What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2023-02-23 compared with 2022-02-24 · 707 added, 771 removed, 1375 unchanged (52% of the section changed)

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Based on this assessment and those criteria, management concluded that we maintained effective internal control over financial reporting as of December 31, 2022.

See Deloitte & Touche LLP’s accompanying report on their audit of our internal controls over financial reporting.

We acquired Clairvoyant AI Inc.

(“Clairvoyant”) on December 16, 2021, as discussed in Note 9 to our consolidated financial statements.

As permitted by the SEC staff’s Frequently Asked Question 3 on Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports (revised September 24, 2007), our management excluded Clairvoyant from its assessment of internal control over financial reporting, which was acquired on December 16, 2021, and whose financial statements constitute 7.4% of total assets and 0.1% of revenues of the consolidated financial statement amounts as of and for the year ended December 31, 2021.

We will include Clairvoyant in our assessment of the effectiveness of internal control over financial reporting starting fiscal 2022.

See Deloitte & Touche LLP’s accompanying attestation report on their audit of our internal controls over financial reporting.

Changes in Internal Control over Financial Reporting

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Executive Compensation

We incorporate by reference the information responsive to this Item appearing in our Proxy Statement, including under the headings “Executive Compensation — Compensation Discussion and Analysis,” “— Compensation Committee Report,” “— Summary Compensation Table for Fiscal Year 2021,” “— Grants of Plan-Based Awards Table for Fiscal Year 2021,” “Outstanding Equity Awards at Fiscal 2021 Year-End,” “Option Exercises and Stock Vested During Fiscal Year 2021,” “— Pension Benefits for Fiscal Year 2021,” “— Potential Payments upon Termination or Change in Control at Fiscal 2021 Year-

End,” “— Director Compensation for Fiscal Year 2021,” “— Risk and Compensation Policies” and “Corporate Governance —Compensation Committee Interlocks and Insider Participation.”

We incorporate by reference the information responsive to this Item appearing in our Proxy Statement, including under the headings “Executive Compensation — Compensation Discussion and Analysis,” “— Compensation and Talent Management Committee Report,” “— Summary Compensation Table for Fiscal Year 2022,” “— Grants of Plan-Based Awards Table for Fiscal Year 2022,” “Outstanding Equity Awards at Fiscal 2022 Year-End,” “Option Exercises and Stock Vested During Fiscal Year 2022,” “— Pension Benefits for Fiscal Year 2022,” “— Potential Payments upon Termination or Change in Control at Fiscal 2022 Year-End,” “— Director Compensation for Fiscal Year 2022,” “— Risk and Compensation Policies” and “Corporate Governance — Compensation and Talent Management Committee Interlocks and Insider Participation.”

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

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Chairman of the Board February 23, 2023

/ S / G AREN K.

/ S / A NDREAS F IBIG

Director February 23, 2023

Andreas Fibig

/ S / A NNE E.

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1-33089) filed on October 29, 2020).

10.2+ Amendment to Second Amended and Restated Employment and Non-Competition Agreement, dated August 12, 2022, between the Company and Rohit Kapoor (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (File No.

1-33089) filed on October 27, 2022).

10.3+ Employment Agreement, effective as of February 3, 2020, between ExlService Holdings, Inc.

51 unchanged sentences

1-33089) filed on April 29, 2021).

10.21 Credit Agreement, dated as of November 21, 2017, among ExlService Holdings, Inc., the other loan parties thereto, the lenders party thereto, and Citibank, N.A., as administrative agent, Citibank, N.A.

and PNC Capital Markets LLC, as joint lead arrangers and joint bookrunners, and JPMorgan Chase Bank, N.A., as syndication agent (incorporated by reference to Exhibit 10.37 to the Company’s Annual Report on Form 10-K (File No.

1-33089) filed on February 27, 2018).

10.22 First Amendment to Credit Agreement, dated as of July 2, 2018, by and among the Company and the other loan parties thereto, the lenders party thereto, and Citibank, N.A., as administrative agent (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K (File No.

1-33089) filed on February 28, 2019).

10.23 Second Amendment to Credit Agreement, dated as of October 1, 2018, by and among the Company and the other loan parties thereto, the lenders party thereto, and Citibank, N.A., as administrative agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No.

1-33089) filed on October 4, 2018).

10.24 Third Amendment to Credit Agreement, dated as of April 16, 2021, by and among the Company and the other loan parties thereto, the lenders party thereto, and Citibank, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No.

10.22+ ExlService Holdings, Inc.

2022 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No.

1-33089) filed on June 22, 2022.

10.23 Amendment and Restatement Agreement, dated April 18, 2022, by and among the Company and the other loan parties thereto, the lenders party thereto, and Citibank, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No.

1-33089) filed on April 20, 2022.

10.25 Payoff and Termination Agreement between ExlService Holdings, Inc.

and Orogen Echo, LLC, dated August 27, 2021 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K (File No.

1-33089) filed on August 27, 2021).

21.1 Subsidiaries of the Company .

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Consolidated Statements of Comprehensive Income for the years ended December 31, 2022, 2021 and 2020

Consolidated Statements of Equity for the years ended December 31, 202 1 , 20 20 and 20 19

Consolidated Statements of Stockholders' Equity for the years ended December 31, 2022, 2021 and 2020

Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020

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We have audited the accompanying consolidated balance sheets of ExlService Holdings, Inc.

(the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements").

(the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

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The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Business Combination - Refer to Note 9 to the financial statements

Revenues - Refer to Notes 2 and 4 to the financial statements

Critical Audit Matter Description

On December 16, 2021, ExlService.com, LLC (the “Purchaser”), a wholly owned subsidiary of the Company, entered into a purchase agreement (the “Purchase Agreement”) with Clairvoyant AI Inc.

(“Clairvoyant”) to purchase all of the issued and outstanding equity securities of Clairvoyant.

The initial purchase consideration was $80,080, excluding cash and cash equivalents acquired, debt and other estimated post-closing adjustments.

The Purchase Agreement allows sellers the ability to earn up to $20,000 in earn-out payments, based on the achievement of certain performance goals by Clairvoyant during the 2022 and 2023 calendar years.

This contingent consideration has an estimated fair value of $9,000.

The purchase consideration remains subject to certain post-closing adjustments, as required under the Purchase Agreement.

The Company accounted for this business combination using the acquisition method of accounting.

The aggregate purchase consideration for Clairvoyant was allocated to identifiable net tangible and intangible assets based upon their preliminary fair values.

The guidance specifies criteria as to intangible assets acquired in a business combination that must be recognized and reported separately from goodwill.

Contingent consideration is recognized at its fair value on the acquisition date.

The liability resulting from contingent consideration is re-measured to fair value as of each reporting date until the

contingency is resolved, whereby such changes in fair value are recognized in earnings.

These fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market.

Under ASC 350, Intangibles - Goodwill and Other, all assets and liabilities of the acquired businesses, including goodwill, are assigned to reporting units.

Acquisition related costs are expensed as incurred under general and administrative expenses.

The determination of the fair value of the net assets of Clairvoyant, specifically the estimates of the fair value of the identifiable intangible assets and contingent consideration, requires judgment, and is subjective based on assumptions, the most significant being the related revenue projections within future cash flows, and the discount rate applied within the discounted cash flow model of Clairvoyant.

We identified the valuation of the net assets of Clairvoyant, specifically the estimates of the fair value of the identifiable intangible assets and contingent consideration, as a critical audit matter because of the significant estimates and management assumptions utilized in projecting revenue within future cash flows, and selecting an appropriate discount rate.

This required a high degree of auditor judgment and an increased audit effort, including the need to involve our fair value specialists when performing auditor procedures to evaluate the reasonableness of management’s valuation methodology and the selection of inputs to the valuation.

Revenue is recognized when services are provided to the Company’s customers, in an amount that reflects the consideration which the Company expects to be entitled to in exchange for the services provided.

Revenue is measured based on consideration specified in a contract with a customer and excludes discounts and amounts collected on behalf of third parties.

Revenues under time-and-material, transaction and outcome-based contracts are recognized as the services are performed.

Total revenues were $1,412 million for the year ended December 31, 2022.

At the inception of a new contract with a customer, the Company evaluates the revenue recognition principles, including judgments in identifying performance obligations in a contract and determining the timing of revenue recognition.

The Company’s contracts may be modified to add, remove or change existing performance obligations, which require judgment to evaluate and determine whether they are to be accounted for on a prospective basis either as a separate contract, or as a termination of existing contract and creation of a new contract.

Auditing revenue recognition requires significant audit effort resulting from the number of customers and related contracts that require evaluation and auditor judgment as to whether revenue was recorded in accordance with the terms of the contracts and revenue recognition principles under Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”).

______________________________________________________________________________________________________

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the fair value of the net assets of Clairvoyant, specifically the estimates of the fair value of the identifiable intangible assets and contingent consideration, including projections of revenue within future cash flows and the selection of the discount rate included the following, among others:

• We evaluated the business rationale for the acquisition;

• We tested the operating effectiveness of internal controls over the valuation of the net assets of Clairvoyant, including management’s internal controls over the selection and review of key assumptions used in projected financial information;

• We assessed the reasonableness of management's revenue projections by comparing the projections to historical results and market data;

• With the assistance of our fair value specialists, we evaluated the reasonableness of the valuation methodology and key valuation inputs utilized in the analysis including the selected discount rate by:

• Developing a range of independent estimates of the discount rate and comparing those to the rates selected by management;

• Testing the reasonableness of the valuation inputs against observable market data and generally accepted valuation methodologies;

• Testing the mathematical accuracy of the calculations.

Our audit procedures related to whether revenue was recorded in accordance with the terms of the contracts with the Company’s customers and met the criteria for revenue recognition in accordance with ASC Topic 606 included the following, among others:

• We tested the effectiveness of internal controls over revenue, specifically management’s controls over the identification of performance obligations within the customer contracts and determining timing of revenue recognition for new customer contracts and contracts with significant scope modifications.

• We selected a sample of recorded revenue transactions from new customer contracts and evaluated the appropriateness of the performance obligations identified within the customer contracts, and assessed if the revenue recognition principles applied are in accordance with ASC Topic 606.

• We selected a sample of recorded revenue transactions related to the Company’s contracts that were modified to add, remove or change existing performance obligations and (1) assessed whether the services added to an existing contract are distinct and whether the pricing is at a standalone selling price.

and (2) services added that are distinct and at standalone selling price are accounted for on a prospective basis either as a separate contract, or as a termination of existing contract and creation of a new contract.

/s/ Deloitte & Touche LLP

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We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2022, of the Company and our report dated February 23, 2023, expressed an unqualified opinion on those financial statements.

As described in Management’s Annual Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Clairvoyant AI Inc., which was acquired on December 16, 2021, and whose financial statements constitute 7.4% of total assets and 0.1% of revenues of the consolidated financial statement amounts as of and for the year ended December 31, 2021.

Accordingly, our audit did not include the internal control over financial reporting at Clairvoyant AI Inc.

Basis for Opinion

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CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(In thousands, except per share amount and share count)

December 31, 2022 December 31, 2021

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Accounts receivable, net 259,222 194,232

Prepaid expenses 14,655 11,344

Advance income tax, net 15,199 5,684

Other current assets 50,979 62,971

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Goodwill 405,637 403,902

Long-term investments 34,779 3,190

Other assets 32,069 30,183

Investment in equity affiliate 3,004 2,957

Total assets $ 1,346,119 $ 1,282,904

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Operating lease liabilities, less current portion 48,155 68,506

Income taxes payable 1,790 1,790

Deferred tax liabilities, net 547 965

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Total liabilities 587,940 589,748

Commitments and contingencies (Refer Note 25)

Preferred stock, $ 0.001 par value;

15,000,000 shares authorized, none issued

Commitments and contingencies (Refer to Note 25)

ExlService Holdings, Inc.

Stockholders’ equity:

Preferred stock, $ 0.001 par value;

15,000,000 shares authorized, none issued

Common stock, $ 0.001 par value;

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Retained earnings 899,105 756,137

Accumulated other comprehensive income/(loss) ( 89,474 ) ( 74,984 )

Accumulated other comprehensive loss ( 144,143 ) ( 89,474 )

Total including shares held in treasury 1,200,110 1,062,445

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( 441,931 ) ( 369,289 )

Stockholders' equity 693,156 719,172

Total equity 693,156 719,172

Total stockholders’ equity 758,179 693,156

Total liabilities and stockholders’ equity $ 1,346,119 $ 1,282,904

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CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share amounts)

(In thousands, except per share amount and share count)

Year ended December 31,

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Depreciation and amortization expense 56,282 49,132 50,462

Impairment and restructuring charges — — 8,671

Total operating expenses 323,287 275,478 224,476

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Interest expense ( 8,252 ) ( 7,561 ) ( 11,190 )

Other income, net 6,773 12,065 16,507

Other income/(loss), net ( 10 ) 6,773 12,065

Loss on settlement of convertible notes — ( 12,845 ) —

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Other comprehensive income/(loss):

Unrealized gain on cash flow hedges 4,663 12,665 8,773

Unrealized gain/(loss) on cash flow hedges ( 27,333 ) 4,663 12,665

Loss on net investment hedges — ( 1,134 ) —

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Reclassification adjustments:

Gain on cash flow hedges (1)

(Gain)/loss on cash flow hedges (1)

1,295 ( 9,264 ) ( 801 )

Retirement benefits (2)

709 394 ( 159 )

Income tax effects relating to above (3)

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Total comprehensive income $ 88,299 $ 100,268 $ 99,384

(1) These are reclassified to net income and are included in cost of revenues and operating expenses, as applicable in the consolidated statements of income.

(1) These are reclassified to net income and are included in cost of revenues, operating expenses and interest expense, as applicable in the consolidated statements of income.

Refer to Note 17 - Derivatives and Hedge Accounting to the consolidated financial statements.

(2) These are reclassified to net income and are included in other income, net in the consolidated statements of income.

(2) These are reclassified to net income and are included in other income/(loss), net in the consolidated statements of income.

Refer to Note 20 - Employee Benefit Plans to the consolidated financial statements.

(3) These are income tax effects recognized on cash flow hedges, retirement benefits and foreign currency translation gains/(losses).

(3) These are income tax effects recognized on cash flow hedges, retirement benefits and foreign currency translation loss.

Refer to Note 22 - Income Taxes to the consolidated financial statements.

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EXLSERVICE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands, except share and per share amounts)

Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income/(Loss) Treasury Stock Non - Controlling Interest Total Equity

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share count)

Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income/(Loss) Treasury Stock Total

Shares Amount Shares Amount

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Acquisition of treasury stock — — — — — ( 1,113,205 ) ( 79,949 ) ( 79,949 )

Allocation of equity component related to issuance costs on convertible notes — — ( 13 ) — — — — — ( 13 )

Purchase of non-controlling interest — — 18 — — — — ( 250 ) ( 232 )

Other comprehensive loss — — — — ( 1,425 ) — — — ( 1,425 )

Other comprehensive income — — — — 9,908 — — 9,908

Net income — — — 89,476 — — — 89,476

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Acquisition of treasury stock — — — — — ( 1,118,634 ) ( 118,357 ) ( 118,357 )

Other comprehensive income — — — — 9,908 — — — 9,908

Issuance of treasury stock — — 19,436 — — 310,394 17,306 36,742

Settlement of convertible notes — — ( 84,000 ) — — — — ( 84,000 )

Other comprehensive loss — — — — ( 14,490 ) — — ( 14,490 )

Net income — — — 114,758 — — — 114,758

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Acquisition of treasury stock — — — — — ( 536,674 ) ( 72,642 ) ( 72,642 )

Issuance of treasury stock — — 19,436 — — 310,394 17,306 — 36,742

Settlement of convertible notes — — ( 84,000 ) — — — — — ( 84,000 )

Other comprehensive loss — — — — ( 54,669 ) — — ( 54,669 )

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Amortization of operating lease right-of-use assets 21,783 26,326 27,146

Unrealized loss/(gain) on short term investments 5,139 ( 7,174 ) ( 10,116 )

Unrealized (gain)/loss on investments ( 1,209 ) 5,139 ( 7,174 )

Unrealized foreign currency exchange (gain)/loss, net ( 16,643 ) ( 3,821 ) 402

Deferred income tax (benefit)/expense ( 19,552 ) ( 20,326 ) 2,697

Reversal/(allowance) for expected credit losses ( 464 ) 297 614

Allowance/(reversal) for expected credit losses 683 ( 464 ) 297

Loss on settlement of convertible notes — 12,845 —

(Gain)/loss from equity-method investment ( 47 ) 227 269

Amortization of non-cash interest expense related to convertible senior notes 1,795 2,616 2,472

Impairment charges — — 3,627

Fair value changes in contingent consideration 8,250 — —

Amortization of non-cash interest expense related to convertible notes — 1,795 2,616

Others, net 510 168 ( 315 )

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Accounts receivable ( 68,121 ) ( 37,684 ) 24,696

Prepaid expenses and other current assets ( 1,179 ) ( 5,133 ) 1,385

Advance income tax, net ( 12,062 ) 696 7,194

Other current assets ( 7,709 ) ( 1,179 ) ( 5,133 )

Income taxes payable, net 8,779 ( 12,062 ) 696

Other assets ( 10,723 ) 227 6,505

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Cash flows from investing activities:

Purchase of property and equipment ( 37,248 ) ( 42,224 ) ( 40,545 )

Purchases of property and equipment ( 44,836 ) ( 37,248 ) ( 42,224 )

Proceeds from sale of property and equipment 266 1,300 916

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Purchases of investments ( 212,607 ) ( 96,011 ) ( 102,462 )

Proceeds from redemptions of investments 94,520 126,154 176,968

Proceeds from redemption of investments 164,503 94,520 126,154

Investment in equity affiliate — — ( 700 )

Purchase of non-controlling interest — — ( 241 )

Net cash used for investing activities ( 96,546 ) ( 114,270 ) ( 18,316 )

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Repayments of borrowings ( 45,000 ) ( 329,031 ) ( 120,867 )

Payment of debt issuance costs — — ( 117 )

Acquisition of treasury stock ( 72,642 ) ( 118,357 ) ( 79,949 )

Proceeds from exercise of stock options — 710 1,501

Proceeds from ESPP contribution 1,060 — —

Net cash used for financing activities ( 81,724 ) ( 146,879 ) ( 89,564 )

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Net (decrease)/increase in cash, cash equivalents and restricted cash ( 18,189 ) ( 81,709 ) 98,475

Cash, cash equivalents and restricted cash at the beginning of the year 225,519 127,044 104,131

Cash, cash equivalents and restricted cash at the end of the year $ 143,810 $ 225,519 $ 127,044

Cash, cash equivalents and restricted cash at the beginning of the period 143,810 225,519 127,044

Cash, cash equivalents and restricted cash at the end of the period $ 125,621 $ 143,810 $ 225,519

Supplemental disclosure of cash flow information:

Cash paid during the year for:

Cash paid during the period for:

Interest $ 8,189 $ 6,589 $ 7,626

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December 31, 2022

(In thousands, except share and per share amounts)

(In thousands, except per share amount and share count)

ExlService Holdings, Inc.

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ExlService Holdings, together with its subsidiaries and affiliates (collectively, the “Company”), is a leading data analytics and digital operations and solutions company that partners with clients to improve business outcomes and unlock growth.

By bringing together deep domain expertise with robust data, powerful analytics, cloud, artificial intelligence and machine learnings, the Company creates agile, scalable solutions and executes complex operations for the world’s leading corporations in industries including insurance, healthcare, banking and financial services, media, and retail, among others.

By bringing together deep domain expertise with robust data, powerful analytics, cloud, artificial intelligence and machine learning, the Company creates agile, scalable solutions and executes complex operations for the world’s leading corporations in industries including insurance, healthcare, banking and financial services, media, and retail, among others.

