), under which shares may be purchased by the Company from time to time from the open market and through private transactions during each of the fiscal years 2017 through 2019 up to an aggregate additional amount
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
of $100,000. The approval increased the 2017 authorization from $20,000 to $40,000 and authorizes stock repurchases of up to $40,000 in each of 2018 and 2019.
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”). The 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.
During the three and six months ended June 30, 2020 and 2019, the Company purchased shares of its common stock, including commissions, under the 2019 Repurchase Program and the 2017 Repurchase Program, respectively, as below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased
|
|
Total consideration
|
|
Weighted average purchase price per share
|
|
Three months ended June 30, 2020
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Three months ended June 30, 2019
|
198,160
|
|
$
|
12,130
|
|
|
$
|
61.21
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2020
|
175,765
|
|
$
|
11,983
|
|
|
$
|
68.18
|
|
|
Six months ended June 30, 2019
|
438,025
|
|
$
|
26,130
|
|
|
$
|
59.65
|
|
Repurchased shares have been recorded as treasury shares and will be held until the Company’s Board of Directors designates that these shares be retired or used for other purposes.
The 2019 Repurchase Program may be suspended or discontinued at any time. During the quarter ended March 31, 2020, to enhance the Company’s liquidity position in response to COVID-19, the Company elected to temporarily suspend share repurchases under the 2019 Repurchase Program. The 2019 Repurchase Program remains authorized by the Board of Directors and the Company resumed share repurchases effective July 1, 2020, considering improved market conditions, the Company’s capital and liquidity needs and other factors.
19. Employee Benefit Plans
The Company’s Gratuity Plans in India ("Gratuity Plan") provide for lump sum payment to vested employees on retirement or upon termination of employment in an amount based on the respective employee’s salary and years of employment with the Company. Liabilities with regard to the Gratuity Plans are determined by actuarial valuation using the projected unit credit method. Current service costs for the Gratuity Plan are accrued in the year to which they relate. Actuarial gains or losses or prior service costs, if any, resulting from amendments to the plans are recognized and amortized over the remaining period of service of the employees.
In addition, the Company’s subsidiary operating in the Philippines conforms to the minimum regulatory benefit, which provide for lump sum payment to vested employees on retirement from employment in an amount based on the respective employee’s salary and years of employment with the Company (the "Philippines Plan"). The benefit costs of the Philippines Plan for the year are calculated on an actuarial basis.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
Components of net periodic benefit cost were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Service cost
|
$
|
664
|
|
|
$
|
493
|
|
|
$
|
1,342
|
|
|
$
|
980
|
|
|
Interest cost
|
237
|
|
|
221
|
|
|
480
|
|
|
440
|
|
|
Expected return on plan assets
|
(157)
|
|
|
(144)
|
|
|
(318)
|
|
|
(286)
|
|
|
Amortization of actuarial (gain)/loss
|
97
|
|
|
(40)
|
|
|
198
|
|
|
(79)
|
|
|
Net gratuity cost
|
$
|
841
|
|
|
$
|
530
|
|
|
$
|
1,702
|
|
|
$
|
1,055
|
|
The Gratuity Plan in India is partially funded whereas the Philippines plan is unfunded. The Company makes annual contributions to the employees' gratuity fund of the Gratuity Plan established with Life Insurance Corporation of India and HDFC Standard Life Insurance Company. Fund managers manage these funds and calculate the annual contribution required to be made by the Company and manage the Gratuity Plans, including any required payouts. These funds are managed on a cash accumulation basis and interest is declared retrospectively on March 31 of each year. The Company expects to earn a return of approximately 7.0% per annum on these Gratuity Plans for the year ended December 31, 2020. The duration and severity of COVID-19 and continued market volatility is highly uncertain and, as such, the impact on assets and obligations related to employee benefit plans is subject to significant judgment and may cause variability in the Company’s net periodic benefit cost in future periods.