The Company’s data-led value creation framework enables better and faster decision making, leveraging its end-to-end data and analytics capabilities to drive improved business outcomes, and re-designing of operating models to integrate advanced technology into operational workflows.

The Company embeds digital operations and solutions into clients’ businesses and introduces its data led approach to transform operations.

The Company’s clients are located principally in the United States of America (“U.S.”) and the United Kingdom (“U.K.”).

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Intra-group balances and transactions, and gains and losses arising from intra-group transactions, are eliminated while preparing consolidated financial statements.

Accounting policies of the respective individual subsidiary and associate are aligned wherever necessary, so as to ensure consistency with the accounting policies that are adopted by the Company under U.S.

The Company’s investments in equity affiliates are initially recorded at cost and any excess purchase consideration paid over proportionate share of the fair value of the net assets of the investee at the acquisition date is recognized as goodwill.

The proportionate share of net income or loss of the investee after its acquisition is recognized in the 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 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 - Business Combinations, Goodwill and Intangible Assets to the consolidated financial statements, with no impact on the consolidated balance sheets, statements of income, comprehensive income, equity and cash flows.

Accounting policies of the respective individual subsidiaries and equity affiliates are aligned wherever necessary, so as to ensure consistency with the accounting policies that are adopted by the Company under U.S.

For purposes of comparability, certain prior period amounts have been reclassified to conform to the current year presentation in accordance with U.S.

(b) Use of Estimates

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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 consolidated financial statements include, but are not limited to, estimates of the fair value of the identifiable intangible assets and contingent consideration, purchase price allocation, including revenue projections and the discount rate applied within the discounted cash

EXLSERVICE HOLDINGS, INC.

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December 31, 2022

(In thousands, except share and per share amounts)

consideration, purchase price allocation, allowance for expected credit losses, the nature and timing of the satisfaction of performance obligations, the standalone selling price of performance obligations, and variable consideration in a customer contract, expected recoverability from customers with contingent fee arrangements, estimated costs to complete fixed price contracts, recoverability of dues from statutory authorities, assets and obligations related to employee benefit plans, deferred tax valuation allowances, income-tax uncertainties and other contingencies, valuation of derivative financial instruments, assumptions used to calculate stock-based compensation expense, assumptions used to determine the incremental borrowing rate to calculate lease liabilities and right-of-use (“ROU”) assets, lease term to calculate amortization of ROU, depreciation and amortization periods, revenue projections and discount rate applied within the discounted cash flow model for business acquisitions, and recoverability of long-lived assets, goodwill and intangibles.

As of December 31, 2021, the extent to which the global Coronavirus Disease 2019 pandemic (“COVID-19”) will ultimately impact the Company's business depends on numerous dynamic factors, which the Company still cannot reliably predict.

As a result, many of the Company's estimates and assumptions herein required increased judgment and carry a higher degree of variability and volatility.

As events continue to evolve with respect to COVID-19, the Company’s estimates may materially change in future periods.

Any changes in estimates are adjusted prospectively in the Company’s consolidated financial statements.

(In thousands, except per share amount and share count)

flow model for business acquisitions, credit risk of customers, the nature and timing of the satisfaction of performance obligations, the standalone selling price of performance obligations, and variable consideration in a customer contract, expected recoverability from customers with contingent fee arrangements, estimated costs to complete fixed price contracts, recoverability of dues from statutory authorities, assets and obligations related to employee benefit plans, deferred tax valuation allowances, income-tax uncertainties and other contingencies, valuation of derivative financial instruments, stock-based awards, and debt instruments, assumptions used to calculate stock-based compensation expense, assumptions used to determine the incremental borrowing rate to calculate lease liabilities and right-of-use (“ROU”) assets, lease term to calculate amortization of ROU, depreciation and amortization periods, and recoverability of long-lived assets, goodwill and intangibles.

The functional currency of each entity in the Company is its respective local country currency which is also the currency of the primary economic environment in which it operates except for the entities in Mauritius which use the U.S.

dollar as its functional currency.

The functional currency of each entity in the Company is the currency of the primary economic environment in which it operates.

Transactions in foreign currencies are initially recorded into functional currency at the rates of exchange prevailing on the date of the transaction.

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Revenue is recognized when services are provided to the Company's customers, in an amount that reflects the consideration which the Company expect to be entitled to in exchange for the services provided.

Revenue is measured based on consideration specified in a contract with a customer and excludes discounts and amounts collected on behalf of third parties.

The Company recognizes revenue when it satisfies a performance obligation by providing services to a customer.

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.

Revenue is measured based on consideration specified in a contract with a customer and excludes value added tax, business tax, any applicable discounts and amounts collected on behalf of third parties.

Reimbursements of out-of-pocket expenses are included as a part of revenue.

Nature of Services

1 unchanged sentence

The Company provides digital operations and solutions and analytics services helping businesses enhance revenue growth and improve profitability.

Type of Contracts

Type of Contracts and Basis of Recognition

a) Revenues under time-and-material, transaction and outcome-based contracts are recognized as the services are performed.

When the terms of the client contract specify service level parameters that must be met (such as turnaround time or accuracy), the Company monitors such service level parameters to determine if any service credits

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

or penalties have been incurred.

Revenues are recognized net of any penalties or service credits that are due to a client.

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Revenues are recognized on a gross basis if the Company is in the capacity of principal and on a net basis if it falls in the capacity of an agent.

Revenues for the Company’s fixed-price contracts are recognized using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations.

Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the client.

The use of this method requires significant judgment to estimate the cost required to complete the contracted scope of work, including assumptions and estimates relative to the length of time to complete the project and the nature and complexity of the work to be performed and resources engaged.

Revenues for the Company’s fixed-price contracts, which include business support services provided on a fixed price basis or implementation of applications or solutions, are recognized considering costs incurred to date relative to total

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

estimated costs at completion to measure progress toward satisfying the Company’s performance obligations.

Incurred cost represents work performed, which corresponds with, and thereby reasonably reflects transfer of control to the client.

The use of this method requires significant judgment to estimate the stage of completion and/or cost required to complete the contracted scope of work, including assumptions and estimates relative to the length of time to complete the project and the nature and complexity of the work to be performed and resources engaged.

The Company regularly monitors these estimates throughout the execution of the project and records changes in the period in which a change in an estimate is determined.

9 unchanged sentences

In such contracts, the Company’s consideration is contingent upon the actual collections made by its customers and net of any subsequent retraction claims.

Based on guidance on “variable consideration” in Topic 606, the Company uses its historical experience and projections to determine the expected recoveries from its customers and recognizes revenue based upon such expected recoveries.

Based on guidance on “variable consideration” in Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”), the Company uses its historical experience and projections to determine the expected recoveries from its customers and recognizes revenue based upon such expected recoveries.

Any adjustment required due to change in estimates are recorded in the period in which such change is identified.

5 unchanged sentences

The Company’s contracts with customers do not generally bundle different services together except for software and related services contracts, which are not significant, involving implementation services and post contract maintenance services.

In such software and related services contracts, revenue is allocated to each performance obligation based on the relative standalone selling price.

In such software and related services contracts, revenue is recognized based upon the transaction price allocated to each performance obligation based on the relative standalone selling price.

Allocation of Transaction Price to Performance Obligations

The transaction price is allocated to performance obligations on a relative standalone selling price basis.

Standalone selling prices are estimated by reference to the total transaction price less the sum of the observable standalone selling prices of other goods or services promised in the contract.

In assessing whether to allocate variable consideration to a specific part of the contract, the Company considers the nature of the variable payment and whether it relates specifically to its efforts to satisfy a specific part of the contract.

Variable Consideration

Variability in the transaction price arises primarily due to service level agreements and volume discounts.

EXLSERVICE HOLDINGS, INC.

1 unchanged sentence

December 31, 2022

(In thousands, except share and per share amounts)

Variability in the transaction price arises primarily due to service level agreements and volume discounts.

(In thousands, except per share amount and share count)

The Company considers its experience with similar transactions and expectations regarding the contract in estimating the amount of variable consideration that should be recognized during a period.

The Company believes that the expected value method is most appropriate for determining the variable consideration since the Company has large number of contracts with similar nature of transactions/services.

Allocation of Transaction Price to Performance Obligations

The transaction price is allocated to performance obligations on a relative standalone selling price basis.

Standalone selling prices are estimated by reference to the total transaction price less the sum of the observable standalone selling prices of other goods or services promised in the contract.

Unbilled Receivables

2 unchanged sentences

In such contracts, Company’s consideration is contingent upon and collectable only when the actual collections are made by its customers.

Based on guidance on “variable consideration” in Topic 606, Company use its historical experience and projections to determine the expected recoveries from its customers and recognize revenue and receivables based upon such expected recoveries.

Based on guidance on “variable consideration” in ASC Topic 606, Company use its historical experience and projections to determine the expected recoveries from its customers and recognize revenue and receivables based upon such expected recoveries.

Accordingly, the amounts for which services have been performed and for which invoices have not been issued to customers on the balance sheet date, (i.e.

unbilled receivables) are presented under accounts receivable.

unbilled receivables) are presented under accounts receivable, net.

Deferred Revenue and Contract Fulfillment Costs

11 unchanged sentences

Out-of-Pocket Expenses

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

Reimbursements of out-of-pocket expenses received from clients are included as part of revenues.

4 unchanged sentences

Remaining Performance Obligations

The Company does not disclose the value of remaining performance obligations as a result of applying the practical expedient provided in Topic 606, for contracts that meet any of the following criteria:

Contracts with an original expected length of one year or less as determined under ASC 606,

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

The Company does not disclose the value of remaining performance obligations as a result of applying the practical expedient provided in ASC Topic 606, for contracts that meet any of the following criteria:

Contracts with an original expected length of one year or less as determined under ASC Topic 606,

Contracts for which Company recognize revenue based on the right to invoice for service performed.

1 unchanged sentence

The Company considers all highly liquid investments purchased with an original maturity of ninety days or less to be cash equivalents.

Pursuant to the Company’s investment policy, surplus funds are invested in highly-rated debt mutual funds, money market accounts and time deposits to reduce its exposure to market risk with regard to these funds.

Restricted cash represents amounts on deposit with banks against bank guarantees issued through banks in favor of relevant statutory authorities for equipment imports, deposits for obtaining indirect tax registrations and for demands against pending income tax assessments (refer to Note 7 - Cash, Cash Equivalents and Restricted Cash to the consolidated financial statements for details).

These deposits with banks have maturity dates after December 31, 2021.

Restricted cash presented under current assets represents funds held on behalf of clients in dedicated bank accounts.

The corresponding liability against the same is included under “Accrued Expenses and other current liabilities.”

Pursuant to the Company’s investment policy, surplus funds are invested in highly-rated debt mutual funds, money market funds and time deposits to reduce its exposure to market risk with regard to these funds.

Restricted cash includes any cash and cash equivalents that are legally restricted as to withdrawal or usage.

The Company invests for a term of up to three months in money market funds, which invest in instruments of various maturities in the United States.

These investments are accounted for in accordance with the fair value option under ASC Topic 825, Financial Instruments .

The fair value is represented by original cost on the acquisition date and the net asset value (“NAV”) as quoted, at each reporting period and any changes in fair value are included in other income/(loss), net.

Gain or loss on the disposal of these investments is calculated using the weighted average cost of the investments sold and is included in other income/(loss), net.

For purposes of the statements of cash flows, the Company includes in its cash and cash-equivalent balances those amounts that have been classified as restricted cash and restricted cash equivalents.

(f) Investments

The Company’s investments consist of time deposits with financial institutions which are valued at cost and approximate fair value.

Interest earned on such investments is included in interest income.

Investments with original maturities greater than ninety days but less than twelve months are classified as short-term investments.

Investments with maturities greater than twelve months from the balance sheet date are classified as long-term investments.

The Company's mutual fund investments are in debt funds invested in India and money market funds which invest in instruments of various maturities in the United States.

These investments are accounted for in accordance with the fair value option under Financial Accounting Standard Board Accounting Standards Codification (“ASC”) Topic 825, Financial Instruments , (“Topic 825”).

Gain or loss on the disposal of these investments is calculated using the weighted average cost of the investments sold or disposed and is included in other income.

(f) Short-Term and Long-Term Investments

The Company’s short-term investments consist of investments in mutual funds and those term deposits with more than three months of original maturity and less than twelve months of remaining maturity as of the reporting date, while long-term investments consist of term deposits with more than twelve months of remaining maturity as of the reporting date and investments in equity affiliate.

The Company’s investments in term deposits with financial institutions are measured and recognized at amortized cost.

Interest earned on such investments is included in other income/(loss), net.

The Company’s mutual fund investments are in debt funds invested in India.

These investments are accounted for in accordance with the fair value option under ASC Topic 825, Financial Instruments .

Gain or loss on the disposal of these investments is calculated using the weighted average cost of the investments sold and is included in other income/(loss), net.

Investments in equity affiliates are initially recorded at cost and any excess purchase consideration paid over proportionate share of the fair value of the net assets of the investee at the acquisition date is recognized as goodwill.

The proportionate share of net income or loss of the investee after its acquisition is recognized in the consolidated statements of income.

The Company periodically reviews the carrying value of its investment to determine if there has been any other than temporary decline in carrying value.

The investment balance for an investee is increased or decreased for cash contribution and distributions to or from, respectively .

(g) Accounts Receivable and Allowance for Expected Credit Losses

6 unchanged sentences

December 31, 2022

(In thousands, except share and per share amounts)

future and estimates relating to the possible effects resulting from COVID-19.

(In thousands, except per share amount and share count)

Accounts receivable balances are written-off against the allowance for expected credit losses after all means of collection have been exhausted and the potential for recovery is considered remote.

1 unchanged sentence

(h) Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and impairment.

Equipment held under finance leases are capitalized at the commencement of the lease at the lower of present value of minimum lease payments at the inception of the leases or its fair value.

Property and equipment are stated at cost, which is generally comprised of the purchase price for such property or equipment, non-refundable duties and taxes, but excludes any discounts and/or rebates, less accumulated depreciation and impairment.

Equipment held under finance leases are capitalized at the commencement of the lease at an amount equal to the lease liability, adjusted for any lease prepayments, initial direct costs and lease incentives, which usually approximate the fair value of the underlying asset.

Expenditures for replacements and improvements are capitalized, if they enhance the production capacity and future benefits whereas the costs of maintenance and repairs are charged to earnings as incurred.

Advances paid towards acquisition of property and equipment and the cost of property and equipment not yet placed in service before the end of the reporting period are classified as capital work in progress.

Advances paid towards acquisition of property and equipment and the cost of property and equipment not yet placed in service before the end of the reporting period, net of impairment, if any, are classified as capital work in progress.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets.

7 unchanged sentences

The Company exercises judgment in determining the point at which various projects may be capitalized, in assessing the ongoing value of the capitalized costs, and in determining the estimated useful lives over which the costs are amortized.

Implementation costs in cloud computing arrangements (“CCA”), such as software as a service and other hosting arrangements are evaluated in a similar manner as capitalized software development costs.

If CCA do not provide a contractual right upon the Company to take possession of the software at any time during the hosting period without significant penalty, and it is not feasible to either run the software on the Company’s own hardware, then implementation costs incurred are accounted for as a service contract.

In case of the existence of such a contractual right to take possession of the software and the Company is able to run the software on its own hardware, then such implementation costs are recognized as capitalized software development costs.

Implementation costs in cloud computing arrangements (“CCAs”), such as software as a service and other hosting arrangements are evaluated to ascertain if the arrangement includes a license to internal-use software.

If a CCA does not provide a contractual right to the Company to take possession of the software at any time during the hosting period without significant penalty, and it is not feasible to either run the software on the Company’s own hardware, then implementation costs incurred are accounted for as a service contract.

Annual amortization of internally developed software products meant for sale, lease or otherwise marketing is the greater of the amount computed using the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or the straight-line method over the remaining estimated economic life of the software product, generally estimated to be up to 5 years from the date the product became available for use.

1 unchanged sentence

The Company amortizes capitalized implementation costs in a CCA over the life of the service contract.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

(j) Business Combinations, Goodwill and Other Intangible Assets

2 unchanged sentences

Contingent consideration is recognized at its fair value on the acquisition date.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

liability resulting from contingent consideration is re-measured to fair value as of each reporting date until the contingency is resolved, whereby such changes in fair value are recognized in earnings.

These fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market.

Under ASC 350, Intangibles - Goodwill and Other , all assets and liabilities of the acquired businesses, including goodwill, are assigned to reporting units.

A liability resulting from contingent consideration is re-measured to fair value as of each reporting date until the contingency is resolved, whereby such changes in fair value are recognized in earnings.

Under ASC Topic 350, Intangibles - Goodwill and Other , all assets and liabilities of the acquired businesses, including goodwill, are assigned to reporting units.

Acquisition related costs are expensed as incurred under general and administrative expenses.

In addition, assets acquired and liabilities assumed including uncertain tax positions and tax-related valuation allowances in connection with business combinations are initially estimated as of the acquisition date.

The Company subsequently re-evaluates the assets acquired and liabilities assumed, including additional assets and liabilities identified subsequent to acquisition date, with any adjustments to its preliminary estimates being recorded to goodwill within the measurement period (up to one year from the acquisition date).

Goodwill represents the cost of the acquired businesses in excess of the fair value of identifiable tangible and intangible net assets purchased in a business combination.

3 unchanged sentences

The Company tests for goodwill impairment at the reporting unit level, as that term is defined in U.S.

The Company also assesses any potential goodwill impairment for all its reporting units immediately prior to any segment changes and reallocates goodwill to its new reporting units using a relative fair value approach.

Refer to Note 9 - Business Combinations, Goodwill and Intangible Assets to the consolidated financial statements for discussion of the Company's goodwill impairment testing.

The Company adopted ASU No.

Refer to Note 10 - Business Combinations, Goodwill and Other Intangible Assets to the consolidated financial statements for discussion of the Company's goodwill impairment testing.

The Company adopted Accounting Standard Update (“ASU”) No.

2017-04, Simplifying the Test for Goodwill Impairment, effective January 1, 2018 in conjunction with our goodwill impairment assessment.

The goodwill quantitative impairment test involves a comparison of the fair value of a reporting unit with its carrying amount.

The Company estimates the fair value of reporting unit using a combination of the income approach, using discounted cash flow analysis (“DCF model”), and also the market approach, using market multiples for reporting units whereby the fair value is not substantially in excess of carrying value.

The Company estimates the fair value of a reporting unit using a combination of the income approach, using discounted cash flow analysis (“DCF model,”) and the market approach, using market multiples for reporting units whereby the fair value is not substantially in excess of carrying value.

Under the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate.

1 unchanged sentence

Actual results may differ from those assumed in our forecasts.

Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting units.

The discount rate is mainly based on judgment of the specific risk inherent within each reporting unit.

The discount rate is based on judgment of the specific risk inherent in the future cash flows of the respective reporting units.

The variables within the discount rate, many of which are outside of the Company’s control, provide the Company’s best estimate of all assumptions applied within the DCF model.

The Company also uses the “Market approach” to corroborate the results of the income approach for some of the Company’s reporting units.

Under the market approach, the Company estimates fair value based on market multiples of revenues and earnings derived from comparable publicly-traded companies with characteristics similar to the reporting unit and comparable market transactions.

The market approach is used to corroborate the results of the income approach.

The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions and other factors.

4 unchanged sentences

If the carrying amount of the reporting unit exceeds its fair value, an impairment loss shall be recognized, in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

Intangible assets acquired in a business combination are initially valued and recognized at fair market value using generally accepted valuation methods appropriate for the type of intangible asset.

2 unchanged sentences

If the fair value of the intangible assets is less than the carrying amount of the asset, the asset is considered impaired and an impairment expense is recognized equal to any shortfall in the current period.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

The Company’s definite lived intangible assets are amortized over their estimated useful lives as listed below using a straight-line method:

3 unchanged sentences

Trade names and trademarks 2 - 10

(k) Investment in Equity Affiliate

Investments in equity affiliate are initially recorded at cost and any excess purchase consideration paid over proportionate share of the fair value of the net assets of the investee at the acquisition date is recognized as goodwill.

The proportionate share of net income or loss of the investee after its acquisition is recognized in the consolidated statements of income.

The Company periodically reviews the carrying value of its investment to determine if there has been any other than temporary decline in carrying value.

The investment balance for an investee is increased or decreased for cash contribution and distributions to or from, respectively.

(l) Impairment of Long-lived Assets

(k) Impairment of Long-lived Assets

Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

5 unchanged sentences

The impairment amount to be recognized is measured as the amount by which the carrying value of the assets exceeds their fair value.

(m) Derivative Financial Instruments

In the normal course of business, the Company uses derivative instruments for the purpose of mitigating the exposure from risk of foreign currency fluctuation associated with forecasted transactions denominated in certain foreign currencies and to minimize earnings and cash flow volatility associated with changes in foreign currency exchange rates, and not for speculative trading purposes.

These derivative contracts are purchased adhering to the Company’s policy and are with counterparties that are highly rated financial institutions.

The Company hedges forecasted transactions that are subject to foreign exchange exposure with foreign currency exchange contracts that qualify as cash flow hedges.

Changes in the fair value of these cash flow hedges are recorded as a component of accumulated other comprehensive income/(loss) (“AOCI”), net of tax, until the hedged transactions occurs.

The resultant foreign exchange gain/(loss) upon settlement of cash flow hedges are recorded in the consolidated statements of income along with the underlying hedged item in the same line as part of “Cost of revenues,” “General and administrative expenses,” “Selling and marketing expenses,” and “Depreciation and amortization expense,” as applicable.

(l) Derivative Financial Instruments

In the normal course of business, the Company uses derivative instruments to mitigate the exposure from risk of foreign currency and interest rate fluctuations.

The Company enters into foreign currency forward contracts to hedge cash flow risks from forecasted transactions denominated in certain foreign currencies, and interest rate swaps to hedge cash flow risks from its revolving credit facility having variable interest rate obligations.

These contracts adhere to the Company’s treasury operations’ objectives and policies to qualify as cash flow hedges, and are with counterparties that are highly rated financial institutions.

Changes in the fair value of these cash flow hedges are recorded as a component of accumulated other comprehensive income/(loss) (“AOCI”), net of tax.

The resultant foreign exchange gain/(loss) upon settlement of cash flow hedges of forecasted transactions are recorded in the consolidated statements of income along with the underlying hedged item in the same line as part of “Cost of revenues,” “General and administrative expenses,” “Selling and marketing expenses,” and “Depreciation and amortization expense,” as applicable.

The accumulated changes in the fair value of interest rate swaps recognized in AOCI are reclassified to the consolidated statements of income and are presented as a part of “Interest expense” over the term of the contract.

The Company evaluates hedge effectiveness of cash flow hedges at the time a contract is entered into as well as on an ongoing basis.

For hedge relationships that are discontinued because the forecasted transaction is not expected to occur by the end of the originally specified period, any related derivative amounts recorded in equity are reclassified to earnings.

The Company uses derivatives instruments consisting of foreign currency exchange contracts to economically hedge intercompany balances and other monetary assets or liabilities denominated in currencies other than the functional currency, against the risk of foreign currency fluctuations associated with remeasurement of such assets and liabilities to functional

The Company also uses derivatives instruments consisting of foreign currency forward contracts to hedge intercompany balances and other monetary assets or liabilities denominated in currencies other than the functional currency, against the risk of

EXLSERVICE HOLDINGS, INC.

1 unchanged sentence

December 31, 2022

(In thousands, except share and per share amounts)

Changes in the fair value of these derivatives are recognized in the consolidated statements of income and are included in foreign exchange gain/(loss).

The Company also uses forward contracts designated as net investment hedges to hedge the foreign currency risks related to the Company's investment in foreign subsidiaries.

Gains and losses on these forward contracts are recognized in AOCI as part of the foreign currency translation adjustment.

(n) Borrowings

The Company accounts for convertible notes in accordance with the guidelines established by the ASC 470-20, Debt with Conversion and Other Options.

The Company separates the convertible notes into liability and equity components.

The Beneficial Conversion Feature ("BCF") of a convertible note, which is the equity component and recorded as additional paid-in capital, is normally characterized as the convertible portion or feature of certain notes payable that provide a rate of conversion that is below market value or in-the-money when issued.

The Company records a BCF related to the issuance of a convertible note when issued.

If a convertible note is within the scope of the Cash Conversion Subsections and contains embedded features other than the embedded conversion option, the guidance in ASC 815-15, Derivatives and Hedging - Embedded Derivatives (ASC 815-15), is applied to determine if any of those features must be separately accounted for as a derivative instrument.

The estimated fair value of the liability component at issuance is determined using a discounted cash flow technique, which considers debt issuances with similar features of the Company’s convertible notes, excluding the conversion feature.

The excess of the gross proceeds received over the estimated fair value of the liability component is allocated to the BCF, which is credited to additional paid-in-capital, with a corresponding offset recognized as a discount to reduce the net carrying value of the convertible notes.

The discount is amortized to interest expense over the expected term of the convertible notes using the effective interest method.

Pursuant to ASC Subtopic 470-20, total consideration paid for the settlement of an existing convertible note is separated into liability and equity components.

The fair value of the liability component is estimated using a discounted cash flow technique, which considers debt issuances with terms similar to that of the Company’s debt, however without the conversion feature.

The excess of consideration over the fair value of the liability component is assigned to the equity component.

The effective interest rate used to estimate the fair value of the liability component is based on the income and market based approaches, adjusted for the remaining tenor of the extinguished debt.

The difference between the fair value and the carrying value of the extinguished debt, net of the unamortized debt discount and unamortized debt issuance costs, is recorded as a gain or loss on settlement in the consolidated statements of income.

(o) Employee Benefits

(In thousands, except per share amount and share count)

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 Topic 815.

Changes in the fair value of these derivatives are recognized in the consolidated statements of income and are included in foreign exchange gain, net.

The Company also uses foreign currency forward contracts designated as net investment hedges to hedge the foreign currency risks related to the Company's investment in foreign subsidiaries.

Fair value changes on these forward contracts and gains and losses on settlement of such forward contracts are recognized in AOCI as part of the foreign currency translation adjustments and are reclassified to consolidated statements of income when a foreign operation is disposed or partially disposed.

All of the assets and liabilities related to the Company’s forward contracts are subject to master netting arrangements with each individual counterparty.

These master netting arrangements generally provide for net settlement of all outstanding contracts with the counterparty in the case of an event of default or a termination event.

The Company has presented all of the assets and liabilities related to these contracts on a gross basis, with no offsets, in its consolidated statements of financial position.

There is no financial collateral (including cash collateral) provided or received by the Company related to these contracts.

(m) Employee Benefits

Contributions to defined contribution plans are charged to the consolidated statements of income in the period in which services are rendered by the covered employees.

7 unchanged sentences

The Company includes the service cost component of the net periodic benefit cost in the same line item or items as other compensation costs arising from services rendered by the respective employees during the period.

The interest cost, expected

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

return on plan assets and amortization of actuarial gains/loss, are included in “Other income, net.” Refer to Note 19 - Employee Benefit Plans to the consolidated financial statements for details.

The interest cost, expected return on plan assets and amortization of actuarial gains/loss, are included in “ Other income/(loss), net.

” Refer to Note 20 - Employee Benefit Plans to the consolidated financial statements for details.

The Company recognizes its liabilities for compensated absences depending on whether the obligation is attributable to employee services already rendered, rights to compensated absences vest or accumulate and payment is probable and estimable.

(p) Stock-Based Compensation

(n) Stock-Based Compensation

The Company recognizes stock-based compensation expense in the consolidated statements of income for awards of equity instruments to employees and non-employee directors based on the grant-date fair value of those awards.

1 unchanged sentence

Forfeitures are accounted when the actual forfeitures occur.

Under the Company’s 2018 Omnibus Incentive Plan (the “2018 Plan”), which was adopted by the Company's stockholders on June 15, 2018, which replaces and supersedes the 2015 Amendment and Restatement of the Company’s 2006 Omnibus Award Plan (the “Prior Plan”) and is effective upon the date approved by the Company’s stockholders, the Company grants performance-based restricted stock units (“PRSUs”) to executive officers and other specified employees.

Generally the grants provide that 50 % of the PRSUs cliff vest based on an aggregated revenue target (“PU”) for a three-year period.

The remaining 50 % vest based on a market condition (“MUs”) that is contingent on meeting or exceeding the Company's total shareholder return relative to a group of peer companies specified under the program, measured over a three-year performance period.

The award recipient may earn up to 200 % of the PRSUs granted based on the actual achievement of both targets.

However, the features of the equity incentive compensation program are subject to change by the Compensation Committee of our Board of Directors.

Under the Company’s 2018 Omnibus Incentive Plan (the “2018 Plan”), which was adopted by the Company's stockholders on June 15, 2018, which replaces and supersedes the 2015 Amendment and Restatement of the Company’s 2006 Omnibus Award Plan (the “Prior Plan”) and is effective upon the date approved by the Company’s stockholders, the Company grants performance-based restricted stock units (“PRSU”) to executive officers and other specified employees.

Generally, the Company grants PRSUs that cliff vest based on an aggregated revenue target (“PU”) for a three-year period, and PRSUs that are based on market conditions (“MU”) and cliff vest upon meeting or exceeding the Company's total shareholder return relative to a group of peer companies specified under the 2018 Plan, and are measured over a three-year performance period.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

The award recipient may earn up to 200 % of the PRSUs granted based on the actual achievement of the respective targets.

However, the features of the equity incentive compensation program are subject to change by the Compensation and Talent Management Committee of our board of directors.

The fair value of each PU is determined based on the market price of one common share of the Company on the day prior to the date of grant, and the associated compensation expense is calculated on the basis that performance targets at 100 % are probable of being achieved.

The compensation expense for the PUs is recognized on a straight-line basis over the service period, which is through the end of the third year.

The compensation expense for the PU is recognized on a straight-line basis over the service period, which is through the end of the third year.

Over this period, the number of shares that will be issued is adjusted upward or downward based upon the probability of achievement of the performance targets.

The final number of shares issued and the related compensation cost recognized as an expense will be based on a comparison of the final performance metrics to the specified targets.

The expense related to the unvested PUs as of December 31, 2021 was based on the Company's assessment of performance criteria for these grants that would most likely be met during the respective years of vesting against the targeted performance level.

The expense related to the unvested PU as of December 31, 2022 was based on the Company's assessment of performance criteria for these grants that would most likely be met during the respective years of vesting against the targeted performance level.

The grant date fair value for the MUs is determined using a Monte Carlo simulation model and the related compensation expense is expensed on a straight-line basis over the vesting period.

All compensation expense related to the MUs will be recognized if the requisite performance period is fulfilled, regardless of the extent of the market condition achieved.

(q) Income Taxes

All compensation expense related to the MU will be recognized if the requisite performance period is fulfilled, regardless of the extent of the market condition achieved.

Stock-based compensation expense associated with the Company's 2022 Employee Stock Purchase Plan (“ESPP”) is measured at fair-value using a Black-Scholes option-pricing model at the commencement of each offering period and recognized over that offering period.

(o) Income Taxes

The Company accounts for income taxes using the asset and liability method of accounting for income taxes.

3 unchanged sentences

The effect on deferred tax assets and liabilities of a change in tax rates or tax status is recognized in the statements of income in the period in which the change is identified.

The Company releases the tax effects from AOCI at the time of reclassification of cash flows hedges gains/ (losses) from AOCI to the consolidated statements of income.

The Company releases (reclassifies) the tax effects from AOCI to the consolidated statements of income at the time of settlement of cash flows hedges and amortization of deferred actuarial gain/(loss) on retirement benefits.

Deferred tax assets are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The Company establishes provisions for uncertain tax provisions and related interest and penalties when the Company believes those tax positions are not more likely than not of being sustained, if challenged.

(r) Financial Instruments and Concentration of Credit Risk

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

Financial Instruments .

For certain financial instruments, including cash and cash equivalents, short-term investments (except investment in mutual funds, as disclosed in Note 15), restricted cash, accounts receivable, accrued interest on term deposits, accrued capital expenditures, accrued expenses and interest payable on borrowings for which fair values approximate their carrying amounts due to their short-term nature.

The carrying value of the Company’s outstanding revolving credit facility approximates its fair value because the Company’s interest rate yield is near current market rates for comparable debt instruments.

Concentration of Credit Risk .

The Company intends to indefinitely reinvest earnings from its foreign subsidiaries and has not recorded deferred tax liabilities for the indefinitely reinvested earnings.

The Company accounts for the tax effects of Global Intangible Low-Taxed Income of certain foreign subsidiaries as a period cost.

(p) Concentration of Credit Risk in Financial Instruments

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, time deposits, mutual fund investments, accounts receivable and derivative financial instruments.

By their nature, all such financial instruments involve risks including the credit risks of non-performance by counterparties.

Pursuant to the Company’s investment policy, surplus funds are maintained as cash equivalents and short- term investments, and are invested in highly-rated mutual funds, money market accounts and time deposits, placed with highly rated financial institutions to reduce its exposure to market risk with regard to these funds.

Pursuant to the Company’s investment policy, surplus funds are maintained as cash equivalents and short-term investments, and are invested in highly-rated mutual funds, money market funds and time deposits, placed with highly rated financial institutions to reduce its exposure to market risk with regard to these funds.

The Company’s exposure to credit risk on account receivable is influenced mainly by the individual characteristic of each customer and the concentration of risk from the top few customer s.

To mitigate this risk the Company evaluates the creditworthiness of its clients in conjunction with its revenue recognition processes as well as through its ongoing collectability assessment processes for accounts receivable.

To mitigate this risk the Company evaluates the creditworthiness of its clients in conjunction with its revenue recognition

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

processes as well as through its ongoing collectability assessment processes for accounts receivable.

The Company does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes.

(q) Fair value measurements

ASC Topic 820, Fair Value Measurements and Disclosures defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability.

The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability as against assumptions specific to the entity.

In addition, the fair value of liabilities should include consideration of non-performance risk, including the Company’s own credit risk.

The fair value hierarchy consists of the following three levels:

• Level I — Quoted prices for identical instruments in active markets.

• Level II — Quoted prices for similar instruments in active markets;

quoted prices for identical or similar instruments in markets that are not active;

and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

• Level III — Instruments whose significant value drivers are unobservable.

The Company determines if an arrangement is a lease at inception of the contract.

6 unchanged sentences

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 arrangement.

Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

Lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

Operating lease ROU assets are recognized at commencement date in an amount equal to lease liability, adjusted for any lease prepayments, initial direct costs, and lease incentives.

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.

The Company determines the incremental borrowing rate by adjusting the benchmark reference rates with appropriate financing spreads applicable to the respective geographies where the leases are entered and lease specific adjustments for the effects of collateral.

Lease terms includes the effects of options to extend or terminate the lease when it is reasonably certain at commencement of the lease 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.

Upon modification, the Company remeasures the lease liability to reflect changes to the remaining lease payments and discount rates and recognizes the amount of the remeasurement of the lease liability as an adjustment to the ROU assets.

However, if the carrying amount of the ROU assets is reduced to zero as a result of modification, any remaining amount of the remeasurement is recognized as an expense in consolidated statements of income.

The Company evaluates lease agreements to determine lease and non-lease components, which are accounted for separately.

Lease payments that depend on factors other than an index or rate are considered variable lease payments and are excluded from the operating lease assets and liabilities and are recognized as expense in the period in which the obligation is incurred.

Lease payments include payments for common area maintenance, utilities such as electricity, heating and water, among others, and property taxes, and other similar payments paid to the landlord, which are treated as non-lease component.

The Company accounts for lease-related concessions 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.

EXLSERVICE HOLDINGS, INC.

1 unchanged sentence

December 31, 2022

(In thousands, except share and per share amounts)

(In thousands, except per share amount and share count)

circumstances of the particular contract.

The Company reviews ROU assets for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable.

(t) Government Grants

Government grants related to income are recognized as a reduction of expenses in the consolidated statements of income when there is a reasonable assurance that the entity will comply with the conditions attached to the grant and that the grants will be received.

Certain units of our Indian subsidiaries were established as 100% Export-Oriented units under the Software Technology Parks of India (“STPI”) or Special Economic Zone ("SEZ") scheme promulgated by the Government of India.

These units enjoy exemption from payment of customs, central excise duties, and levies on imported and indigenous capital goods, subject to certain performance conditions being fulfilled by these units.

Such exemption is considered as a government grant.

Grants from the government are recognized when there is reasonable assurance that these units will comply with those conditions.

The carrying amount of an item of property and equipment is reduced by government grants received (i.e.

the asset is accounted for on the basis of its net acquisition cost).

The grant is recognized in the consolidated statements of income over the life of the depreciable asset in the form of reduced depreciation expense.

(u) Earnings per share

(s) Government Grants

Government grants are recognized at their fair value when there is a reasonable assurance that the conditions attached to them have been satisfied and the grants have been received.

Government grants relating to income are recognized as a reduction of expenses in the consolidated statements of income.

Government grants relating to a property and equipment are recognized as a reduction from the cost of acquisition of such property and equipment.

The grant is subsequently measured in the consolidated statements of income over the life of the property and equipment in the form of reduced depreciation expense.

(t) Earnings per share

Basic earnings per share is computed using the weighted average number of common shares outstanding, adjusted for outstanding shares that are subject to repurchase during the period.

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Under the treasury stock method, the convertible notes shall have a dilutive impact related to the conversion premium, if any, on diluted earnings per share to the extent the issuance is dilutive based on the average market price of our common stock for a reporting period being greater the conversion price.

(v) Commitments and contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated.

(u) Commitments and contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties, and other sources are recognized when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated.

A disclosure for a contingent liability is made when there is a possible obligation that may require an outflow of resources.

When there is a possible obligation or a present obligation in respect of which the likelihood of outflow of resources is remote, no provision or disclosure is made.

Legal costs incurred in connection with such liabilities are expensed as incurred.

(w) Recent Accounting Pronouncements

In March 2020, Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) No.

Capital commitments are disclosed in the financial statements.

(v) Recent Accounting Pronouncements

In October 2021, FASB (“Financial Accounting Standard Board”) issued ASU No.

2021-08, Business Combinations (“ASC Topic 805”) :

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers .

This ASU provides guidance in ASC Topic 805 to require the acquirer entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606, as if it had originated the contracts.

Generally, this should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements, if the acquiree prepared financial statements in accordance with U.S.

The ASU is effective for fiscal years beginning after December 15, 2022.

An entity may early adopt the ASU including adoption in an interim period, with retrospective application to all business combinations within the fiscal year that includes such interim period.

The adoption of this ASU will not have a material impact on the Company’s consolidated financial statements.

(w) Recently Adopted Accounting Pronouncements

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

In March 2020, FASB issued ASU No.

2020-04, Reference Rate Reform (Topic 848) :

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The amendments are elective and are effective upon issuance for all entities through December 31, 2022.

The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

In October 2021, FASB issued ASU No.

2021-08, Business Combinations (Topic 805) :

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers .

This ASU provides guidance in Topic 805 to require the acquirer entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers , as if it had originated the contracts.