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
Plan assets at January 1, 2020
|
|
$
|
8,784
|
|
|
Actual return
|
|
285
|
|
|
Employer contribution
|
|
—
|
|
|
Benefits paid*
|
|
(431)
|
|
|
Effect of exchange rate changes
|
|
(477)
|
|
|
Plan assets at June 30, 2020
|
|
$
|
8,161
|
|
* Benefits payments were substantially made through the plan assets during the six months ended June 30, 2020.
The Company maintains several 401(k) plans (the “401(k) Plans”) under Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”), covering all eligible employees, as defined in the Code as a defined contribution plan. The Company may make discretionary contributions of up to a maximum of 4.0% of employee compensation within certain limits. During the three months ended March 31, 2020 and six months ended June 30, 2020, to enhance the Company’s liquidity position in response to COVID-19, the Company elected to temporarily suspend making any discretionary contributions to the 401(k) Plans.
The Company's accrual for contributions to the 401(k) Plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Contribution to the 401(k) Plan
|
$
|
29
|
|
|
$
|
909
|
|
|
$
|
255
|
|
|
$
|
2,122
|
|
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
The Company's contribution for various defined benefit plans on behalf of employees in India, the Philippines, Bulgaria, Romania, the Czech Republic, South Africa, Colombia, Australia and Singapore were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Contribution to the defined benefit plans
|
$
|
2,646
|
|
|
$
|
2,762
|
|
|
$
|
5,624
|
|
|
$
|
4,816
|
|
20. Leases
The Company conducts its operations using facilities leased under operating lease agreements that expire at various dates. The Company finances its use of certain motor vehicles and other equipment under various lease arrangements provided by financial institutions.
The Company had performed an evaluation of its contracts with suppliers in accordance with Topic 842 and had determined that, except for leases for office facilities, motor vehicles and other equipment as described above, none of the Company’s contracts contain a lease. In assessment of the lease term, the Company considers the extension option as part of its lease term for those lease arrangements where the Company is reasonably certain of availing the extension option. The lease agreements do not contain any covenant to impose any restrictions except for market-standard practice for similar lease arrangements.
The impact of the COVID-19 pandemic on the economic environment is uncertain and has caused variability in the determination of the incremental borrowing rate, which has impacted the measurement of lease liabilities and ROU assets.
The Company accounts for lease-related concessions to mitigate the economic effects of COVID-19 on lessees in accordance with guidance in Topic 842, Leases, to determine on lease-by-lease basis, whether the concession provided by a lessor should be accounted for as a lease modification. Such concessions had an insignificant impact on our unaudited consolidated financial statements during the three and six months ended June 30, 2020.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
Supplemental balance sheet information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Operating Lease
|
|
|
|
|
Operating lease right-of-use assets
|
$
|
96,789
|
|
|
$
|
86,396
|
|
|
|
|
|
|
|
Operating lease liabilities - Current
|
$
|
18,199
|
|
|
$
|
24,148
|
|
|
Operating lease liabilities - Non-current
|
90,934
|
|
|
74,709
|
|
|
Total operating lease liabilities
|
$
|
109,133
|
|
|
$
|
98,857
|
|
|
|
|
|
|
|
Finance Lease
|
|
|
|
|
Property and equipment, gross
|
$
|
1,564
|
|
|
$
|
1,757
|
|
|
Accumulated depreciation
|
(995)
|
|
|
(1,120)
|
|
|
Property and equipment, net
|
$
|
569
|
|
|
$
|
637
|
|
|
|
|
|
|
|
Finance lease liabilities - Current
|
$
|
253
|
|
|
$
|
253
|
|
|
Finance lease liabilities - Non-current
|
357
|
|
|
430
|
|
|
Total finance lease liabilities
|
$
|
610
|
|
|
$
|
683
|
|
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.
During the three months ended June 30, 2019, the Company performed an impairment test of its long-lived assets of its Health Integrated business. Based on the results, the operating lease ROU assets carrying value exceeded their fair value. As a result of this analysis, the Company recognized impairment on ROU assets of $989 during the three and six months ended June 30, 2019, in the unaudited consolidated statements of income under "impairment and restructuring charges".