Generally, this should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

recognized and measured in the acquiree’s financial statements, if the acquiree prepared financial statements in accordance with U.S.

The ASU is effective for fiscal years beginning after December 15, 2022.

An entity may early adopt the ASU including adoption in an interim period, with retrospective application to all business combinations within the fiscal year that includes such interim period.

The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

(x) Recently Adopted Accounting Pronouncements

In December 2022, FASB issued ASU No.

2019-12, Income Taxes Simplifying the Accounting for Income Taxes .

This ASU eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.

The Company adopted this ASU on January 1, 2021.

The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In October 2020, FASB issued ASU No.

2020-10, Codification Improvements , to provide guidance for technical corrections such as conforming amendments, clarifications to guidance, simplifications to wording or structure of guidance, and other minor improvements.

The amendments in this ASU improve the consistency of the ASC by ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to financial statements is codified in the disclosure section of the ASC.

The Company adopted this ASU on January 1, 2021.

The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In January 2021, FASB issued ASU No.

2022-06, Reference Rate Reform (Topic 848) :

Scope , to expand the scope of Topic 848 to include derivative instruments affected by changes to the interest rates used for discounting, margining or contract price alignment (commonly referred to as the discounting transition).

This ASU extends some of Topic 848’s optional expedients and exceptions for contract modifications and hedge accounting to derivative instruments impacted by discounting transition as a result of the discontinuation of the use of LIBOR as a benchmark interest rate due to reference rate reform.

This ASU is effective immediately for all entities with the option to be applied retrospectively as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, and prospectively to any new contract modifications made on or after January 7, 2021 through December 31, 2022.

The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

Deferral of the Sunset Date of Topic 848 , to defer the sunset date of Topic 848 until December 31, 2024.

The adoption of these ASUs did not have a material impact on the Company’s consolidated financial statements.

Segment and Geographical Information

The Company is a provider of data analytics and digital operations and solutions.

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 since then manages and reports financial information through its four reportable segments:

The Company manages and reports financial information through its four reportable segments:

Insurance, Healthcare, Analytics and Emerging Business, which reflects how management reviews financial information and makes operating decisions.

These business units develop client-specific solutions, build capabilities, maintain a unified go-to-market approach and are integrally responsible for service delivery, customer satisfaction, growth and profitability.

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.

Finance & Accounting and Consulting services to clients outside of the Insurance and Healthcare industries are part of the Company’s “Emerging Business” operating segment.

In addition, the Company integrated its former Travel, Transportation and Logistics, Banking and Financial Services, and Utilities operating segments under Emerging Business to further leverage and optimize the operating scale in providing digital operations and solutions.

The Company’s reportable segments effective January 1, 2020 are as follows:

• Healthcare,

• Emerging Business, and

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

In conjunction with the new reporting structure, the Company has recast 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.

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The Company manages these assets on a total Company basis, not by operating segment, and therefore asset information and capital expenditures by operating segment are not presented.

The December 2021 acquisition of Clairvoyant AI Inc.

(“Clairvoyant”) is included in the Analytics reportable segment.

Refer to Note 9 - Business Combinations, Goodwill and Intangible Assets to the consolidated financial statements for further details.

The December 2021 and June 2022 acquisitions of Clairvoyant AI, Inc.

(“Clairvoyant”) and Inbound Media Group, LLC (“Inbound”), respectively, are both included in the Analytics reportable segment.

Refer to Note 10 - Business Combinations, Goodwill and Other Intangible Assets to the consolidated financial statements for further details.

Revenues and cost of revenues for the years ended December 31, 2022, 2021 and 2020, respectively, for each of the reportable segments, are as follows:

7 unchanged sentences

Operating expenses 323,287

Loss on settlement of convertible notes, foreign exchange gain, interest expense and other income, net ( 9,320 )

Foreign exchange gain, net, interest expense and other loss, net ( 2,063 )

Income tax expense 47,565

2 unchanged sentences

(1) Exclusive of depreciation and amortization expense.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

Year ended December 31, 2021

6 unchanged sentences

Operating expenses 275,478

Foreign exchange gain, interest expense and other income, net 5,307

Loss on settlement of convertible notes, foreign exchange gain, net, interest expense and other income, net ( 9,320 )

Income tax expense 31,850

Loss from equity-method investment 227

Gain from equity-method investment 47

Net income $ 114,758

(1) Exclusive of depreciation and amortization expense.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

Year ended December 31, 2020

6 unchanged sentences

Operating expenses 224,476

Foreign exchange gain, interest expense and other income, net 6,647

Foreign exchange gain, net, interest expense and other income, net 5,307

Income tax expense 25,626

12 unchanged sentences

The Company attributes the revenues to regions based upon the location of its customers.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

Year ended December 31,

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Long-lived assets by geographic area, which consist of property and equipment, net and operating lease right-of-use assets were as follows:

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

December 31, 2022 December 31, 2021

Long-lived assets

India $ 79,604 $ 97,261

United States $ 60,709 $ 50,095

India 50,118 79,604

Philippines 18,406 22,011

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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.

These costs are amortized over the expected period of the benefit and are recorded as an adjustment to transaction price and

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

reduced from revenues.

The Company’s assessment did not indicate any impairment losses on its contract assets for the periods presented.

9 unchanged sentences

$ 1,635 $ 1,886

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

Contract acquisition and fulfillment costs

10 unchanged sentences

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.

1 unchanged sentence

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.

There was not a material impact on the provision for credit losses upon adoption of the Topic 326 guidance.

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.

December 31, 2022 December 31, 2021

Accounts receivable, including unbilled receivables $ 260,554 $ 194,805

Allowance for expected credit loss ( 573 ) ( 1,189 )

Allowance for expected credit losses ( 1,332 ) ( 573 )

Accounts receivable, net $ 259,222 $ 194,232

The movement in “Allowance for expected credit losses” on customer balances for the years ended December 31, 2021 and 2020 was as follows:

Year ended December 31,

Balance at the beginning of the year $ 1,189 $ 1,163

Additions / (reductions) during the period ( 496 ) 300

Reductions due to write-off of Accounts Receivables ( 129 ) ( 269 )

Translation adjustment 9 ( 5 )

Balance at the end of the year $ 573 $ 1,189

The movement in “Allowance for expected credit losses” on customer balances was as follows:

EXLSERVICE HOLDINGS, INC.

1 unchanged sentence

December 31, 2022

(In thousands, except share and per share amounts)

Other Income, net

Other income, net consists of the following:

(In thousands, except per share amount and share count)

Year ended December 31,

2021 2020 2019

Gain on sale and mark-to-market of mutual funds and money market funds $ 4,891 $ 9,615 $ 13,180

Interest and dividend income 2,726 2,501 2,184

Others, net ( 844 ) ( 51 ) 1,143

Other income, net $ 6,773 $ 12,065 $ 16,507

Opening Balance $ 573 $ 1,189

Additions / (reductions) 815 ( 496 )

Reductions due to write-off of Accounts Receivables ( 60 ) ( 129 )

Translation adjustment 4 9

Closing Balance $ 1,332 $ 573

Concentration of credit risk

To reduce the credit risk, the Company conducts ongoing credit evaluations of its customers.

No client accounted for more than 10% of accounts receivable, net as of December 31, 2022 and 2021.

Earnings Per Share

Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding, adjusted for outstanding shares that are subject to repurchase during each period.

Diluted earnings per share is computed using the weighted average number of common shares plus the potentially dilutive effect of common stock equivalents (outstanding stock options, restricted stock and restricted stock units) issued and outstanding at the reporting date, and an assumed conversion premium of outstanding convertible notes, using the treasury stock method (as discussed further in the subsequent paragraph).

Common stock equivalents and the conversion premium on outstanding convertible notes that are anti-dilutive are excluded from the computation of weighted average shares outstanding.

The Company includes performance stock unit awards in dilutive potential common shares when they become contingently issuable and have a dilutive impact per authoritative guidance and excludes such awards when they are not contingently issuable.

Diluted weighted-average shares outstanding is affected by the treatment of the Company's 3.5 % per annum Convertible Senior Notes due October 1, 2024 (the “Notes”).

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, restricted stock units and common stock to be issued under the ESPP) issued and outstanding at the reporting date, and an assumed conversion premium of outstanding convertible notes, using the treasury stock method (as discussed further in the subsequent paragraph).

Common stock equivalents that are anti-dilutive are excluded from the computation of weighted average shares outstanding.

In 2021, diluted weighted-average shares outstanding was affected by the treatment of the Company’s 3.5 % per annum Convertible Senior Notes due October 1, 2024 (the “Notes”).

The Company had a choice to settle the Notes in cash, shares or any combination of the two.

The Company intended and had the ability to settle the principal balance of the Notes in cash, and as such, the Company applied the treasury stock method.

The Company had the ability to settle the principal balance of the Notes in cash, and as such, the Company applied the treasury stock method.

The dilution related to the conversion premium, if any, of the Notes is included in the calculation of diluted weighted-average shares outstanding for the portion of the period until actual settlement and to the extent the issuance is dilutive based on the average stock price during the reporting period being greater than the conversion price of $ 75 .

During the third quarter of 2021, the Company settled the Notes by electing a combination of cash and shares of the Company’s common stock and as such included the count of shares issued on settlement in the calculation of basic earnings per share for the portion of the period outstanding.

Refer to Note 17 - Borrowings to the consolidated financial statements for further details.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

The following table sets forth the computation of basic and diluted earnings per share:

12 unchanged sentences

Weighted average potentially dilutive shares considered anti-dilutive and not included in computing diluted earnings per share 566 10,705 289,061

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

Other Income/(Loss), net

Other income/(loss), net consists of the following:

Year ended December 31,

2022 2021 2020

Gain on sale and mark-to-market on investments $ 4,907 $ 4,891 $ 9,615

Interest and dividend income 5,229 2,726 2,501

Fair value changes of contingent consideration* ( 8,250 ) — —

Others, net ( 1,896 ) ( 844 ) ( 51 )

Other income/(loss), net $ ( 10 ) $ 6,773 $ 12,065

* Refer to Note 10 - Business Combinations, Goodwill and Other Intangible Assets to the consolidated financial statements for further details.

Cash, Cash Equivalents and Restricted Cash

For the purpose of statements of cash flows, cash, cash equivalents and restricted cash comprise of the following:

For the purposes of statements of cash flows, cash, cash equivalents and restricted cash consist of the following:

December 31, 2022 December 31, 2021 December 31, 2020

3 unchanged sentences

Cash, cash equivalents and restricted cash $ 125,621 $ 143,810 $ 225,519

Restricted cash (current) primarily represents funds held on behalf of clients in dedicated bank accounts.

The corresponding liability against the same is included under “Accrued Expenses and other current liabilities.” Restricted cash (non-current) represents amounts on deposit with banks against bank guarantees issued through banks in favor of relevant statutory authorities for equipment imports, deposits for obtaining indirect tax registrations and for demands against pending income tax assessments.

These deposits with banks have maturity dates after December 31, 2022.

Investments consist of the following:

December 31, 2022 December 31, 2021

Short-term investments

Mutual funds $ 110,964 $ 127,551

Term deposits 68,063 51,879

Total Short-term investments $ 179,027 $ 179,430

Long-term investments

Term deposits $ 31,341 $ 186

Investment in equity affiliate 3,438 3,004

Total Long-term investments $ 34,779 $ 3,190

EXLSERVICE HOLDINGS, INC.

1 unchanged sentence

December 31, 2022

(In thousands, except share and per share amounts)

(In thousands, except per share amount and share count)

Refer to Note 16 - Fair Value Measurements to the consolidated financial statements for further details.

Property and Equipment, net

23 unchanged sentences

Property and equipment, net $ 82,828 $ 86,008

*Depreciation on assets held under finance leases are computed using the straight-line method over the shorter of the asset's estimated useful lives or the lease term.

*Depreciation on assets held under finance leases are computed using the straight-line method over the shorter of the assets estimated useful lives or the lease term.

Capital work in progress represents advances paid towards acquisition of property and equipment and costs incurred on internally developed software not yet ready to be placed in service.

4 unchanged sentences

Depreciation and amortization expense $ 39,173 $ 36,354 $ 36,050

The effect of foreign exchange gain upon settlement of cash flow hedges recorded under depreciation and amortization, was as follows:

The effect of foreign exchange gain/(loss) upon settlement of cash flow hedges recorded under depreciation and amortization expense, was as follows:

EXLSERVICE HOLDINGS, INC.

1 unchanged sentence

December 31, 2022

(In thousands, except share and per share amounts)

(In thousands, except per share amount and share count)

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

Year ended December 31,

2022 2021 2020

Effect of foreign exchange gains $ 524 $ 51 $ 212

Effect of foreign exchange gain/(loss) $ ( 180 ) $ 524 $ 51

Internally developed software costs, included under Software, was as follows:

8 unchanged sentences

As of December 31, 2022 and 2021, the Company believes no impairment exists because the long-lived asset's future undiscounted net cash flows expected to be generated exceeds its carrying value;

however, there can be no 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.

however, there can be no assurance that long-lived assets will not be impaired in future periods.

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.

During the year ended December 31, 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 an anticipated reduction to the Company's estimated future cash flows.

As a result of this analysis, the Company recognized impairment charges of $ 2,178 during the year ended December 31, 2019, to write down the carrying value of property and equipment to its fair value.

This impairment charge was recorded in the consolidated statements of income under "Impairment and restructuring charges".

Business Combinations, Goodwill and Intangible Assets

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

Business Combinations, Goodwill and Other Intangible Assets

Clairvoyant AI, Inc.

On December 16, 2021, the Company, through its wholly owned subsidiary ExlService.com, LLC (“Buyer”), completed the acquisition of Clairvoyant, a Delaware corporation, pursuant to an equity securities purchase agreement dated December 16, 2021 (the "Purchase Agreement").

On December 16, 2021, the Company, through its wholly owned subsidiary ExlService.com, LLC, completed the acquisition of Clairvoyant, a Delaware corporation, pursuant to an equity securities purchase agreement dated December 16, 2021 (the “Purchase Agreement”).

The Company purchased 100 % of the issued and outstanding equity securities in Clairvoyant.

2 unchanged sentences

The acquisition strengthens the Company’s capabilities by adding additional expertise in data engineering and cloud enablement, further supporting its clients in insurance, healthcare, banking and financial services, and retail.

The base purchase consideration payable at Closing was $ 80,080 , excluding cash and cash equivalents acquired, debt and other estimated post-closing adjustments.

As of December 31, 2021, of the total purchase consideration, the Company has paid

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

$ 76,831 , net of cash and cash equivalents acquired.

The Purchase Agreement also allows sellers the ability to earn up to $ 20,000 in earn-out payments, based on the achievement of certain performance goals by Clairvoyant during 2022 and 2023 calendar years.

The earn-out has an estimated fair value of $ 9,000 and has been presented as contingent consideration under “Other non-current liabilities.” A portion of the purchase consideration otherwise payable was placed into escrow as security for the post-closing working capital adjustments and the indemnification obligations under the Purchase Agreement.

To finance the acquisition at Closing, the Company utilized its revolving Credit Facility in the amount of $ 75,000 and paid the balance with available cash on hand.

The Company is in the process of finalizing the adjustments related to debt, working capital position and other post- closing adjustments, which, when determined, may result in the recognition of additional assets or liabilities as of the acquisition date, and shall accordingly lead to finalization of the purchase consideration.

The base purchase consideration payable at closing of the acquisition (the “Closing”) was $ 80,080 , excluding cash and cash equivalents acquired, debt and estimated other post-closing adjustments.

The Purchase Agreement also allows sellers the ability to earn up to $ 20,000 of contingent consideration, based on the achievement of certain performance goals by Clairvoyant during the 2022 and 2023 calendar years.

The contingent consideration had an estimated fair value of $ 17,500 and $ 9,000 , as of December 31, 2022 and 2021, respectively, and has been presented as contingent consideration under “Accrued expenses and other current liabilities” and “Other non-current liabilities,” as applicable, in the consolidated balance sheets.

Changes in the fair value of contingent consideration were recognized in the consolidated statements of income and presented as a part of “Other income/(loss), net.”

The Company accounted for the business combination using the acquisition method of accounting.

The measurement period will not exceed one year from the acquisition date.

Pursuant to the Company’s business combinations accounting policy, the aggregate purchase consideration for Clairvoyant was allocated to identifiable net tangible and intangible assets based upon their preliminary fair values.

The excess of the estimated purchase consideration over fair value of identifiable net tangible and intangible assets was recorded as goodwill.

In order to allocate the consideration transferred for Clairvoyant, the fair values of all identifiable assets and liabilities must be established.

For accounting and financial reporting purposes, fair value is defined under ASC No.

820, Fair Value Measurement and Disclosure , as the price that would be received upon sale of an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Market participants are assumed to be buyers and sellers in the principal (most advantageous) market for the asset or liability.

Additionally, fair value measurements for an asset assume the highest and best use of that asset by market participants.

Use of different estimates and judgments could yield different results.

The Company’s preliminary purchase price allocation to net tangible and intangible assets of Clairvoyant as of December 16, 2021 is as follows:

The tables below presents the fair value of the consideration exchanged and the allocation of purchase consideration to the major classes of assets and liabilities of Clairvoyant as of December 16, 2021:

Cash and cash equivalents $ 5,598

11 unchanged sentences

Accrued expenses and other current liabilities

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

Deferred tax liabilities ( 9,383 )

4 unchanged sentences

Total purchase consideration* $ 90,325

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

* Includes contingent consideration of $ 9,000 recognized at fair value.

The fair value of assets acquired and liabilities assumed from the acquisition of Clairvoyant is based on a preliminary valuation and, as such, the Company's estimates and assumptions are subject to change within the measurement period.

The primary areas of the purchase price allocation that are not yet finalized are related to direct and indirect taxes and reflect management’s best estimates and assumptions as of the reporting date.

* Includes contingent consideration of $ 9,000 recognized at fair value as of the date of acquisition .

During the years ended December 31, 2022 and 2021, the Company recognized measurement period adjustments, which led to increase in goodwill in an amount of $ 2,229 and $ nil , respectively.

These adjustments primarily relate to an increase in income tax liabilities of $ 988 included under “other non-current liabilities” and post-closing purchase adjustments.

The fair values of customer relationships were determined by using an “income approach,” specifically the Multi-Period Excess Earnings Method (“MPEEM”).

11 unchanged sentences

Acquisition-related costs are being expensed as incurred and are included in general and administrative expenses in the consolidated statements of income.

The Company recognized acquisition-related costs of $ 761 during the year ended December 31, 2021.

The Company recognized acquisition-related costs of $ 134 and $ 761 during the years ended December 31, 2022 and 2021, respectively.

The results of operations of the acquired business and the fair value of the acquired assets and assumed liabilities are included in the Company’s consolidated financial statements with effect from the date of the acquisition.

The acquisition did not materially impact the Company’s financial position, results of operations or cash flows, and therefore, the Company has not provided unaudited supplemental pro forma results.

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.

The following table sets forth details of changes in goodwill by reportable segment of the Company:

Inbound Media Group, LLC

On June 10, 2022, the Company, through its wholly owned subsidiary ExlService.com, LLC, entered into an Asset Purchase Agreement to acquire certain assets of Inbound, a Wyoming limited liability company, which is a digital marketing business focused primarily on lead generation in the insurance space, for cash consideration of $ 1,469 and contingent consideration with an estimated fair value of $ 1,439 as of the date of acquisition based on the achievement of certain performance goals by Inbound during the 2022 to 2024 calendar years.

The contingent consideration had an estimated fair value of $ 1,189 as of December 31, 2022, and has been presented as contingent consideration under “Other non-current liabilities,” in the consolidated balance sheets.

Changes in the fair value of contingent consideration were recognized in the consolidated statements of income and presented as a part of “Other income/(loss), net.”

EXLSERVICE HOLDINGS, INC.

1 unchanged sentence

December 31, 2022

(In thousands, except share and per share amounts)

Insurance Healthcare Emerging Business Analytics TT&L F&A All Other Total

Balance at January 1, 2020 $ 38,276 $ 19,276 $ — $ 227,289 $ 12,457 $ 46,905 $ 5,326 $ 349,529

Goodwill reallocation (1)

12,192 2,693 49,803 — ( 12,457 ) ( 46,905 ) ( 5,326 ) —

(In thousands, except per share amount and share count)

The Company accounted for this business combination using the acquisition method of accounting.

Goodwill and intangible assets of $ 1,992 and $ 916 , respectively, were recognized by the Company as a result of this transaction.

The goodwill recognized for this business is deductible for income tax purposes.

The acquisition strengthens the Company’s capabilities in digital direct-to-consumer marketing by adding performance marketing, lead generation and customer engagement capabilities to its suite of end-to-end marketing solutions, proprietary data sets and robust consumer analytics.

The results of operations of the acquired business and the fair value of the net assets acquired are included in the Company’s consolidated financial statements with effect from the date of the acquisition.

The following table sets forth details of changes in goodwill by reportable segment of the Company:

Insurance Healthcare Emerging Business Analytics Total

Balance as of January 1, 2021 $ 50,499 $ 21,953 $ 49,348 $ 227,288 $ 349,088

Acquisition — — — 55,225 55,225

Currency translation adjustments ( 71 ) ( 11 ) ( 328 ) ( 1 ) ( 411 )

Balance at December 31, 2020 $ 50,499 $ 21,953 $ 49,348 $ 227,288 $ — $ — $ — $ 349,088

Balance as of December 31, 2021 $ 50,428 $ 21,942 $ 49,020 $ 282,512 $ 403,902

Acquisition — — — 1,992 1,992

Measurement period adjustments — — — 2,229 2,229

Currency translation adjustments ( 499 ) ( 67 ) ( 1,919 ) ( 1 ) ( 2,486 )

Balance at December 31, 2021 $ 50,428 $ 21,942 $ 49,020 $ 282,512 $ — $ — $ — $ 403,902

(1) Includes effects of reallocation of goodwill because of the Company reorganizing its operating segments as described in Note 3 - Segment and Geographical Information to the consolidated financial statements.

Balance as of December 31, 2022 $ 49,929 $ 21,875 $ 47,101 $ 286,732 $ 405,637

During the fourth quarter of 2022, the Company performed its annual goodwill quantitative impairment test for those reporting units that had goodwill recorded.

Key assumptions used in determining the fair value of the Company’s reporting units were, a long-term revenue growth rate in the terminal year of 3.0 %, which was based upon expected long-term inflation rate and real gross domestic product growth over a long-term, and discount rates ranging from 12.0 % to 12.1 %, which vary based upon the risks and uncertainties inherent in each individual reporting unit.

Key assumptions used in determining the fair value of the Company’s reporting units were, a long-term revenue growth rate in the terminal year of 3.0 %, which was based upon expected long-term inflation rate and real gross domestic product growth over a long-term, and discount rate of up to 10.0 %, which vary based upon the risks and uncertainties inherent in each individual reporting unit.

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.

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• Increasing the depth and breadth of the services the Company provides across its clients’ value chains and geographies;

• Offering the full suite of the Company's services that includes digital operations and solutions and data and analytics;

• Offering the full suite of the Company's services, which includes digital operations and solutions and data and analytics;

• Supporting the Company's clients’ geographic expansion leveraging its global footprint.

The Company also considers selective strategic relationships with industry leaders that add new long-term client relationships, enhance the depth and breadth of its services and solutions, and complement its business strategy.

Through its various Partnership programs, the Company expands its technology and innovation ecosystem with select partnerships, alliances or investments that the Company expects will enhance go-to-market opportunities and expand the scope and effectiveness of the Company’s services and solutions by adding digital assets and intellectual property, which will help the Company to win new clients or allowing it to enter new industry verticals and geographic markets.

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

EXLSERVICE HOLDINGS, INC.

1 unchanged sentence

December 31, 2022

(In thousands, except share and per share amounts)

continued market volatility is highly uncertain and, as such, the impact on cash flows, long-term debt-free net cash flow growth rate in the terminal year and discount rates are subject to significant judgments and may cause variability in the Company’s assessment of existence of any impairment.

The Company continues to monitor the impacts of COVID-19 on the Company and significant changes in key assumptions that could result in future period impairment charges.

Intangible Assets

(In thousands, except per share amount and share count)

effectiveness of the Company’s services and solutions by adding digital assets and intellectual property, which will help the Company to win new clients or allowing it to enter new industry verticals and geographic markets.

There can be no assurances that goodwill will not be impaired in future periods.

Estimating the fair value of reporting units requires the use of estimates and significant judgments that are based on a number of factors including actual operating results.

These estimates and judgements may not be within the control of the Company and accordingly it is reasonably possible that the judgments and estimates described above could change in future periods.

The duration of market volatility is highly uncertain and, as such, the impact on cash flows, long-term debt-free net cash flow growth rate in the terminal year and discount rates are subject to significant judgments and may cause variability in the Company’s assessment of existence of any impairment.

The Company continues to monitor significant changes in key assumptions that could result in future period impairment charges.

Other Intangible Assets

Information regarding the Company’s intangible assets is set forth below:

18 unchanged sentences

Trade names and trademarks 1,700 ( 1,006 ) 694

Non-compete agreements 300 — 300

130,056 ( 49,874 ) 80,182

6 unchanged sentences

Amortization expense $ 17,109 $ 12,778 $ 14,412

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

The remaining weighted average life of intangible assets is as follows:

Customer relationships 5.5

Developed technologies 2.1

Developed technology 1.4

Trade names and trademarks (finite lived) 1.5

Non-compete agreements 2.8

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

Estimated future amortization expense related to finite-lived intangible assets as of December 31, 2022 was as follows:

5 unchanged sentences

December 31, 2022 December 31, 2021

Prepaid expenses $ 18,132 $ 14,655

Receivables from statutory authorities 15,724 18,023

Derivative instruments 8,682 9,755

Advance income tax, net 5,716 15,199

Advances to suppliers 1,944 1,464

Derivative instruments 1,526 8,682

Deferred contract fulfillment costs 1,178 1,483

Contract assets 904 1,319

Interest accrued on term deposits 892 169

Others 5,855 2,146

Other current assets $ 50,979 $ 62,971

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

Other assets consist of the following:

December 31, 2022 December 31, 2021

Deferred contract fulfillment costs $ 12,693 $ 4,312

Lease deposits 6,621 9,649

Deposits with statutory authorities 6,276 6,417

Derivative instruments 6,307 6,933

Deferred contract fulfillment costs 4,312 2,743

Contract assets 1,864 1,205

Derivative instruments 820 6,307

Receivable from Statutory authorities — 222

Term deposits 186 216

Others 3,795 2,071

Other assets $ 32,069 $ 30,183

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

Accrued Expenses and Other Current Liabilities

3 unchanged sentences

Payable to statutory authorities 20,430 13,902

Accrued capital expenditures 7,404 7,857

Client liabilities 6,097 4,740

Derivative instruments 10,059 1,852

Client liabilities 5,110 6,097

Contingent consideration 5,000 —

Accrued capital expenditures 4,032 8,630

Interest payable 451 252

5 unchanged sentences

December 31, 2022 December 31, 2021

Retirement benefits $ 9,604 $ 8,940

Contingent consideration $ 13,689 $ 9,000

Retirement benefits 12,982 9,604

Derivative instruments 6,218 1,785

1 unchanged sentence

Unrecognized tax benefits 2,329 1,068

Income taxes payable — 1,790

Finance lease liabilities 355 229

Accrued capital expenditures — 3,486

Others 1,311 120

Other non-current liabilities $ 41,292 $ 24,591

Accumulated Other Comprehensive Income/(Loss)

Accumulated other comprehensive income/(loss) (“AOCI”) consists of actuarial gain/(loss) on retirement benefits and foreign currency translation adjustments.

In addition, the Company enters into foreign currency exchange contracts, which are designated as cash flow hedges and net investment hedges in accordance with ASC 815.

Cumulative changes in the fair values of these foreign currency exchange contracts are recognized in AOCI on the Company's consolidated balance sheets.

Upon settlement of foreign exchange contracts designated as cash flow hedges, fair value changes are reclassified from AOCI to net income, whereas such fair value changes related to net investment hedges are included in net income when a foreign operation is disposed or partially disposed.

The balances as of December 31, 2021 and 2020 are as follows:

EXLSERVICE HOLDINGS, INC.

1 unchanged sentence

December 31, 2022

(In thousands, except share and per share amounts)

(In thousands, except per share amount and share count)

Accumulated Other Comprehensive Income/(Loss)

Foreign currency translation loss Unrealized gain on cash flow hedges Retirement benefits Total

Accumulated other comprehensive income/(loss) (“AOCI”) consists of actuarial gain/(loss) on retirement benefits and foreign currency translation adjustments.

In addition, the Company enters into foreign currency forward contracts and interest rate swaps, which are designated as cash flow hedges and net investment hedges, as applicable, in accordance with ASC Topic 815.

Cumulative changes in the fair values of cash flow hedges are recognized in AOCI on the Company’s consolidated balance sheets.

The fair value changes are reclassified from AOCI to consolidated statements of income upon settlement of foreign currency forward contracts designated as cash flow hedges of a forecast transaction, whereas such changes for interest rate swaps are reclassified over the term of the contract.

Fair value changes related to net investment hedges are included in AOCI and are reclassified to consolidated statements of income when a foreign operation is disposed or partially disposed.

The following table sets forth the changes in AOCI during the years ended December 31, 2022, 2021 and 2020:

Accumulated Other Comprehensive Income/(Loss)

Foreign currency translation loss Unrealized gain/(loss) on cash flow hedges Retirement benefits Total

Balance as of January 1, 2020 $ ( 87,591 ) $ 4,098 $ ( 1,399 ) $ ( 84,892 )

1 unchanged sentence

Reclassification to net income — ( 801 ) 394 ( 407 )

— ( 801 ) 394 ( 407 )

Income tax effects (2)

8 unchanged sentences

Accumulated other comprehensive income/(loss) as of December 31, 2021 $ ( 95,437 ) $ 8,420 $ ( 2,457 ) $ ( 89,474 )

Gains / (losses) recognized during the year ( 47,734 ) ( 27,333 ) 2,574 ( 72,493 )

Reclassification to net income (1)

— 1,295 592 1,887

Income tax effects (2)

10,032 6,315 ( 410 ) 15,937

Accumulated other comprehensive income/(loss) as of December 31, 2022 $ ( 133,139 ) $ ( 11,303 ) $ 299 $ ( 144,143 )

Refer to Note 17 - Derivatives and Hedge Accounting and Note 20 - Employee Benefit Plans to the consolidated financial statements for reclassification to net income.

These are income tax effects recognized on cash flow hedges, retirement benefits and foreign currency translation gains / (losses).

These are income tax effects recognized on cash flow hedges, retirement benefits and foreign currency translation loss.

Refer to Note 22 - Income Taxes to the consolidated financial statements.

Fair Value Measurements

ASC Topic 820, “Fair Value Measurements and Disclosures ” ("ASC 820") defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability.

The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability as against assumptions specific to the entity.

In addition, the fair value of liabilities should include consideration of non-performance risk, including the Company’s own credit risk.

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 December 31, 2021 and 2020.

EXLSERVICE HOLDINGS, INC.

1 unchanged sentence

December 31, 2022

(In thousands, except share and per share amounts)

(In thousands, except per share amount and share count)

Fair Value Measurements

Assets and Liabilities Measured at Fair Value

The following table sets forth the Company’s assets and liabilities that were recognized at fair value:

Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Other Unobservable Inputs

As of December 31, 2022 (Level 1) (Level 2) (Level 3) Total

Cash and cash equivalents (money market funds)* $ 5,374 $ — $ — $ 5,374

Cash equivalents - Money market funds* $ 1,137 $ — $ — $ 1,137

Mutual funds** 110,964 — — 110,964

6 unchanged sentences

As of December 31, 2021 (Level 1) (Level 2) (Level 3) Total

Cash and cash equivalents (money market funds)* $ 13,463 $ — $ — $ 13,463

Cash equivalents - Money market funds* $ 5,374 $ — $ — $ 5,374

Mutual funds** 127,551 — — 127,551

2 unchanged sentences

Derivative financial instruments $ — $ 3,637 $ — $ 3,637

Contingent consideration*** — — 9,000 9,000

Total $ — $ 3,637 $ 9,000 $ 12,637

* Represents money market funds which are carried at the fair value option under ASC 825 "Financial Instruments".

** Represents those short-term investments which are carried at the fair value option under ASC 825 "Financial Instruments".

* Represents money market funds which are carried at the fair value option under ASC Topic 825 “ Financial Instruments ” .

** Represents those short-term investments which are carried at the fair value option under ASC Topic 825 “ Financial Instruments ” .

*** Contingent consideration is presented under “Accrued Expenses and Other Current Liabilities” and “Other Non-Current Liabilities,” as applicable, in the consolidated balance sheets.

Derivative Financial Instruments :

The Company’s derivative financial instruments consist of foreign currency forward exchange contracts.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

The Company’s derivative financial instruments consist of foreign currency forward contracts and interest rate swaps.

Fair values for derivative financial instruments are based on independent sources including highly rated financial institutions and are classified as Level 2.

2 unchanged sentences

The fair value measurement of contingent consideration is determined using Level 3 inputs.

The Company’s contingent consideration represents a component of the total purchase consideration for its acquisition of Clairvoyant.

The measurement is calculated using unobservable inputs based on the Company’s own assessment of achievement of certain performance goals by Clairvoyant during 2022 and 2023 calendar years.

The Company estimated the fair value of the contingent consideration to be $ 9,000 , based on Monte Carlo simulation model and scenario-based method.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

The Company’s contingent consideration represents a component of the total purchase consideration for its acquisitions of Clairvoyant and Inbound.

The measurement is calculated using unobservable inputs based on the Company’s own assessment of achievement of certain performance goals by Clairvoyant during the 2022 and 2023 calendar years and Inbound during the 2022 to 2024 calendar years.

The Company estimated the fair value of the contingent consideration based on the Monte Carlo simulation model and scenario-based method.

Refer to Note 10 - Business Combinations, Goodwill and Other Intangible Asset s to the consolidated financial statements for further details.

The following table summarizes the changes in the fair value of contingent consideration:

Year ended December 31,

Opening balance $ 9,000 $ —

Acquisitions 1,439 9,000

Fair value changes 8,250 —

Closing balance $ 18,689 $ 9,000

During the years ended December 31, 2022, 2021 and 2020, there were no transfers among Level 1, Level 2 and Level 3.

Financial Instruments Not Carried at Fair Value :

The Company’s other financial instruments not carried at fair value consist primarily of cash and cash equivalents (except investments in money market funds, as disclosed above), short-term investments (except investments in mutual funds, as disclosed above), restricted cash, accrued interest on term deposits, accrued capital expenditures, accrued expenses and interest payable on borrowings for which fair values approximate their carrying amounts due to their short-term nature.

The Company’s other financial instruments not carried at fair value consist primarily of cash and cash equivalents (except investments in money market funds, as disclosed above), short-term investments (except investments in mutual funds, as disclosed above), restricted cash, accounts receivable, net, long-term investments, accrued capital expenditures, accrued expenses, client liabilities and interest payable on borrowings for which fair values approximate their carrying amounts.

Convertible Senior Notes:

The Company settled the Notes during the year ended December 31, 2021.

Refer to Note 17 - Borrowings to the consolidated financial statements for further details.

The total estimated fair value of the Notes as of December 31, 2020 was $ 152,384 .

The fair value was determined based on market yields for similar convertible notes as of December 31, 2020.

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 of goodwill conducted by the Company during the years ended December 31, 2022 and 2021.

The fair value determination of the Company's reporting units was based on a combination of the income approach, using DCF model, which are Level 3 inputs, and also the market approach, as applicable, using market multiples for reporting units, which are Level 2 inputs.

The fair value determination of the Company's reporting units was based on a combination of the income approach, using a DCF model, which are Level 3 inputs, and also the market approach, as applicable, using market multiples for reporting units, which are Level 2 inputs.

During the years ended December 31, 2022 and 2021, the Company did no t recognize any impairment charges on goodwill as the fair values of the reporting units exceeded their carrying value.

Refer to Note 9 - Business Combinations, Goodwill and Intangible Assets to the 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.

Refer to Note 8 - Property and Equipment, net and Note 20 - Leases to the consolidated financial statements for further details.

Refer to Note 10 - Business Combinations, Goodwill and Other Intangible Assets to the consolidated financial statements for further details.

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 $ 514,580 as of December 31, 2021 and $ 451,935 as of December 31, 2020.

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 consolidated statements of income as a part of “Cost of revenues,” “General and administrative expenses,” “Selling and marketing expenses,” and “Depreciation and amortization expense,” as applicable.

The Company evaluates hedge effectiveness at the time a contract is entered into as well as on an ongoing basis.

For hedging positions that are discontinued because the forecasted transaction is not expected to occur by the end of the originally specified period, any related amounts recorded in equity are reclassified to earnings.

The Company estimates that approximately $ 7,345 of derivative gains, net, excluding tax effects, included in AOCI, representing changes in the value of cash flow hedges, could be reclassified into earnings within the next twelve months based

The Company uses derivative instruments to mitigate cash flow volatility from risk of fluctuations in foreign currency exchange rates and interest rates.

These contracts qualify as cash flow hedges under ASC Topic 815 and are with counterparties that are highly rated financial institutions.

For derivatives in cash flow hedging relationships as

EXLSERVICE HOLDINGS, INC.

1 unchanged sentence

December 31, 2022

(In thousands, except share and per share amounts)

on exchange rates prevailing as of December 31, 2021.

At December 31, 2021, the maximum outstanding term of the cash flow hedges was 42 months.

The Company also enters into foreign currency forward contracts to economically hedge its intercompany balances and other monetary assets and liabilities denominated in currencies other than functional currencies, against the risk of foreign currency fluctuations associated with remeasurement of such assets and liabilities to functional currency.

These derivatives do not qualify as fair value hedges under ASC 815.

Changes in the fair value of these derivatives are recognized in the consolidated statements of income and are included in the foreign exchange gain/ (loss) line item.

The Company’s primary exchange rate exposure is with the Indian rupee, the U.K.

pound sterling (GBP) and the Philippine peso.

(In thousands, except per share amount and share count)

of December 31, 2022 and 2021, the Company had outstanding foreign currency forward contracts totaling $ 841,620 and $ 514,580 , respectively and interest rate swaps totaling $ 75,000 and $ nil , respectively.

The Company estimates that approximately $ 8,773 of derivative losses, net, excluding tax effects, included in AOCI, representing changes in the value of cash flow hedges based on exchange rates prevailing as of December 31, 2022, could be reclassified into earnings within the next twelve months.

As of December 31, 2022, the maximum outstanding term of the cash flow hedges was approximately 45 months.

The Company also enters into foreign currency forward contracts to hedge its intercompany balances and other monetary assets and liabilities denominated in currencies other than functional currencies, against the risk of fluctuations in foreign currency exchange rates associated with remeasurement of such assets and liabilities to functional currency.

These foreign currency forward contracts do not qualify as fair value hedges under ASC Topic 815.

Changes in the fair value of these financial instruments are recognized in the consolidated statements of income and are included in the foreign exchange gain/(loss) line item.

The Company’s primary exchange rate exposure is with the Indian rupee, the Philippine peso and the U.K.

pound sterling (GBP).