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 June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
Finance lease:
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Amortization of right-of-use assets
|
$
|
63
|
|
|
$
|
92
|
|
|
$
|
125
|
|
|
$
|
187
|
|
|
Interest on lease liabilities
|
20
|
|
|
20
|
|
|
50
|
|
|
45
|
|
|
|
83
|
|
|
112
|
|
|
175
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease(a)
|
6,850
|
|
|
6,684
|
|
|
13,703
|
|
|
13,701
|
|
|
|
6,850
|
|
|
6,684
|
|
|
13,703
|
|
|
13,701
|
|
|
|
|
|
|
|
|
|
|
|
Sublease income
|
—
|
|
|
(105)
|
|
|
—
|
|
|
(105)
|
|
|
Total lease cost
|
$
|
6,933
|
|
|
$
|
6,691
|
|
|
$
|
13,878
|
|
|
$
|
13,828
|
|
(a) Includes short-term leases, which are immaterial.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
Supplemental cash flow and other information related to leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
Cash payments for amounts included in the measurement of lease liabilities :
|
|
|
|
|
Operating cash outflows for operating leases
|
$
|
12,831
|
|
|
$
|
13,749
|
|
|
Operating cash outflows for finance leases
|
$
|
50
|
|
|
$
|
45
|
|
|
Financing cash outflows for finance leases
|
$
|
124
|
|
|
$
|
207
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
$
|
17,999
|
|
|
$
|
27,750
|
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
$
|
75
|
|
|
$
|
144
|
|
|
Weighted-average remaining lease term
|
|
|
|
|
Finance lease
|
2.1 years
|
|
2.4 years
|
|
Operating lease
|
6.8 years
|
|
6.5 years
|
|
Weighted-average discount rate
|
|
|
|
|
Finance lease
|
10.2
|
%
|
|
8.7
|
%
|
|
Operating lease
|
7.4
|
%
|
|
7.3
|
%
|
The Company determines the incremental borrowing rate by adjusting the benchmark reference rates, applicable to the respective geographies where the leases were entered, with appropriate financing spreads and lease specific adjustments for the effects of collateral.
Maturities of lease liabilities as of June 30, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
|
2020 (July 1 - December 31)
|
$
|
12,989
|
|
|
$
|
183
|
|
|
2021
|
24,909
|
|
|
266
|
|
|
2022
|
23,121
|
|
|
153
|
|
|
2023
|
21,205
|
|
|
103
|
|
|
2024
|
16,841
|
|
|
32
|
|
|
2025 and thereafter
|
43,770
|
|
|
6
|
|
|
Total lease payments
|
$
|
142,835
|
|
|
$
|
743
|
|
|
Less: Imputed interest
|
33,702
|
|
|
133
|
|
|
Present value of lease liabilities
|
$
|
109,133
|
|
|
$
|
610
|
|
Maturities of minimum lease payments as of December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the next twelve months ending December 31,
|
Operating Leases
|
|
Capital Leases
|
|
2020
|
$
|
26,932
|
|
|
$
|
325
|
|
|
2021
|
23,783
|
|
|
251
|
|
|
2022
|
21,526
|
|
|
157
|
|
|
2023
|
19,381
|
|
|
86
|
|
|
2024
|
14,865
|
|
|
22
|
|
|
2025 and thereafter
|
23,983
|
|
|
—
|
|
|
Total minimum lease payment
|
$
|
130,470
|
|
|
$
|
841
|
|
|
Less: Imputed interest
|
31,613
|
|
|
158
|
|
|
Present value of minimum lease payments
|
$
|
98,857
|
|
|
$
|
683
|
|
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
21. Income Taxes
The Company determines the tax provision for interim periods using an estimate of its annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the Company updates its estimate of annual effective tax rate, and if its estimated tax rate changes, the Company makes a cumulative adjustment. The impact of COVID-19 on the economic environment is uncertain and may change the annual effective tax rate, which could impact tax expense.