The Company also has exposure to Colombian pesos (COP), Czech koruna, the Euro (EUR), South African ZAR, the Australian dollar (AUD) and other local currencies in which it operates.

Outstanding foreign currency forward contracts amounted to USD 134,612 , GBP 6,763 , EUR 1,343 and COP 2,541,902 as of December 31, 2021 and USD 143,394 , GBP 6,753 , EUR 2,447 and COP 8,287,950 as of December 31, 2020.

The Company uses forward contracts designated as net investment hedges to hedge the foreign currency risks related to our investments in foreign subsidiaries.

Gains and losses on these net investment hedges are recognized in AOCI as part of foreign currency translation adjustments.

All of the assets and liabilities related to our foreign exchange forward contracts are subject to master netting arrangements with each individual counterparty.

These master netting arrangements generally provide for net settlement of all outstanding contracts with the counterparty in the case of an event of default or a termination event.

We have presented all of the assets and liabilities related to our foreign exchange forward contracts on a gross basis, with no offsets, in our consolidated statements of financial position.

There is no financial collateral (including cash collateral) provided or received by us related to our foreign exchange forward contracts.

The following tables set forth the fair value of the foreign currency exchange contracts and their location on the consolidated financial statements:

Derivatives designated as hedging instruments:

Foreign currency exchange contracts December 31, 2021 December 31, 2020

The following table sets forth the aggregate notional principal amounts of outstanding foreign currency forward contracts for derivatives not designated as hedging instruments:

Foreign currency forward contracts denominated in:

December 31, 2022 December 31, 2021

dollar (USD) 163,990 134,612

pound sterling (GBP) 8,351 6,763

Euro (EUR) 1,956 1,343

Australian dollar (AUD) 1,951 —

Colombian peso (COP) — 2,541,902

The following table sets forth the fair value of the foreign currency forward contracts and interest rate swaps and their location on the consolidated balance sheets:

Derivatives in cash flow hedging relationships Derivatives not designated as hedging instruments

December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021

Other current assets $ 1,271 $ 8,669 $ 255 $ 13

2 unchanged sentences

Other non-current liabilities $ 6,218 $ 1,785 $ — $ —

Derivatives not designated as hedging instruments :

Foreign currency exchange contracts December 31, 2021 December 31, 2020

Other current assets $ 13 $ 15

Accrued expenses and other current liabilities $ 528 $ 259

The following tables set forth the effect of foreign currency exchange contracts on the consolidated statements of income and accumulated other comprehensive income/(loss) for the years ended December 31, 2021, 2020 and 2019.

The following tables set forth the effect of foreign currency forward contracts and interest rate swaps on AOCI and the consolidated statements of income:

EXLSERVICE HOLDINGS, INC.

1 unchanged sentence

December 31, 2022

(In thousands, except share and per share amounts)

(In thousands, except per share amount and share count)

Year ended December 31,

Forward Exchange Contracts:

Derivative financial instruments:

2022 2021 2020

Unrealized gain recognized in AOCI

Unrealized gain/(loss) recognized in AOCI

Derivatives in cash flow hedging relationships $ ( 27,333 ) $ 4,663 $ 12,665

Gain recognized in consolidated statements of income

Gain/(loss) recognized in consolidated statements of income

Derivatives not designated as hedging instruments $ ( 9,571 ) $ 196 $ 3,686

Location and amount of gain/(loss) recognized in consolidated statements of income for cash flow hedging relationships and derivatives not designated as hedging instruments:

Location and amount of gain/(loss) recognized in consolidated statements of income for derivatives in cash flow hedging relationships and derivatives not designated as hedging instruments:

Year ended December 31,

2022 2021 2020

As per consolidated statements of income Gain on foreign currency exchange contracts As per consolidated statements of income Gain/(loss) on foreign currency exchange contracts As per consolidated statements of income Gain on foreign currency exchange contracts

As per consolidated statements of income Gain/(loss) on derivative financial instruments As per consolidated statements of income Gain on derivative financial instruments As per consolidated statements of income Gain/(loss)

on derivative financial instruments

Cash flow hedging relationships

Location in consolidated statements of income where gain/(loss) was reclassed from AOCI

Location in consolidated statements of income where gain/(loss) was reclassified from AOCI

Cost of revenues $ 896,595 $ ( 1,304 ) $ 690,934 $ 7,785 $ 623,936 $ 1,008

2 unchanged sentences

Depreciation and amortization expense $ 56,282 ( 32 ) $ 49,132 478 $ 50,462 ( 41 )

Interest expense $ 8,252 ( 110 ) $ 7,561 — $ 11,190 —

Total before tax ( 1,295 ) 9,264 801

Income tax benefit/(expense) relating to above $ ( 1,530 ) $ 500 $ ( 1,173 )

Income tax effects on above ( 455 ) ( 1,530 ) 500

Net of tax $ ( 1,750 ) $ 7,734 $ 1,301

Derivatives not designated as hedging instruments

Location in consolidated statements of income where gain was recognized

Location in consolidated statements of income where gain/(loss) was recognized

Foreign exchange gain, net $ 6,199 $ ( 9,571 ) $ 4,313 $ 196 $ 4,432 $ 3,686

$ 6,199 $ ( 9,571 ) $ 4,313 $ 196 $ 4,432 $ 3,686

Effect of net investment hedges on accumulated other comprehensive income/(loss):

Effect of net investment hedges on AOCI:

Year ended December 31,

2 unchanged sentences

2022 2021 2020

Foreign exchange contracts

$ 1,134 $ — $ —

Foreign currency forward contracts $ — $ 1,134 $ —

EXLSERVICE HOLDINGS, INC.

1 unchanged sentence

December 31, 2022

(In thousands, except share and per share amounts)

The following tables summarizes the Company’s debt position as of December 31, 2021 and 2020.

As of December 31, 2021 As of December 31, 2020

Revolving Credit Facility Total Revolving Credit Facility Notes Total

(In thousands, except per share amount and share count)

The following tables summarizes the Company’s debt position:

As of December 31,

Revolving credit facility

Current portion of long-term borrowings $ 30,000 $ 260,016

Long-term borrowings 220,000 —

Unamortized debt discount — — — ( 11,236 ) ( 11,236 )

Unamortized debt issuance costs* — — — ( 803 ) ( 803 )

Long-term borrowings $ — $ — $ 64,000 $ 137,961 $ 201,961

Total borrowings $ 250,000 $ 260,016

1 unchanged sentence

Credit Agreement

On November 21, 2017, the Company and each of the Company’s wholly owned material domestic subsidiaries entered into a Credit Agreement with certain lenders, and Citibank, N.A.

as Administrative Agent (the “Credit Agreement”).

The Credit Agreement provides for a $ 200,000 revolving credit facility (the “Credit Facility”) with an option to increase the commitments by up to $ 100,000 , subject to certain approvals and conditions as set forth in the Credit Agreement.

The Credit Agreement also includes a letter of credit sub facility.

The Credit Facility has a maturity date of November 21, 2022 and is voluntarily pre-payable from time to time without premium or penalty.

Borrowings under the Credit Agreement may be used for working capital and general corporate purposes, including permitted acquisitions.

On July 2, 2018, the Company exercised its option under the Credit Agreement to increase the commitments by $ 100,000 thereby utilizing the entire revolver under the Credit Facility of $ 300,000 to fund the Company’s July 2018 acquisition of SCIO.

Depending on the type of borrowing, loans under the Credit Agreement bear interest at a rate equal to the specified prime rate (alternate base rate) or adjusted LIBO rate, plus, in each case, an applicable margin.

The applicable margin is tied to the Company’s total net leverage ratio and ranges from 0 % to 0.75 % per annum with respect to loans pegged to the specified prime rate, and 1.00 % to 1.75 % per annum on loans pegged to the adjusted LIBO rate.

The Company held a $ 300,000 revolving credit facility pursuant to its credit agreement (the “Credit Agreement”), dated as of November 21, 2017 with certain lenders and Citibank N.A.

as Administrative Agent.

The revolving credit facility originally had a maturity date of November 21, 2022 and was voluntarily pre-payable from time to time without premium or penalty.

On April 18, 2022, the Company and each of the Company’s wholly owned material domestic subsidiaries entered into an Amendment and Restatement Agreement with Citibank, N.A.

as Administrative Agent and certain lenders (the “2022 Credit Agreement”), pursuant to which the parties thereto amended and restated the Credit Agreement.

Among other things, the 2022 Credit Agreement (a) provides for the issuance of new revolving credit commitments such that the aggregate amount of revolving credit commitments available to the Company is equal to $ 400,000 ;

(b) extends the maturity date of the revolving credit facility from November 21, 2022 to April 18, 2027;

and (c) replaces LIBOR with Secured Overnight Financing Rate (“SOFR”) as the reference rate for the U.S.

dollar borrowings.

The 2022 Credit Agreement provides an option to increase the commitments by up to $ 200,000 , subject to certain approvals and conditions.

The 2022 Credit Agreement includes a letter of credit sub facility and is voluntarily pre-payable from time to time without premium or penalty.

Borrowings under the 2022 Credit Agreement can be used for working capital and general corporate purposes, including permitted acquisitions.

Obligations under the 2022 Credit Agreement are guaranteed by the Company’s material domestic subsidiaries and are secured by all or substantially all of the Company’s and our material domestic subsidiaries’ assets.

The 2022 Credit Agreement contains customary affirmative and negative covenants, including, but not limited to, restrictions on the ability to incur indebtedness, create liens, make certain investments, make certain dividends and related distributions, enter into, or undertake, certain liquidations, mergers, consolidations or acquisitions and dispose of certain assets or subsidiaries.

In addition, the 2022 Credit Agreement contains a covenant to not permit the interest coverage ratio or the total net leverage ratio, both as defined for the four consecutive quarter period ending on the last day of each fiscal quarter, to be less than 3.0 to 1.0 or more than 3.5 to 1.0, respectively.

The 2022 Credit Agreement bears interest at a rate equal to specified prime rate (alternate base rate) or adjusted SOFR, plus, in each case, an applicable margin.

The applicable margin is tied to the Company’s total net leverage ratio and ranges from 0 % to 0.75 % per annum on loans pegged to the specified prime rate, and 0.88 % to 1.75 % per annum on loans pegged to the adjusted SOFR.

The revolving credit commitments under the 2022 Credit Agreement are subject to a commitment fee which is also tied to the Company’s total net leverage ratio, and ranges from 0.13 % to 0.28 % per annum on the average daily amount by which the aggregate revolving commitments exceed the sum of outstanding revolving loans and letter of credit obligations.

The revolving credit facility carried an effective interest rate as shown below:

Year ended December 31,

2021 2020 2019

Effective Interest Rate 1.7 % 2.3 % 4.0 %

Obligations under the Credit Agreement are guaranteed by the Company’s material domestic subsidiaries and are secured by all or substantially all of the assets of the Company and its material domestic subsidiaries.

The Credit Agreement contains customary affirmative and negative covenants, including, but not limited to, restrictions on the ability to incur indebtedness, create liens, make certain investments, make certain dividends and related distributions, enter into, or undertake, certain liquidations, mergers, consolidations or acquisitions and dispose of assets or subsidiaries.

In addition, the Credit Agreement contains a covenant to not permit the interest coverage ratio (the ratio of EBITDA to cash interest expense) or the total net leverage ratio (total funded indebtedness, less unrestricted domestic cash and cash equivalents not to exceed $ 50,000 to EBITDA) for the four consecutive quarter period ending on the last day of each fiscal quarter, to be less than 3.5 to 1.0 or more

EXLSERVICE HOLDINGS, INC.

1 unchanged sentence

December 31, 2022

(In thousands, except share and per share amounts)

than 3.0 to 1.0, respectively.

As of December 31, 2021, the Company was in compliance with all financial and non-financial covenants listed under the Credit Agreement.

The Company entered into a second amendment and a third amendment (the “Amendments”) to its Credit Agreement, as amended, among the Company, as borrower, with certain lenders, and Citibank, N.A.

as Administrative Agent to, among other things, permit the issuance by the Company of the convertible notes, and settlement upon maturity or conversion thereof, in accordance with the Investment Agreement, the indenture dated as of October 4, 2018 and the other documents entered into in connection therewith and the change in definition of restricted payments in connection with the Company’s share-buyback plan.

(In thousands, except per share amount and share count)

Year ended December 31,

2022 2021 2020

Effective Interest Rate 2.9 % 1.7 % 2.3 %

As of December 31, 2022 and 2021, the Company was in compliance with all financial and non-financial covenants listed under the applicable revolving credit facility.

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 the Notes.

The transactions contemplated by the Investment Agreement, including the issuance of the Notes, closed on October 4, 2018.

On October 1, 2018, the Company entered into an investment agreement with Orogen Echo LLC (the “Purchaser”), an affiliate of The Orogen Group LLC, relating to the issuance to the Purchaser of $ 150,000 , in an aggregate principal amount (the “Notes”).

The Notes carried interest at a rate of 3.5 % per annum, payable semi-annually in arrears in cash on April 1 and October 1 of each year.

The Notes were convertible at an initial conversion rate of 13.3333 shares of the common stock per one thousand dollar principal amount of the Notes (which represented an initial conversion price of approximately $ 75 per share).

The Company had the option to redeem the principal amount of the Notes, at its option, in whole but not in part, at a purchase price equal to the principal amount plus accrued and unpaid interest on or after October 1, 2021, if the closing sale price of the common stock exceeded 150 % of the then-current conversion price for 20 or more trading days in the 30 consecutive trading day period preceding the Company’s exercise of this redemption right (including the trading day immediately prior to the date of the notice of redemption).

The Company had the option to elect to settle conversions of the Notes by paying or delivering, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock.

The Company had the option to redeem the principal amount of the Notes, at its option, if the closing sale price of the common stock exceeded 150 % of the then-current conversion price for 20 or more trading days in the 30 consecutive trading day period preceding the Company’s exercise of this redemption right (including the trading day immediately prior to the date of the notice of redemption).

The Notes carried an effective interest rate as shown below:

Year ended December 31,

2021 2020 2019

Effective Interest Rate 3.6 % 3.6 %

On August 27, 2021, the Company entered into a Payoff and Termination Agreement (the “Payoff and Termination Agreement”) with the Purchaser, pursuant to which the Company prepaid and settled its outstanding obligations under the Notes for an aggregate consideration of $ 236,742 , excluding accrued and unpaid interest under the Notes calculated through, and including, August 26, 2021, in the form of a combination of cash and shares of the Company’s common stock.

As a result, the Company made a cash payment of $ 200,000 to the Purchaser and satisfied the remainder of the obligation under the Notes by issuing to the Purchaser 310,394 shares of the Company’s common stock calculated at $ 118.37 per share based on a 20 -day volume weighted average price ending on, and including, August 26, 2021.

The Company satisfied the cash payment obligation under the Payoff and Termination Agreement by drawing $ 200,000 from its existing revolving Credit Facility, and the Company’s common stock was issued from its existing treasury shares.

Refer to Note 18 - Capital Structure to the consolidated financial statements for further details.

The aggregate consideration of $ 236,742 was allocated between the debt and equity components in an amount of $ 152,742 and $ 84,000 , respectively.

The consideration was first allocated to the fair value of debt component and the remaining was allocated to the equity component.

The fair value of the debt component was calculated using a discounted cash flow technique, which considered debt issuances with similar features of the Company’s debt, without the conversion feature.

The resulting effective interest rate for the Notes was 2.9 % per annum at the time of settlement.

The portion allocated to the equity component was recorded as additional paid-in capital.

Immediately prior to the settlement of the Notes, the carrying amount of the debt component of the Notes, net of unamortized debt discount and issuance costs, was $ 139,897 .

On August 27, 2021, the Company entered into a Payoff and Termination Agreement with the Purchaser, pursuant to which the Company prepaid and settled its outstanding obligations under the Notes, by electing a combination of cash and shares of the Company’s common stock.

During the year ended December 31, 2021, the Company recognized a loss on settlement of the Notes of $ 12,845 , representing the difference between the fair value of the consideration allocated to the debt component and the carrying value of the debt component immediately before settlement, and is presented as “Loss on settlement of convertible notes,” in the Company’s consolidated statements of income.

During the years ended December 31, 2021, 2020 and 2019, the Company recognized interest expense and amortization of debt discount on the Notes as below:

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

Year ended December 31,

2021 2020 2019

Interest expense on the Notes $ 3,442 $ 5,250 $ 5,206

Amortization of debt discount on the Notes $ 1,795 $ 2,616 $ 2,472

During the years ended December 31, 2021 and 2020, the Company recognized interest expense and amortization of debt discount of $ 5,237 and $ 7,866 , respectively, on the Notes.

Expected payments for all of the Company’s borrowings as of December 31, 2022 were as follows:

Revolving Credit Facility Interest payments

Revolving credit facility

Principal Payments Interest Payments*

2023 $ 30,000 $ 12,374

2024 — 11,926

2025 — 11,926

2026 — 11,926

2027 220,000 4,472

Total $ 250,000 $ 52,624

* Interest payments are based on effective interest rate as of December 31, 2022.

Letters of Credit

1 unchanged sentence

As of December 31, 2022 and 2021, the Company had outstanding letters of credit of $ 461 , each, that were not recognized in the consolidated balance sheets.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

Capital Structure

The Company has one class of common stock outstanding.

The Company purchased shares of common stock from employees in connection with withholding tax payments related to the vesting of restricted stock units and performance-based restricted stock units, as below:

The Company purchased shares of its common stock from employees in connection with withholding tax payments related to the vesting of restricted stock units and performance-based restricted stock units, as below:

Shares repurchased Total consideration Weighted average purchase price per share (1)

2 unchanged sentences

Twelve months ended December 31, 2020 28,052 $ 2,131 $ 75.96

(1) The weighted average purchase price per share is based on the closing price of the Company’s common stock on the Nasdaq Global Select Market on the trading day prior to the applicable vesting date of the shares of restricted stock.

On December 16, 2019, the Company’s board of directors authorized a $ 200,000 common stock repurchase program beginning January 1, 2020 through December 31, 2022 (the “2019 Repurchase Program”).

2 unchanged sentences

Repurchases may be discontinued at any time by the management.

The Company purchased shares of its common stock, including commissions, under repurchase programs, as below:

The Company purchased shares of its common stock, for a total consideration including commissions, under repurchase programs, as below:

Shares repurchased Total consideration Weighted average purchase price per share

2 unchanged sentences

Twelve months ended December 31, 2020 1,085,153 $ 77,818 $ 71.71

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 Company has not paid or declared any cash dividends on its common stock during the years ended December 31, 2022, 2021 and 2020.

The Company’s borrowings under the revolving credit facility could restrict its ability to declare or make any dividends or similar distributions.

EXLSERVICE HOLDINGS, INC.

1 unchanged sentence

December 31, 2022

(In thousands, except share and per share amounts)

(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.

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.

In connection with the settlement of the Notes, the Company issued to the Purchaser 310,394 shares of the Company's common stock.

This common stock was issued from the Company’s existing treasury shares.

The excess of issuance price of the Company’s treasury stock over its weighted average cost was recognized in additional paid-in-capital.

The Company has not paid or declared any cash dividends on its common stock during the years ended December 31, 2021, 2020 and 2019.

The Company’s line of credit with a bank could restrict, the Company’s ability to declare or make any dividends or similar distributions.

(In thousands, except per share amount and share count)

Employee Benefit Plans

4 unchanged sentences

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.

The benefit obligation has been measured as of December 31, 2021.

The India Plan is partially funded whereas the Philippines plan is unfunded.

The Company makes annual contributions to the India Plan established with insurance companies.

Fund managers manage these funds and calculate the annual contribution required to be made by the Company and manage the India Plan, including any required payouts.

These funds are managed on a cash accumulation basis and interest is declared retrospectively on March 31 of each year.

The Company earned a return of approximately 5.9 % per annum on the India Plan for the year ended December 31, 2022.

The benefit obligation has been measured as of December 31, 2022 and 2021.

The following table sets forth the activity and the funded status of the gratuity plans and the amounts recognized in the Company’s consolidated financial statements at the end of the relevant periods:

Change in projected benefit obligation, was as follows:

Change in projected benefit obligation

Projected benefit obligation as of January 1 $ 23,271 $ 20,466

3 unchanged sentences

Acquisition adjustments — 209

Actuarial loss* 539 2,425

Actuarial (gain)/loss* ( 2,639 ) 539

Effect of exchange rate changes ( 2,346 ) ( 540 )

Projected benefit obligation as of December 31 $ 21,531 $ 23,271

Unfunded amount-non-current $ 9,604 $ 8,940

Unfunded amount-current 62 14

Change in Plan Assets

Plan assets as of January 1 $ 13,605 $ 11,512

Actual return 798 777

Employer contribution 3,273 3,361

Benefits paid ( 1,737 ) ( 1,835 )

Effect of exchange rate changes ( 1,490 ) ( 210 )

Plan assets as of December 31 $ 14,449 $ 13,605

Unfunded status as of December 31 $ 7,082 $ 9,666

Unfunded amount recognized in the consolidated balance sheets

Non-current liability (included under other non-current liabilities) $ 6,971 $ 9,604

Current liability (included under accrued employee costs) 111 62

Total accrued liability $ 7,082 $ 9,666

Accumulated benefit obligation $ 14,794 $ 12,490

Accumulated benefit obligation in excess of plan assets $ 1,189 $ 978

*During the year ended December 31, 2021, actuarial loss was driven by experience adjustments on present value of benefit obligations offset by changes in actuarial assumptions.

During the year ended December 31, 2020, actuarial loss was driven by changes in actuarial assumptions, offset by experience adjustments on present value of benefit obligations.

Accumulated benefit obligation as of December 31 $ 14,447 $ 14,794

Accumulated benefit obligation in excess of plan assets as of December 31 $ ( 2 ) $ 1,189

EXLSERVICE HOLDINGS, INC.

1 unchanged sentence

December 31, 2022

(In thousands, except share and per share amounts)

Components of net periodic benefit costs, were as follows:

(In thousands, except per share amount and share count)

*During the year ended December 31, 2022, actuarial gain was driven by changes in actuarial assumptions, offset by experience adjustments on present value of benefit obligations.

During the year ended December 31, 2021, actuarial loss was driven by experience adjustments on present value of benefit obligations offset by changes in actuarial assumptions.

Components of net periodic benefit costs recognized in consolidated statements of income and actuarial loss reclassified from AOCI, were as follows:

Year ended December 31,

3 unchanged sentences

Expected return on plan assets ( 872 ) ( 796 ) ( 636 )

Amortization of actuarial (gain)/loss, gross of tax 709 394 ( 159 )

Amortization of actuarial loss, gross of tax 592 709 394

Net gratuity cost $ 4,722 $ 4,354 $ 3,428

Income tax effects on amortization of actuarial (gain)/loss ( 204 ) ( 127 ) 16

Amortization of actuarial (gain)/loss, net of tax $ 505 $ 267 $ ( 143 )

The components of actuarial gain/(loss) on retirement benefits included in accumulated other comprehensive income/(loss), excluding tax effects, were as follows:

Amortization of actuarial loss, gross of tax $ 592 $ 709 $ 394

Income tax effects on above ( 179 ) ( 204 ) ( 127 )

Amortization of actuarial loss, net of tax $ 413 $ 505 $ 267

The components of actuarial loss on retirement benefits included in AOCI, excluding tax effects, were as follows:

As of December 31,

2 unchanged sentences

Net prior service cost ( 8 ) ( 12 ) ( 15 )

Accumulated other comprehensive income/(loss), excluding tax effects $ ( 3,636 ) $ ( 3,787 ) $ ( 1,780 )

Amount recognized in AOCI, excluding tax effects $ ( 470 ) $ ( 3,636 ) $ ( 3,787 )

The weighted average actuarial assumptions used to determine benefit obligations and net gratuity cost were:

5 unchanged sentences

The discount rates are either based on current market yields on government securities or yields on government securities adjusted for a suitable risk premium, if available.

Expected benefit payments during the year ending December 31,

2027 to 2031 $ 8,006

The India Plan is partially funded whereas the Philippines plan is unfunded.

The Company makes annual contributions to the employees' gratuity fund of the India Plan established with Life Insurance Corporation of India and HDFC Standard Life Insurance Company.

Fund managers manage these funds and calculate the annual contribution required to be made by the Company and manage the India Plan, including any required payouts.

These funds are managed on a cash accumulation basis

EXLSERVICE HOLDINGS, INC.

1 unchanged sentence

December 31, 2022

(In thousands, except share and per share amounts)

and interest is declared retrospectively on March 31 of each year.

The Company earned a return of approximately 6.7 % per annum on the India Plan for the year ended December 31, 2021.

Change in Plan Assets

Plan assets at January 1, 2020 $ 8,784

Actual return 661

Employer contribution 3,099

Benefits paid* ( 869 )

Effect of exchange rate changes ( 163 )

Plan assets at December 31, 2020 $ 11,512

Actual return 777

Employer contribution 3,361

Benefits paid* ( 1,835 )

Effect of exchange rate changes ( 210 )

Plan assets at December 31, 2021 $ 13,605

* Benefits payments were substantially made from the plan assets during the year.

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.

(In thousands, except per share amount and share count)

Expected benefit payments during the year ending December 31,

2028 to 2032 $ 8,388

The Company may make discretionary contributions of up to a maximum of 3.0 % of employee compensation within certain limits.

3 unchanged sentences

Contribution to the 401(k) Plans $ 5,205 $ 3,693 $ 3,577

The Company's contribution for various defined benefit plans on behalf of employees in India, the Philippines, the Czech Republic, South Africa, Canada, Colombia, Australia and Singapore were as follows:

The Company’s contribution for various defined social security contribution plans on behalf of employees in foreign subsidiaries of the Company were as follows:

Year ended December 31,

2022 2021 2020

Contribution to the defined benefit plans $ 16,340 $ 11,332 $ 10,614

Contributions to the defined social security contribution plans $ 18,215 $ 16,340 $ 11,332

The Company conducts its operations using facilities leased under operating lease agreements that expire at various dates.

1 unchanged sentence

The lease agreements do not contain any covenants to impose any restrictions except for market-standard practice for similar lease arrangements.

The Company had performed an evaluation of its contracts with suppliers in accordance with Topic 842, Leases , and had determined that, except for leases for office facilities, motor vehicles and other equipment as described above, none of the Company’s contracts contain a lease.

In assessment of the lease term, the Company considers the extension option as part of its lease term for those lease arrangements where the Company is reasonably certain of availing the extension option.

As part of the Company’s effort to moderate the impact of COVID-19, the Company continued to evaluate its office facilities to determine where it can exit, consolidate, or otherwise optimize its use of office space.

During the years ended December 31, 2021 and 2020, the Company changed the lease term for certain of its leases and recognized the resultant amount of the remeasurement of the lease liability as an adjustment to the ROU assets.

The Company had performed an evaluation of its contracts with suppliers in accordance with ASC 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.

As part of the Company’s efforts to optimize its existing network of operations centers, the Company continued to evaluate its office facilities to determine where it can exit or consolidate its use of office space.

EXLSERVICE HOLDINGS, INC.

1 unchanged sentence

December 31, 2022

(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 determination of the incremental borrowing rate and extension option, which have an impact on measurement of lease liabilities and ROU assets.

(In thousands, except per share amount and share count)

Supplemental balance sheet information

16 unchanged sentences

The components of lease cost, which are included in the Company’s consolidated statements of income, are as follows:

Year ended December 31, 2021 Year ended December 31, 2020

Year ended December 31,

Lease cost 2022 2021

Finance lease:

4 unchanged sentences

Variable lease costs 5,033 7,621

$ 33,947 $ 35,642

Total lease cost $ 27,026 $ 34,198

3 unchanged sentences

December 31, 2022

(In thousands, except share and per share amounts)

(In thousands, except per share amount and share count)

Supplemental cash flow and other information related to leases are as follows:

Year ended December 31, 2021 Year ended December 31, 2020

Year ended December 31

Cash payments for amounts included in the measurement of lease liabilities :

10 unchanged sentences

Operating lease 6.8 % 7.2 %

The Company determines the incremental borrowing rate by adjusting the benchmark reference rates, with appropriate financing spreads applicable to the respective geographies where the leases were entered and lease specific adjustments for the effects of collateral.

During the years ended December 31, 2021 and 2020, the Company modified certain of its operating leases resulting in a reduction of its lease liabilities by $ 2,917 and $ 3,143 respectively, with a corresponding reduction in ROU assets.

As of December 31, 2021, the Company did not have any significant leases that have not yet commenced but that create significant rights and obligations for the Company.

The Company modified certain of its operating leases, resulting in a decrease of its lease liabilities by $ 2,723 , $ 2,917 and $ 3,143 , during the years ended December 31, 2022, 2021 and 2020, respectively, with a corresponding adjustment to ROU assets.

As of December 31, 2022 and 2021, the Company did not have any significant leases that have not yet commenced but that create significant rights and obligations for the Company.

During the years ended December 31, 2022, 2021 and 2020, the Company recognized $ nil impairment on ROU assets.

During the year ended December 31, 2019, the Company recognized an impairment charge on ROU assets related to its Health Integrated business of $ 1,449 , to write down the carrying value of operating lease right-of-use assets to its fair value.

This impairment charge was recorded in the consolidated statements of income under “Impairment and restructuring charges.”

Maturities of lease liabilities as of December 31, 2022 were as follows:

12 unchanged sentences

December 31, 2022

(In thousands, except share and per share amounts)

(In thousands, except per share amount and share count)

Maturities of lease liabilities as of December 31, 2021 were as follows:

30 unchanged sentences

December 31, 2022

(In thousands, except share and per share amounts)

(In thousands, except per share amount and share count)

Income taxes (deferred) recognized in AOCI were as follows:

2 unchanged sentences

Deferred taxes benefit / (expense) recognized on:

Unrealized gain on cash flow hedges $ ( 2,308 ) $ ( 1,663 ) $ ( 1,564 )

Unrealized gain/(loss) on cash flow hedges $ 5,860 $ ( 2,308 ) $ ( 1,663 )

Reclassification adjustment for cash flow hedges 455 1,530 ( 500 )

2 unchanged sentences

Reclassification adjustment for retirement benefits ( 179 ) ( 204 ) ( 127 )

Foreign currency translation gain/(loss) 3,016 1,946 ( 644 )

Total income tax benefit / (expense) recognized in AOCI $ 2,228 $ 591 $ ( 707 )

Foreign currency translation loss 10,032 3,016 1,946

Total income tax benefit recognized in AOCI $ 15,937 $ 2,228 $ 591

The effective income tax rate differs from the amount computed by applying the U.S.

3 unchanged sentences

Expected tax expense $ 39,921 $ 30,777 $ 24,219

Impact of tax holiday — ( 757 ) ( 5,920 )

Foreign tax rate differential ( 1,136 ) 1,127 ( 2,748 )

Deferred tax provision 3,801 350 2,888

Unrecognized tax benefits and interest 161 6 174

Unrecognized tax benefits 273 161 6

State taxes, net of Federal taxes 7,730 4,968 3,242

6 unchanged sentences

Tax expense $ 47,565 $ 31,850 $ 25,626

The effective tax rate decreased from 22.2 % during the year ended December 31, 2020 to 21.7 % during the year ended December 31, 2021.

The effective tax rate increased from 21.7 % during the year ended December 31, 2021 to 25.0 % during the year ended December 31, 2022.

The Company recorded income tax expense of $ 47,565 and $ 31,850 for the years ended December 31, 2022 and 2021, respectively.

The increase in income tax expense was primarily as a result of higher profit during the year ended December 31, 2021, compared to the year ended December 31, 2020, increase in state taxes and increase in non-deductible expense during the year ended December 31, 2021, partially offset by (i) the recording of higher excess tax benefits related to stock awards of $ 3,651 pursuant to ASU No.

2016-09 during the year ended December 31, 2021, compared to $ 2,378 during the year ended December 31, 2020, and (ii) the recording of a one-time deferred tax benefit of $ 2,411 on settlement of the Notes during the year ended December 31, 2021.

During the year 2018, the Company made an election to change the tax status of most of its controlled foreign corporations (“CFC”) to disregarded entities for U.S.

income tax purposes.

As a result, the Company no longer has undistributed earnings in connection with these CFCs.

The Transition Tax resulted in previously taxed income (“PTI”) which may be subject to withholding taxes and currency gains or losses upon repatriation.

The Company periodically evaluates opportunities to repatriate PTI held by its foreign subsidiaries to fund its operations in the United States and other geographies, and as and when it decides to repatriate such PTI, it may have to accrue additional taxes in accordance with local tax laws, rules and regulations in the relevant foreign jurisdictions.

The Company has adopted an accounting policy to treat Global Intangible Low-Taxed Income (“GILTI”) as a period cost.

The increase in income tax expense was primarily as a result of higher profit during the year ended December 31, 2022, compared to the year ended December 31, 2021, an increase in state taxes and an increase in non-deductible expense, partially offset by higher excess tax benefits related to stock-based compensation.

Effective for taxable years beginning after December 31, 2021, Internal Revenue Code Section 174, Amortization of Research and Experimental Expenditures , provides that research and experimentation expenses can no longer be currently deducted, instead such expenses are required to be capitalized.

Such capitalized expenses are to be amortized over a period of five and fifteen years for the U.S.

and foreign research, respectively.

However, this change has no net impact on the current year income statement due to offsetting a current tax expense of $ 24,743 with a corresponding deferred tax benefit.

The Company is under Internal Revenue Service audit for the years 2017 and 2018.

The audit process is substantially complete and is expected to conclude with no adjustments.

EXLSERVICE HOLDINGS, INC.

1 unchanged sentence

December 31, 2022

(In thousands, except share and per share amounts)

During the year ended December 31, 2021, the Company repatriated to the United States $ 66,000 (net of $ 3,494 withholding taxes) from India and $ 42,500 (net of $ 7,494 withholding taxes) from the Philippines.

As of December 31, 2021, the Company’s deferred tax assets includes $ 10,988 of withholding taxes associated with these distributions.

These distributions do not constitute a change in the Company’s permanent reinvestment assertion.

The Company bases its decision to continue to indefinitely reinvest earnings in India and the Philippines on its estimate of the working capital required to support its operations in these geographies and periodically reviews its capital initiatives to support and expand the Company’s global operations, as well as whether there exists an economically viable rate of return on its investments made in India and the Philippines as compared to those made in the United States.

The Company has benefitted from a corporate tax holiday in the Philippines for our operations centers established there over the last several years.

The tax holiday expired for few of the Company’s operations centers in the last few years and will expire for other operations centers by year 2022, which may lead to an increase in the Company’s overall tax rate.

Following the expiry of the tax exemption, income generated from operations centers in the Philippines will be taxed at the prevailing annual tax rate, which is currently 5.0 % on gross income.

The diluted earnings per share effect of the tax holiday is nil , $ 0.02 and $ 0.17 for the years ended December 31, 2021, 2020 and 2019, respectively.

The components of the deferred tax balances as of December 31, 2021 and 2020 are as follows:

(In thousands, except per share amount and share count)

The components of the deferred tax balances were as follows:

December 31, 2022 December 31, 2021

Deferred tax assets:

Tax credit carryforward $ 16,236 $ —

Tax credit carry forward $ 5,716 $ 16,236

Depreciation and amortization expense 14,734 10,722

Capitalized research and development expenses 24,743 —

Stock-based compensation 11,425 10,760

1 unchanged sentence

Net operating loss carryforwards 412 2,057

Unrealized exchange loss 408 391

Net unrealized foreign exchange loss 23,572 408

Deferred rent 3,120 4,454

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Deferred tax liabilities:

Unrealized exchange gain $ 5,840 $ 2,668

Intangible assets $ 27,807 $ 28,119

Unamortized discount on convertible notes — 2,753

Net unrealized gain on investments 6,006 5,840

Others 10,132 3,957

2 unchanged sentences

Deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the financial statement carrying values of assets and liabilities and their respective tax bases and operating loss carry forwards.

As of December 31, 2021 and 2020, the Company performed an analysis of the deferred tax asset valuation allowance for its net operating loss carryforwards for its domestic and foreign entities.

Based on this analysis, the Company continues to carry a valuation allowance of $ 188 on the deferred tax assets on certain net operating loss carryforwards, as of December 31, 2021 and 2020.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

The Company’s income tax expense also includes the impact of provisions established for uncertain income tax positions determined in accordance with ASC 740.

Tax exposures can involve complex issues and may require an extended resolution period.

Although the Company believes that it has adequately reserved for its uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different.

The Company adjusts these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate.

The Company performed an analysis of the realizability deferred tax assets as of December 31, 2022 and 2021, and recorded a valuation allowance of $ 309 and $ 188 , respectively.

The Company’s income tax expense also includes provisions established for uncertain income tax positions determined in accordance with Financial Accounting Standards Board Interpretation No.

48, Accounting for Uncertainty in Income Taxes .

The Company monitors and adjusts these reserves in light of changing facts and circumstances.

To the extent that the final tax outcome of these matters differs from the amounts recorded, such differences will impact the income tax expense in the period in which such determination is made.

The following table summarizes the activity related to the unrecognized tax benefits for the years ended December 31, 2021, 2020 and 2019.

The following table summarizes the activity related to the unrecognized tax benefits:

Year ended December 31,

2022 2021 2020

Balance as of January 1 $ 1,068 $ 907 $ 1,047

Decreases/(increases) related to prior year tax positions ( 12 ) — 69

Decreases related to prior year tax positions — ( 324 ) ( 156 )

Increases/(decreases) related to prior year tax positions 158 ( 12 ) ( 324 )

Increases related to current year tax positions 223 173 184

1 unchanged sentence

The unrecognized tax benefits as of December 31, 2022 of $ 1,449 , if recognized, would impact the effective tax rate.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

As of December 31, 2022 and 2021, the Company has no t accrued interest and penalties relating to unrecognized tax benefits.

2 unchanged sentences

As of December 31, 2022, the Company had 1,324,755 shares available for grant under the 2018 Omnibus Incentive Plan (includes 164,195 shares against vested performance-based restricted stock units for which the underlying common stock was issued subsequent to December 31, 2022).

Under the 2018 Omnibus Incentive Plan, the Compensation Committee (the “Committee”) may grant awards of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, stock bonus awards, performance based compensation awards (including cash bonus awards and market condition based awards) or any combination of the foregoing.

Under the 2018 Omnibus Incentive Plan, the Compensation and Talent Management Committee (the “Committee”) may grant awards of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, stock bonus awards, performance based compensation awards (including cash bonus awards and market condition based awards) or any combination of the foregoing.

The Committee determines which employees are eligible to receive the equity awards, the number of equity awards to be granted, the exercise price, the vesting period and the exercise period.

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Restricted stock units generally vest proportionally over a period of four years from the date of grant, unless specified otherwise.

The Company applies the provisions of ASC 718, Compensation - Stock Compensation , to account for its stock based compensation.

Under the provisions of this guidance, the estimated fair value of stock-based awards granted under stock incentive plans is recognized as compensation expense based on straight-line method over the requisite service period, which is generally the vesting period.