The Company recorded income tax expense of $4,072 and $2,670 for the three months ended June 30, 2020 and 2019, respectively. The Company's effective tax rate increased from 17.5% during the three months ended June 30, 2019 to 32.4% during the three months ended June 30, 2020, primarily as a result of recording a one-time tax expense of $1,320 due to electing a new tax regime for two of the Company’s Indian subsidiaries which provides for a lower tax rate on earnings in exchange for foregoing certain tax credits, including minimum alternative tax credits. Accordingly, the Company recorded one-time tax expense of $573 on re-measurement of the Company’s Indian subsidiaries’ deferred taxes to a lower corporate tax rate and one-time tax expense of $747 resulting from foregoing the minimum alternative tax credits.
The Company recorded income tax expense of $9,927 and $6,870 for the six months ended June 30, 2020 and 2019, respectively. The Company's effective tax rate increased from 20.1% during the six months ended June 30, 2019 to 24.3% during the six months ended June 30, 2020, primarily as a result of (i) recording a one-time tax expense of $1,320 due to electing a new tax regime for two of the Company’s Indian subsidiaries which provides for a lower tax rate on earnings in exchange for foregoing certain tax credits, including minimum alternative tax credits during the six months ended June 30, 2020, compared to a benefit of $1,471 recorded during the six months ended June 30, 2019 and (ii) recording of excess tax benefits related to stock awards of $1,822 pursuant to ASU No. 2016-09 during the six months ended June 30, 2020 compared to $1,072 during the six months ended June 30, 2019.
Income tax (deferred) recognized in other comprehensive income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Income tax benefit/(expense) on:
|
|
|
|
|
|
|
|
|
Unrealized gain/(loss) on cash flow hedges
|
$
|
(2,702)
|
|
|
$
|
(113)
|
|
|
$
|
2,106
|
|
|
$
|
(1,656)
|
|
|
Retirement benefits
|
257
|
|
|
19
|
|
|
248
|
|
|
(90)
|
|
|
Currency translation adjustments
|
(4,204)
|
|
|
(413)
|
|
|
(4,204)
|
|
|
(1,119)
|
|
|
Total income tax expense recognized in other comprehensive income
|
$
|
(6,649)
|
|
|
$
|
(507)
|
|
|
$
|
(1,850)
|
|
|
$
|
(2,865)
|
|
22. Stock-Based Compensation
The following costs related to the Company’s stock-based compensation plan are included in the unaudited consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Cost of revenues
|
$
|
1,624
|
|
|
$
|
1,638
|
|
|
$
|
3,042
|
|
|
$
|
2,964
|
|
|
General and administrative expenses
|
3,112
|
|
|
2,781
|
|
|
4,680
|
|
|
5,756
|
|
|
Selling and marketing expenses
|
2,990
|
|
|
2,736
|
|
|
4,782
|
|
|
5,391
|
|
|
Total
|
$
|
7,726
|
|
|
$
|
7,155
|
|
|
$
|
12,504
|
|
|
$
|
14,111
|
|
As of June 30, 2020, the Company had 2,305,155 shares available for grant under the 2018 Omnibus Incentive Plan.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
Stock Options
Stock option activity under the Company’s stock-based compensation plans is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted-Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
Weighted-Average
Remaining
Contractual
Life (Years)
|
|
Outstanding at December 31, 2019
|
98,161
|
|
|
$
|
23.39
|
|
|
$
|
4,522
|
|
|
1.86
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Exercised
|
(41,422)
|
|
|
23.18
|
|
|
1,993
|
|
|
—
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Outstanding at June 30, 2020
|
56,739
|
|
|
$
|
23.54
|
|
|
$
|
2,261
|
|
|
1.54
|
|
Vested and exercisable at June 30, 2020
|
56,739
|
|
|
$
|
23.54
|
|
|
$
|
2,261
|
|
|
1.54
|
The unrecognized compensation cost for unvested options as of June 30, 2020 was $nil.
Restricted Stock and Restricted Stock Units
Restricted stock and restricted stock unit activity under the Company’s stock-based compensation plans is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
|
Restricted Stock Units
|
|
|
|
|
Number
|
|
Weighted Average
Fair Value
|
|
Number
|
|
Weighted Average
Fair Value
|
|
Outstanding at December 31, 2019*
|
27,384
|
|
|
$
|
48.72
|
|
|
913,094
|
|
|
$
|
59.61
|
|
|
Granted
|
—
|
|
|
—
|
|
|
392,287
|
|
|
77.01
|
|
|
Vested
|
—
|
|
|
—
|
|
|
(310,657)
|
|
|
56.59
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
(43,318)
|
|
|
63.87
|
|
|
Outstanding at June 30, 2020*
|
27,384
|
|
|
$
|
48.72
|
|
|
951,406
|
|
|
$
|
67.58
|
|
* As of June 30, 2020 and December 31, 2019 restricted stock units vested for which the underlying common stock is yet to be issued were 181,638 and 167,270, respectively.
As of June 30, 2020, unrecognized compensation cost of $55,720 is expected to be expensed over a weighted average period of 2.85 years.
Performance Based Stock Awards
Performance based restricted stock unit activity under the Company’s stock plans is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Based PRSUs
|
|
|
|
Market Condition Based PRSUs
|
|
|
|
|
Number
|
|
Weighted Average
Fair Value
|
|
Number
|
|
Weighted Average
Fair Value
|
|
Outstanding at December 31, 2019
|
87,685
|
|
|
$
|
62.54
|
|
|
87,670
|
|
|
$
|
82.10
|
|
|
Granted
|
61,368
|
|
|
78.29
|
|
|
61,352
|
|
|
102.10
|
|
|
Vested
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
(2,063)
|
|
|
62.24
|
|
|
(2,062)
|
|
|
80.33
|
|
|
Outstanding at June 30, 2020
|
146,990
|
|
|
$
|
69.12
|
|
|
146,960
|
|
|
$
|
90.47
|
|
As of June 30, 2020, unrecognized compensation cost of $8,959 is expected to be expensed over a weighted average period of 2.01 years.
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
The impact of COVID-19 on the economic environment is uncertain and has caused variability in the estimation of number of performance based restricted stock units that will eventually vest and the related compensation cost to be recognized in the unaudited consolidated statements of income.
23. Related Party Disclosures
On October 1, 2018, the Company entered into the Investment Agreement with the Purchaser relating to the issuance to the Purchaser of $150,000 aggregate principal amount of the Notes. In connection with the investment, Vikram S. Pandit, Chairman and CEO of The Orogen Group LLC (an affiliate of the Purchaser), was appointed to Company’s Board of Directors.
The Company had outstanding Notes with a principal amount of $150,000 each as of June 30, 2020 and December 31, 2019 and interest accrued of $1,313 each as of June 30, 2020 and December 31, 2019, related to the Investment Agreement.
The Company recognized interest expense on the Notes related to the Investment Agreement s as below. Refer to Note 17 – Borrowings to the unaudited consolidated financial statements for details.
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
2019
|
|
|
|
2020
|
|
2019
|
|
Interest expense on Notes
|
$
|
1,313
|
|
$
|
1,269
|
|
|
|
|
$
|
2,625
|
|
|
$
|
2,581
|
|
24. Commitments and Contingencies
Capital Commitments
At June 30, 2020, the Company had committed to spend approximately $9,900 under agreements to purchase property and equipment. This amount is net of capital advances paid as of June 30, 2020 which are recognized in the unaudited consolidated balance sheets as property and equipment.
Other Commitments
Certain units of the Company’s Indian subsidiaries were established as 100% Export-Oriented units or under the Software Technology Parks of India (“STPI”) or Special Economic Zone (“SEZ”) scheme promulgated by the Government of India. These units are exempt from customs, central excise duties, and levies on imported and indigenous capital goods, stores, and spares. The Company has undertaken to pay custom duties, service taxes, levies, and liquidated damages payable, if any, in respect of imported and indigenous capital goods, stores and spares consumed duty free, in the event that certain terms and conditions are not fulfilled. The Company’s management believes, however, that these units have in the past satisfied and will continue to satisfy the required conditions.
The Company’s operations centers in the Philippines are registered with the Philippine Economic Zone Authority (“PEZA”). The registration provides the Company with certain fiscal incentives on the import of capital goods and local purchase of services and materials and requires ExlService Philippines, Inc. to meet certain performance and investment criteria. The Company’s management believes that these centers have in the past satisfied and will continue to satisfy the required criteria.
Contingencies
The U.S. and Indian transfer pricing regulations require that any international transaction involving associated enterprises be at an arm’s-length price. Accordingly, the Company determines the appropriate pricing for the international transactions among its associated enterprises on the basis of a detailed functional and economic analysis involving benchmarking against transactions among entities that are not under common control. The tax authorities have jurisdiction to review this arrangement
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2020
(In thousands, except share and per share amounts)
and in the event that they determine that the transfer price applied was not appropriate, the Company may incur increased tax liability, including accrued interest and penalties. The Company is currently involved in disputes with the Indian tax authorities over the application of some of its transfer pricing policies for some of its subsidiaries. Further, the Company and a U.S. subsidiary are engaged in tax litigation with the income-tax authorities in India on the issue of permanent establishment. The Company is subject to taxation in the United States and various states and foreign jurisdictions. For the U.S., the Philippines and India, tax year 2016 and subsequent tax years remain open for examination by the tax authorities as of June 30, 2020.
The aggregate amount demanded by income tax authorities (net of advance payments, if any) from the Company related to its transfer pricing issues for tax years 2003 to 2015 and its permanent establishment issues for tax years 2003 to 2007 as of June 30, 2020 and December 31, 2019 is $16,152 and $16,220, respectively, of which the Company has made payments and/or provided bank guarantees to the extent $7,856 and $8,108, respectively. Amounts paid as deposits in respect of such assessments aggregating to $6,102 and $6,252 as of June 30, 2020 and December 31, 2019, respectively, are included in “Other assets” and amounts deposited for bank guarantees aggregating to $1,754 and $1,856 as of June 30, 2020 and December 31, 2019, respectively, are included in “Restricted cash” in the non-current assets section of the Company’s unaudited consolidated balance sheets.
Based on the facts underlying the Company’s position and its experience with these types of assessments, the Company believes that its position will more likely than not be sustained upon final examination by the tax authorities based on its technical merits as of the reporting date and accordingly has not accrued any amount with respect to these matters in its unaudited consolidated financial statements. The Company does not expect any impact from these assessments on its future income tax expense. It is possible that the Company might receive similar orders or assessments from tax authorities for subsequent years. Accordingly, even if these disputes are resolved, the Indian tax authorities may still serve additional orders or assessments.
In February 2019, there was a judicial pronouncement in India with respect to defined contribution benefits payments interpreting certain statutory defined contribution obligations of employees and employers. Currently some of the Company's subsidiaries in India are undergoing assessment with the statutory authorities. As of the reporting date, it is unclear whether the interpretation set out in the pronouncement has retrospective application. If applied retrospectively, the interpretation may result in a significant increase in contributions payable by the Company for past periods for certain of its India-based employees. There are numerous interpretative challenges concerning the retrospective application of the judgment. Due to such challenges and a lack of interpretive guidance, and based on legal advice, the Company believes it is currently impracticable to reliably estimate the timing and amount of any payments the Company may be required to make. Accordingly, the Company will re-evaluate the amount of a potential provision, if any, upon further developments.
From time to time, the Company and/or its 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.