The following costs by nature of function related to the Company’s stock-based compensation plan are included in the consolidated statements of income:

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

Stock-based compensation expense by nature of function, as below, are included in the consolidated statements of income:

Year ended December 31,

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The Company accounts for the forfeitures as and when the actual forfeitures occur.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

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, 2020 31,265 $ 25.43 $ 1,866 1.9

Outstanding as of December 31, 2021 3,093 $ 27.62 $ 362 2.0

Granted — — — —

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Forfeited — — — —

Outstanding at December 31, 2021 3,093 $ 27.62 $ 362 2.0

Vested and exercisable at December 31, 2021 3,093 $ 27.62 $ 362 2.0

Outstanding as of December 31, 2022 3,093 $ 27.62 $ 439 1.0

Vested and exercisable as of December 31, 2022 3,093 $ 27.62 $ 439 1.0

The unrecognized compensation cost for unvested options as of December 31, 2022 was $ nil .

The Company did not grant any options during the years ended December 31, 2022, 2021 and 2020.

The aggregate intrinsic value of options exercised during the years ended December 31, 2021, 2020 and 2019 was $ 2,475 , $ 3,488 and $ 3,187 , respectively.

The following table summarizes the status of the Company’s stock options outstanding, vested and exercisable at December 31, 2021:

The aggregate intrinsic value of options exercised during the years ended December 31, 2022, 2021 and 2020 was $nil, $ 2,475 and $ 3,488 , respectively.

The following table summarizes the status of the Company’s stock options outstanding, vested and exercisable as of December 31, 2022:

Options Outstanding, Vested and Exercisable

6 unchanged sentences

Cash received from options exercised during the year $ — $ 710 $ 1,501

Restricted Stock Units

Share Matching Program

Under the Company’s 2018 Omnibus Incentive Plan (the “2018 Plan”), the Company established a share matching program (“SMP”) for executive officers and other specified employees.

Under the SMP, the Company agreed to issue a number of restricted stock units equal to the number of newly acquired shares of the Company's common stock.

For purposes of the match, “newly acquired shares” includes the employee’s first quarter 2022 open market purchase of the common stock, and crediting of equity awards vesting under any existing stock award plan of the Company as having been purchased by such employees, in an amount between $ 100 to $ 500 per such employee.

The matching restricted stock units granted under the SMP will vest in two installments, with one-third to vest on the second anniversary of the grant date and the remaining two-thirds to vest on the third anniversary of the grant date;

the newly acquired shares for which the matching restricted stock units were granted must also be held by the employee until such vesting dates.

The Company’s underlying common stock issued pursuant to the vesting of the matching restricted stock units will not be marketable or transferable for a period of two years following the vesting date.

Certain forfeiture and other conditions apply.

Restricted stock unit activity under the SMP is shown below:

EXLSERVICE HOLDINGS, INC.

1 unchanged sentence

December 31, 2022

(In thousands, except share and per share amounts)

(In thousands, except per share amount and share count)

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

Restricted Stock Units (SMP)

Number Weighted-Average

Outstanding as of December 31, 2021 — $ —

Granted 52,636 124.76

Forfeited ( 5,013 ) 124.76

Outstanding as of December 31, 2022 47,623 $ 124.76

The fair value of common stock to be issued under the SMP was determined by estimating the discount for illiquidity using the Cost of Carry model, the Chaffe model and the Finnerty model with the following assumptions:

Year ended December 31, 2022

Dividend yield —

Expected life (years) 2.0

Risk free interest rate for expected life 2.3 %

Volatility for expected life 32.3 %

Discount for illiquidity 12.9 %

As of December 31, 2022, unrecognized compensation cost of $ 4,451 is expected to be expensed over a weighted average period of 2.3 years.

Restricted Stock Units

The Committee is authorized to award restricted stock units to participants.

7 unchanged sentences

Number Weighted-

Outstanding at December 31, 2020 **

Outstanding as of December 31, 2021 **

982,187 $ 81.61

2 unchanged sentences

Forfeited ( 90,375 ) 94.96

Outstanding at December 31, 2021 **

Outstanding as of December 31, 2022 **

923,126 $ 98.71

* Includes 12,009 and 18,904 restricted stock units vested during the years ended December 31, 2022 and 2021, respectively, for which the underlying common stock is yet to be issued.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

** As of December 31, 2022 and 2021, restricted stock units vested for which the underlying common stock is yet to be issued are 174,490 and 162,481 , respectively.

11 unchanged sentences

Under the 2018 Plan, the Company grants performance-based restricted stock units (“PRSUs”) to executive officers and other specified employees.

Generally the grants provide that 50 % of the PRSUs cliff vest at the end of a three-year period based on an aggregated revenue target for a three year period (“PUs”).

The remaining 50 % is based on a market condition that is contingent on the Company's meeting the total shareholder return relative to a group of peer companies specified under the

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

program measured over a three-year performance period.

During the year ended December 31, 2021, the Company granted PRSUs that cliff vest at the end of a three year period based only on a market condition stated above.

The award recipient may earn up to two hundred percent ( 200 %) of the PRSUs granted based on the actual achievement of targets.

However, the features of the equity incentive compensation program are subject to change by the Compensation Committee of our Board of Directors.

During the year ended December 31, 2022, the Company granted 40 % of each award recipient’s equity grants in the form of PRSUs that cliff vest at the end of a three-year period based on an aggregated revenue target for a three-year period (“PU”).

The remaining 60 % of each award recipient’s equity grants are PRSUs that are based on market conditions contingent on the Company's meeting the total shareholder return relative to a group of peer companies specified under the 2018 Plan, and are measured over a three-year performance period (“MU”).

The fair value of each PU is determined based on the market price of one common share on a day prior to the date of grant, and the associated stock compensation expense is calculated on the basis that performance targets at 100 % are probable of being achieved.

2 unchanged sentences

The final number of shares issued and the related compensation cost recognized as an expense is based on a comparison of the final performance metrics to the specified targets.

The grant date fair value for the MUs is determined using a Monte Carlo simulation model and the related stock compensation expense is expensed on a straight-line basis over the vesting period.

The grant date fair value for each MU is determined using a Monte Carlo simulation model and the related stock compensation expense is expensed on a straight-line basis over the vesting period.

The stock compensation expense related to the MUs is recognized once the requisite performance period is fulfilled regardless of the extent of the market condition achieved.

6 unchanged sentences

• The correlation coefficients are used to model the way in which each entity tends to move in relation to each other are based upon the price data used to calculate the historical volatilities.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

The fair value of each MU granted to employees is estimated on the date of grant using the following weighted average assumptions:

5 unchanged sentences

Volatility for expected life 38.3 % 65.2 % 34.3 %

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

Performance restricted stock unit activity under the Company’s stock plans is shown below:

PRSU activity under the Company’s stock plans is shown below:

Revenue Based PRSUs Market Condition Based PRSUs

1 unchanged sentence

Fair Value Number Weighted Average

Outstanding at December 31, 2020 105,891 $ 72.33 105,869 $ 97.84

Outstanding as of December 31, 2021 58,864 $ 78.29 172,042 $ 113.74

Granted 53,122 119.98 79,631 155.67

2 unchanged sentences

Forfeited ( 7,654 ) 97.55 ( 18,234 ) 126.21

Outstanding at December 31, 2021 58,864 $ 78.29 172,042 $ 113.74

* Represents adjustment of shares vested in respect of PUs and MUs granted in February 2019 upon achievement of the performance targets for such awards for which the underlying common stock was issued subsequent to December 31, 2021.

Outstanding as of December 31, 2022 49,591 $ 119.99 178,712 $ 134.72

* Represents adjustment of shares vested in respect of MUs granted in February 2020 upon achievement of the performance targets for such awards for which the underlying common stock was issued subsequent to December 31, 2022.

As of December 31, 2022, unrecognized compensation cost of $ 20,066 is expected to be expensed over a weighted average period of 1.8 years.

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 consolidated statements of income.

Impairment and Restructuring Charges

In March 2020, the Company completed the wind down of the operations of the Health Integrated business, which was reported within the former Healthcare reportable segment.

The Healthcare reportable segment was based on segment reporting structure that existed prior to the Company's transition to new segment reporting structure effective January 1, 2020, which resulted in certain changes to its reportable segments.

During the year ended December 31, 2019, in connection with the wind down process, the Company recorded pre-tax costs in the consolidated statements of income under “Impairment and restructuring charges,” and paid for the wind down during the years ended December 31, 2020 and 2019.

Employee Stock Purchase Plan

On June 21, 2022, at the annual meeting of stockholders of the Company, the Company’s stockholders approved the ExlService Holdings, Inc.

2022 Employee Stock Purchase Plan (the “2022 ESPP”).

The 2022 ESPP allows eligible employees to purchase the Company’s shares of common stock through payroll deductions at a pre-specified discount to the lower of closing price of the Company’s common shares on the date of offering or the last business day of each purchase interval.

The dollar amount of shares of common stock that can be purchased under the 2022 ESPP must not exceed 15 % of the participating employee’s compensation during the offering period, subject to a cap of $ 25 per employee per calendar year.

The first offering period under the 2022 ESPP commenced on October 1, 2022 with a term of three months.

The Company has registered 800,000 shares of common stock to be reserved for issuance over the term of the 2022 ESPP.

As of December 31, 2022, 800,000 shares remain available for future issuance under the 2022 ESPP, of which 7,636 shares of common stock were eligible for purchase by employees for total proceeds of $ 1,060 for which the underlying common stock was issued subsequent to December 31, 2022.

The ESPP is compensatory and results in compensation expense.

The fair value of common stock to be issued under the ESPP was determined using the Black-Scholes option pricing model with the following assumptions:

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2022

(In thousands, except per share amount and share count)

Year ended December 31, 2022

Dividend yield —

Expected life (years) 0.3

Risk free interest rate for expected life 3.3 %

Volatility for expected life 43.6 %

Discount for illiquidity 9.9 %

The weighted-average fair value of employee stock purchase rights granted pursuant to the ESPP during the year ended December 31, 2022 was $ 20.53 .

Related Party Disclosures

In April 2022, the Company entered into a service contract for providing analytics services to The Vanguard Group Inc., which beneficially owns more than 10% of the Company’s common stock as of December 31, 2022.

During the year ended December 31, 2022, the Company recognized revenues, net of $ 2,258 related to this service contract.

The Company had outstanding accounts receivable of $ 856 related to this service contract as of December 31, 2022.

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.

3 unchanged sentences

Refer to Note 18 - Borrowings to the consolidated financial statements for further details.

The principal amount outstanding for the Notes was $ 150,000 as of December 31, 2020, and interest accrued of $ 1,313 as of December 31, 2020, related to the Investment Agreement.

The following transactions with the Purchaser were recognized by the Company in connection with the Notes:

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

Year ended December 31

2021 2020 2019

Repayment of Notes in cash $ 200,000 $ — $ —

Issuance of shares of the Company's common stock $ 36,742 $ — $ —

Repayment of the Notes in cash $ 200,000 $ —

Repayment of the Notes in shares $ 36,742 $ —

Interest expense on the Notes $ 3,442 $ 5,250

1 unchanged sentence

Capital Commitments

At December 31, 2021 and 2020, the Company had committed to spend approximately $ 8,100 and $ 6,100 under agreements to purchase property and equipment.

As of December 31, 2022 and 2021, the Company had committed to spend approximately $ 9,700 and $ 8,100 , respectively, under agreements to purchase property and equipment.

This amount is net of capital advances paid which are recognized in consolidated balance sheets as “Capital work in progress” under “Property and equipment, net.”

Other Commitments

Certain units of the Company’s Indian subsidiaries were established as 100 % Export-Oriented units or under the STPI or SEZ scheme promulgated by the Government of India.

Certain units of the Company’s Indian subsidiaries were established as 100 % Export-Oriented units or under the Software Technology Parks of India or Special Economic Zone scheme promulgated by the Government of India.

These units are exempt from customs, central excise duties, and levies on imported and indigenous capital goods, stores, and spares.

1 unchanged sentence

The Company believes, however, that these units have in the past satisfied and will continue to satisfy the required conditions.

The Company’s operations centers in the Philippines are registered with the Philippine Economic Zone Authority.

The registration provides the Company with certain fiscal incentives on the import of capital goods and local purchase of services and materials and requires ExlService Philippines, Inc.

to meet certain performance and investment criteria.

The Company believes that these centers have in the past satisfied and will continue to satisfy the required criteria.

The Company’s operations centers in the Philippines are registered as qualified Philippines Economic Zone Authority units, which provides the Company fiscal incentives on the import of capital goods and local purchase of services and materials.

The Company is required to meet certain requirements to retain the incentives.

The Company has, and will continue to, comply with the requirements to avail itself of the incentives.

Contingencies

Transfer pricing regulations generally require that any controlled intercompany transactions involving related entities be at an arm’s-length price.

Accordingly, the Company determines the appropriate transfer prices for transactions among its related entities on the basis of a detailed functional and economic analysis involving benchmarking against transactions among unrelated entities.

Tax authorities have jurisdiction to review transfer pricing results, and in the event that they determine that the transfer price applied was not appropriate, the Company may incur additional tax, interest and penalties.

The Company is currently involved in transfer pricing disputes with Indian tax authorities regarding transactions with some of its related entities.

In addition, the Company and a U.S.

subsidiary are engaged in tax litigation with Indian tax authorities regarding a permanent establishment matter.

The aggregate amount demanded by Indian tax authorities (net of advance payments) from the Company related to its transfer pricing and other corporate tax issues for tax years 2003 to 2019 and its permanent establishment issues for tax years 2003 to 2006 as of December 31, 2021 and 2020 is $ 34,276 and $ 16,748 , respectively.

The Company has made payments and/or provided bank guarantees against these demands in the amounts of $ 7,954 and $ 8,120 , respectively.

Amounts paid as deposits in respect of such assessments aggregating to $ 6,172 and $ 6,307 as of December 31, 2021 and 2020, respectively, are included in “Other assets” and amounts deposited for bank guarantees aggregating to $ 1,782 and $ 1,813 as of December 31, 2021 and 2020, respectively, are included in “Restricted cash” in the non-current assets section of the Company’s consolidated balance sheets.

Based on the facts underlying the Company’s position and its experience with these types of assessments, the Company believes that its position will more likely than not be sustained upon final examination by the tax authorities based on its technical merits as of the reporting date and accordingly has not accrued any amount with respect to these matters in its consolidated financial statements.

It is possible that the Company might receive similar orders or assessments from tax authorities for subsequent years.

Accordingly, even if these disputes are resolved, the Indian tax authorities may still serve additional orders or assessments.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2021

(In thousands, except share and per share amounts)

India’s Value Added Tax ("VAT") regime ended in June 2017 and was replaced by the current Goods and Service Tax regime.

Pursuant to reviewing the Company’s annual VAT filings, the Indian tax authorities raised aggregate VAT tax demands for tax years 2015 and 2017 in the amount $ 6,387 .

Beginning in the first quarter of 2020, the GST authorities began to reject the Company’s GST refunds in the amount of $ 3,322 , and additional refunds may be denied.

The transfer pricing regulations in the countries the Company operates in require that controlled intercompany transactions be at arm’s-length.

Accordingly, the Company determines and documents pricing for controlled intercompany transactions based on an economic analysis as prescribed in the respective regulations.

The tax authorities have jurisdiction to review the Company’s transfer pricing.

If the Company’s transfer pricing is challenged by the authorities, they could assess additional tax, interest and penalties, thereby impacting the Company’s profitability and cash flows.

The Company is currently involved in transfer pricing and related income tax disputes with Indian tax authorities.

The aggregate amount demanded by Indian tax authorities (net of advance payments) as of December 31, 2022 and 2021 is $ 37,088 and $ 34,276 , respectively.

The Company has made payments and/or provided bank guarantees against these demands in the amounts of $ 7,532 and $ 7,954 , as of December 31, 2022 and 2021, respectively.

The Company believes that its positions will more likely than not be sustained upon final examination by the tax authorities, and accordingly has not accrued any liabilities with respect to these matters in its consolidated financial statements.

India’s Value Added Tax (“VAT”) regime ended in June 2017 and was replaced by the current Goods and Service Tax (“GST”) regime.

Pursuant to reviewing the Company’s annual VAT filings, the Indian tax authorities raised aggregate VAT tax demands for tax years 2015 and 2017, in the amounts of $ 5,526 and $ 6,387 , as of December 31, 2022 and 2021, respectively.

The GST authorities rejected the Company’s refunds claims in the amounts of $ 3,866 and $ 3,322 as of December 31, 2022 and 2021, respectively.

The Company has filed appeals against these matters and believes that it is more likely than not that upon final examination its position will be sustained based on its technical merits.

Accordingly, no reserve has been provided as of December 31, 2021.

In February 2019, there was a judicial pronouncement in India with respect to defined social security contribution benefits payments interpreting certain statutory defined contribution obligations of employees and employers.

Currently some of the Company's subsidiaries in India are undergoing assessment with the statutory authorities.

As of the reporting date, it is unclear whether the interpretation set out in the pronouncement has retrospective application.

If applied retrospectively, the interpretation may result in a significant increase in contributions payable by the Company for past periods for certain of its India-based employees.

There are numerous interpretative challenges concerning the retrospective application of the judgment.

Due to such challenges and a lack of interpretive guidance, and based on legal advice, the Company believes it is currently impracticable to reliably estimate the timing and amount of any payments the Company may be required to make.

The Company will continue to monitor and evaluate its position based on future events and developments in this matter for the implications on the financial statements, if any.

In September 2020, the Indian Parliament passed various consolidating labor codes, including the Code on Social Security, 2020 (the “Indian Social Security Code”) which aims to rationalize labor laws.

Accordingly, no provision was recognized as of December 31, 2022 and 2021, respectively.

One of the Company’s subsidiaries in India has undergone an assessment with the statutory authority with respect to defined social security contribution plan.

Except for some components of the assessment for which the Company has recognized a provision in the financial statements, the Company believes that the amount demanded by such authority is not a meaningful indicator of the potential liabilities of the Company, and that the matter is without merit.

The Company is defending against the assessment order and has accordingly instituted an appeal against the order before the relevant tribunal while also making a payment under protest of the amount demanded, being a prerequisite for the appeal to be admitted.

As of the reporting date, the Company’s management does not believe that the ultimate assessment will have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows.

The Company will continue to monitor and evaluate its position based on future events and developments in this matter.

In August 2019 and September 2020, the Indian Parliament passed various consolidating labor codes, including the Code on Social Security, 2020 (the “Indian Social Security Code”) which aims to rationalize labor laws.

The Indian Social Security Code has implications on defined social security contribution plans, provision of certain benefits or facilities to employees at employer’s costs and post-retirement benefits.

Most specifically, it broadens the definition of an employee and wages and liberalizes the definition of “continuous period” for the purpose of determining employee benefits, amongst others.

Most specifically, it broadens the definition of an employee and wages and liberalizes the definition of “continuous period” for the purpose of determining employee benefits, among others.

However, the rules for the Indian Social Security Code are yet to be published and the effective date from which these changes are applicable is yet to be notified.

The Company will complete its evaluation once the subject rules are notified and will give appropriate impact in the financial statements in the period in which, the Indian Social Security Code becomes effective and the related rules to determine the financial impact are published.

From time to time, the Company, its subsidiaries, and/or their present officers or directors, on individual basis, may be or have been, named as a defendant in litigation matters, including employment-related claims.

From time to time, the Company, its subsidiaries, and/or their present officers or directors, 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.

With respect to pending litigation matters as of the reporting date, the Company believes that the damages claimed are without merit, and the Company intends to vigorously defend them.

The Company will continuously monitor developments on these matters to assess potential impacts to the financial statements.

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.

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.

The Company will continuously monitor these matters to assess potential impacts to the financial statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures