ExlService Holdings, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS EXLSERVICE HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands, except per share amount and share count) As of September 30, 2023 December 31, 2022 Assets Current assets: Cash and cash equivalents $ 122,655 $ 118,669 Short-term investments 151,581 179,027 Restricted cash 3,257 4,897 Accounts receivable, net 303,378 259,222 Other current assets 70,697 50,979 Total current assets 651,568 612,794 Property and equipment, net 96,729 82,828 Operating lease right-of-use assets, net 56,817 55,347 Restricted cash 2,047 2,055 Deferred tax assets, net 79,767 55,791 Goodwill 405,579 405,637 Other intangible assets, net 53,315 64,819 Long-term investments 5,273 34,779 Other assets 51,398 32,069 Total assets $ 1,402,493 $ 1,346,119 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 3,159 $ 7,789 Current portion of long-term borrowings 50,000 30,000 Deferred revenue 13,766 18,782 Accrued employee costs 105,535 108,100 Accrued expenses and other current liabilities 107,730 95,352 Current portion of operating lease liabilities 14,008 14,978 Income taxes payable, net 11,948 2,945 Total current liabilities 306,146 277,946 Long-term borrowings, less current portion 160,000 220,000 Operating lease liabilities, less current portion 48,445 48,155 Deferred tax liabilities, net 461 547 Other non-current liabilities 31,354 41,292 Total liabilities 546,406 587,940 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; 400,000,000 shares authorized, 202,124,185 shares issued and 165,117,859 shares outstanding as of September 30, 2023 and 199,939,880 shares issued and 166,172,220 shares outstanding as of December 31, 2022 (1) 202 200 Additional paid-in capital (1) 492,577 444,948 Retained earnings 1,043,380 899,105 Accumulated other comprehensive loss ( 136,805 ) ( 144,143 ) Total including shares held in treasury 1,399,354 1,200,110 3 Table of Contents Less: 37,006,326 shares as of September 30, 2023 and 33,767,660 shares as of December 31, 2022, held in treasury, at cost (1) ( 543,267 ) ( 441,931 ) Total stockholders’ equity 856,087 758,179 Total liabilities and stockholders’ equity $ 1,402,493 $ 1,346,119 (1) Prior period information has been adjusted to reflect the 5 -for-1 forward stock split of the Company’s common stock effected in August 2023. Refer to Note 19 – Capital Structure to the unaudited consolidated financial statements for further details. See accompanying notes to unaudited consolidated financial statements. 4 Table of Contents EXLSERVICE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share amount and share count) Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Revenues, net $ 410,971 $ 361,351 $ 1,216,610 $ 1,037,341 Cost of revenues (1) 256,002 230,462 760,691 659,185 Gross profit (1) 154,969 130,889 455,919 378,156 Operating expenses: General and administrative expenses 52,213 42,519 144,564 122,898 Selling and marketing expenses 30,943 23,879 88,674 72,034 Depreciation and amortization expense 11,583 14,380 38,192 42,057 Total operating expenses 94,739 80,778 271,430 236,989 Income from operations 60,230 50,111 184,489 141,167 Foreign exchange gain, net 409 1,504 838 4,683 Interest expense ( 3,405 ) ( 2,442 ) ( 10,030 ) ( 4,820 ) Other income, net 778 2,261 6,594 4,498 Income before income tax expense and earnings from equity affiliates 58,012 51,434 181,891 145,528 Income tax expense 14,161 12,447 37,773 34,774 Income before earnings from equity affiliates 43,851 38,987 144,118 110,754 Gain from equity-method investment 25 108 157 365 Net income attributable to ExlService Holdings, Inc. stockholders $ 43,876 $ 39,095 $ 144,275 $ 111,119 Earnings per share attributable to ExlService Holdings, Inc. stockholders (2) : Basic $ 0.26 $ 0.24 $ 0.87 $ 0.67 Diluted $ 0.26 $ 0.23 $ 0.86 $ 0.66 Weighted average number of shares used in computing earnings per share attributable to ExlService Holdings, Inc. stockholders (2) : Basic 166,159,619 166,189,165 166,707,599 166,801,730 Diluted 167,688,374 168,888,745 168,591,612 169,168,185 (1) Exclusive of depreciation and amortization expense. (2) Prior period information has been adjusted to reflect the 5 -for-1 forward stock split of the Company’s common stock effected in August 2023. Refer to Note 19 – Capital Structure to the unaudited consolidated financial statements for further details. See accompanying notes to unaudited consolidated financial statements. 5 Table of Contents EXLSERVICE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (In thousands) Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Net income $ 43,876 $ 39,095 $ 144,275 $ 111,119 Other comprehensive income/(loss): Unrealized gain/(loss) on cash flow hedges ( 7,903 ) ( 13,489 ) 8,242 ( 28,638 ) Foreign currency translation loss ( 7,782 ) ( 19,144 ) ( 2,605 ) ( 49,371 ) Reclassification adjustments (Gain)/loss on cash flow hedges (1) 32 1,567 4,261 ( 1,881 ) Retirement benefits (2) ( 22 ) 147 ( 70 ) 451 Income tax effects relating to above (3) 3,017 10,090 ( 2,490 ) 14,710 Total other comprehensive income/(loss) $ ( 12,658 ) $ ( 20,829 ) $ 7,338 $ ( 64,729 ) Total comprehensive income $ 31,218 $ 18,266 $ 151,613 $ 46,390 (1) These are reclassified to net income and are included in cost of revenues, operating expenses and interest expense, as applicable in the unaudited consolidated statements of income. Refer to Note 17 - Derivatives and Hedge Accounting to the unaudited consolidated financial statements. (2) These are reclassified to net income and are included in other income, net in the unaudited consolidated statements of income. Refer to Note 20 - Employee Benefit Plans to the unaudited consolidated financial statements. (3) These are income tax effects recognized on cash flow hedges, retirement benefits and foreign currency translation gain/(loss). Refer to Note 22 - Income Taxes to the unaudited consolidated financial statements. See accompanying notes to unaudited consolidated financial statements. 6 Table of Contents EXLSERVICE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) For the three months ended September 30, 2023 and 2022 (In thousands, except share count) Common Stock (1) Additional Paid-in Capital (1) Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Shares Amount Shares (1) Amount Balance as of June 30, 2023 201,748,635 $ 202 $ 471,962 $ 999,504 $ ( 124,147 ) ( 35,985,285 ) $ ( 513,307 ) $ 834,214 Stock issued against stock-based compensation plans 375,550 — 3,548 — — — — 3,548 Stock-based compensation — — 17,067 — — — — 17,067 Acquisition of treasury stock — — — — — ( 1,021,041 ) ( 29,960 ) ( 29,960 ) Other comprehensive income — — — — ( 12,658 ) — — ( 12,658 ) Net income — — — 43,876 — — — 43,876 Balance as of September 30, 2023 202,124,185 $ 202 $ 492,577 $ 1,043,380 $ ( 136,805 ) ( 37,006,326 ) $ ( 543,267 ) $ 856,087 Common Stock (1) Additional Paid-in Capital (1) Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Shares Amount Shares (1) Amount Balance as of June 30, 2022 198,975,805 $ 199 $ 420,147 $ 828,161 $ ( 133,374 ) ( 33,355,630 ) $ ( 429,480 ) $ 685,653 Stock issued against stock-based compensation plans 18,975 — — — — — — — Stock-based compensation — — 12,186 — — — — 12,186 Acquisition of treasury stock — — — — — ( 384,045 ) ( 11,521 ) ( 11,521 ) Other comprehensive loss — — — — ( 20,829 ) — — ( 20,829 ) Net income — — — 39,095 — — — 39,095 Balance as of September 30, 2022 198,994,780 $ 199 $ 432,333 $ 867,256 $ ( 154,203 ) ( 33,739,675 ) $ ( 441,001 ) $ 704,584 (1) Prior period information has been adjusted to reflect the 5 -for-1 forward stock split of the Company’s common stock effected in August 2023. Refer to Note 19 – Capital Structure to the unaudited consolidated financial statements for further details. 7 Table of Contents EXLSERVICE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) For the nine months ended September 30, 2023 and 2022 (In thousands, except share count) Common Stock (1) Additional Paid-in Capital (1) Retained Earnings Accumulated Other Comprehensive Income/(loss) Treasury Stock Total Shares Amount Shares (1) Amount January 1, 2023 199,939,880 $ 200 $ 444,948 $ 899,105 $ ( 144,143 ) ( 33,767,660 ) $ ( 441,931 ) $ 758,179 Stock issued against stock-based compensation plans 2,184,305 2 4,644 — — — — 4,646 Stock-based compensation — — 42,985 — — — — 42,985 Acquisition of treasury stock — — — — — ( 3,238,666 ) ( 101,336 ) ( 101,336 ) Other comprehensive income — — — — 7,338 — — 7,338 Net income — — — 144,275 — — — 144,275 Balance as of September 30, 2023 202,124,185 $ 202 $ 492,577 $ 1,043,380 $ ( 136,805 ) ( 37,006,326 ) $ ( 543,267 ) $ 856,087 Common Stock (1) Additional Paid-in Capital (1) Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Shares Amount Shares (1) Amount January 1, 2022 197,541,700 $ 198 $ 395,584 $ 756,137 $ ( 89,474 ) ( 31,084,290 ) $ ( 369,289 ) $ 693,156 Stock issued against stock-based compensation plans 1,453,080 1 ( 1 ) — — — — — Stock-based compensation — — 36,750 — — — — 36,750 Acquisition of treasury stock — — — — — ( 2,655,385 ) ( 71,712 ) ( 71,712 ) Other comprehensive loss — — — — ( 64,729 ) — — ( 64,729 ) Net income — — — 111,119 — — — 111,119 Balance as of September 30, 2022 198,994,780 $ 199 $ 432,333 $ 867,256 $ ( 154,203 ) ( 33,739,675 ) $ ( 441,001 ) $ 704,584 (1) Prior period information has been adjusted to reflect the 5 -for-1 forward stock split of the Company’s common stock effected in August 2023. Refer to Note 19 – Capital Structure to the unaudited consolidated financial statements for further details. See accompanying notes to unaudited consolidated financial statements. 8 Table of Contents EXLSERVICE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) Nine months ended September 30, 2023 2022 Cash flows from operating activities: Net income $ 144,275 $ 111,119 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 38,010 41,993 Stock-based compensation expense 42,985 36,750 Amortization of operating lease right-of-use assets 15,171 17,365 Unrealized loss/(gain) on investments 6,003 ( 475 ) Unrealized foreign currency exchange gain, net ( 862 ) ( 16,813 ) Deferred income tax benefit ( 26,555 ) ( 5,621 ) Allowance for expected credit losses 2,444 177 Fair value changes in contingent consideration 2,500 1,000 Others, net 1,384 1,240 Change in operating assets and liabilities, net of effects of acquisitions: Accounts receivable ( 46,488 ) ( 68,066 ) Other current assets ( 412 ) 2,553 Income taxes payable, net ( 12,022 ) 4,043 Other assets ( 18,792 ) ( 8,428 ) Accounts payable ( 4,624 ) ( 1,927 ) Deferred revenue 2,319 2,103 Accrued employee costs ( 1,853 ) ( 11,778 ) Accrued expenses and other liabilities 4,299 13,685 Operating lease liabilities ( 15,622 ) ( 17,831 ) Net cash provided by operating activities 132,160 101,089 Cash flows from investing activities: Purchases of property and equipment ( 41,106 ) ( 32,099 ) Proceeds from sale of property and equipment 640 197 Investment in equity affiliate ( 600 ) — Business acquisition (net of cash and cash equivalents acquired) — ( 3,322 ) Purchases of investments ( 165,021 ) ( 164,313 ) Proceeds from redemption of investments 217,525 124,355 Net cash provided by/(used for) investing activities 11,438 ( 75,182 ) Cash flows from financing activities: Principal payments of finance lease liabilities ( 120 ) ( 108 ) Proceeds from borrowings 70,000 35,000 Repayments of borrowings ( 110,000 ) ( 25,000 ) Acquisition of treasury stock ( 100,542 ) ( 71,712 ) Payment of contingent consideration ( 5,000 ) — Proceeds from ESPP contribution and exercise of stock options 4,690 — Net cash used for financing activities ( 140,972 ) ( 61,820 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 288 ) ( 9,626 ) Net increase/(decrease) in cash, cash equivalents and restricted cash 2,338 ( 45,539 ) Cash, cash equivalents and restricted cash at the beginning of the period 125,621 143,810 Cash, cash equivalents and restricted cash at the end of the period $ 127,959 $ 98,271 Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 10,580 $ 4,982 Income taxes, net of refunds $ 76,743 $ 35,192 Supplemental disclosure of non-cash investing and financing activities: Assets acquired under finance lease $ 285 $ 218 See accompanying notes to unaudited consolidated financial statements. 9 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (In thousands, except per share amount and share count) 1. Organization ExlService Holdings, Inc. (“ExlService Holdings”) is organized as a corporation under the laws of the state of Delaware. ExlService Holdings, together with its subsidiaries and affiliates (collectively, the “Company”), is a leading data analytics and digital operations and solutions company that partners with clients to improve business outcomes and unlock growth. By bringing together deep domain expertise with robust data, powerful analytics, cloud, artificial intelligence and machine learning, the Company creates agile, scalable solutions and executes complex operations for the world’s leading corporations in industries including insurance, healthcare, banking and financial services, media, and retail, among others. The Company’s data-led value creation framework enables better and faster decision making, leveraging its end-to-end data and analytics capabilities to drive improved business outcomes, and re-designing of operating models to integrate advanced technology into operational workflows. The Company embeds digital operations and solutions into clients’ businesses and introduces its data led approach to transform operations. The Company’s clients are located principally in the United States of America (“U.S.”) and the United Kingdom (“U.K.”). 2. Summary of Significant Accounting Policies (a) Basis of Preparation and Principles of Consolidation The unaudited consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The unaudited consolidated financial statements reflect all adjustments (of a normal and recurring nature) that management considers necessary for a fair presentation of such statements for the interim periods presented. The unaudited consolidated statements of income for the interim periods presented are not necessarily indicative of the results for the full year or for any subsequent period. The accompanying unaudited consolidated financial statements include the financial statements of ExlService Holdings and all of its subsidiaries. The standalone financial statements of subsidiaries are fully consolidated on a line-by-line basis. Intra-group balances and transactions, and gains and losses arising from intra-group transactions, are eliminated while preparing consolidated financial statements. The Company’s investments in equity affiliates are initially recorded at cost and any excess purchase consideration paid over proportionate share of the fair value of the net assets of the investee at the acquisition date is recognized as goodwill. The proportionate share of net income or loss of the investee after its acquisition is recognized in the unaudited consolidated statements of income. 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. GAAP. (b) Stock Split The Company recognizes the effects of a forward stock split in the financial statements if there are changes in the total par value of the increased shares upon such forward stock split. The Company reclassifies an amount equal to the par value of the increased shares resulting from the forward stock split from “Additional paid-in capital” to “Common stock.” The Company presents the effects of a forward stock split on earnings per share in the financial statements retroactively for all the periods 10 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) presented. The Company has an option to present other effects of the forward stock split, including changes in the total par value of the increased shares and count of shares of common stock, in the consolidated financial statements either retroactively for all the periods presented or only for the period in which the forward stock split of the common stock becomes effective. The Company has elected to present the effects of the forward stock split retroactively for all the periods presented. (c) Use of Estimates The preparation of the unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the unaudited consolidated statements of income during the reporting period. Although these estimates are based on management’s best assessment of the current business environment, actual results may be different from those estimates. The significant estimates and assumptions that affect the unaudited consolidated financial statements include, but are not limited to, estimates of the fair value of the identifiable intangible assets and contingent consideration, purchase price allocation, including revenue projections and the discount rate applied within the discounted cash 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, assets and obligations related to employee benefit plans, deferred tax valuation allowances, income-tax uncertainties and other contingencies, valuation of derivative financial instruments, and stock-based awards, useful life of long-lived assets and other intangible assets, 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, methods to calculate depreciation and amortization for long-lived assets and other intangible assets, and recoverability of long-lived assets, goodwill and other intangible assets. (d) Recent Accounting Pronouncements In March 2023, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2023-01, Leases (“Accounting Standards Codification (“ASC”) Topic 842”): Common Control Arrangements . This ASU provides guidance in ASC Topic 842 that leasehold improvements associated with common control leases should be (i) amortized by the lessee over the useful life of the leasehold improvements to the common control group, regardless of the lease term, as long as the lessee controls the use of the underlying asset through a lease, and (ii) accounted for as a transfer between entities under common control through an adjustment to equity if and when the lessee no longer controls the use of the underlying asset. The ASU is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted for both interim and annual financial statements that have not yet been issued. When adopted in an interim period, it must be adopted from the beginning of the year that includes that interim period. The Company is currently evaluating the impact of this ASU on its consolidated financial statements. (e) Recently adopted Accounting Pronouncements In October 2021, FASB 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, Revenue from Contract with Customers , as if it had originated the contracts. Generally, this should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements, if the acquiree prepared financial statements in accordance with U.S. GAAP. The ASU is effective for fiscal years beginning after December 15, 2022. An entity may early adopt the ASU including adoption in an interim period, with retrospective application to all business combinations within the fiscal year that includes such interim period. The adoption of this ASU is applicable for future business combinations. In July 2023, the FASB issued ASU No. 2023-03, Presentation of Financial Statements (“ASC Topic 205”), Income Statement-Reporting Comprehensive Income (“ASC Topic 220”), Distinguishing Liabilities from Equity (“ASC Topic 480”), Equity (“ASC Topic 505”), and Compensation-Stock Compensation (“ASC Topic 718”) pursuant to SEC Staff Accounting Bulletin No. 120 and amends various SEC paragraphs in the ASC. The ASU is effective immediately upon issuance and did not have a material impact on the Company’s unaudited consolidated financial statements. 11 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) 3. Segment and Geographical Information The Company is a provider of data analytics and digital operations and solutions. The Company manages and reports financial information through its four reportable segments: Insurance, Healthcare, Analytics and Emerging Business, which reflects how management reviews financial information and makes operating decisions. These business units develop client-specific solutions, build capabilities, maintain a unified go-to-market approach and are integrally responsible for service delivery, customer satisfaction, growth and profitability. The chief operating decision maker (“CODM”) generally reviews financial information such as revenues, cost of revenues and gross profit, disaggregated by the operating segments to allocate an overall budget among the operating segments. The Company does not allocate, and therefore the CODM does not evaluate, certain operating expenses, interest expense or income taxes by segment. Many of the Company’s assets are shared by multiple operating segments. The Company manages these assets on a total Company basis, not by operating segment, and therefore asset information and capital expenditures by operating segment are not presented. Revenues and cost of revenues for the three months ended September 30, 2023 and 2022, respectively, for each of the reportable segments, are as follows: Three months ended September 30, 2023 Insurance Healthcare Emerging Business Analytics Total Revenues, net $ 136,369 $ 26,177 $ 65,316 $ 183,109 $ 410,971 Cost of revenues (1) 86,435 16,533 37,599 115,435 256,002 Gross profit (1) $ 49,934 $ 9,644 $ 27,717 $ 67,674 $ 154,969 Operating expenses 94,739 Foreign exchange gain, net, interest expense and other income, net ( 2,218 ) Income tax expense 14,161 Gain from equity-method investment 25 Net income $ 43,876 (1) Exclusive of depreciation and amortization expense. Three months ended September 30, 2022 Insurance Healthcare Emerging Business Analytics Total Revenues, net $ 116,198 $ 22,820 $ 56,035 $ 166,298 $ 361,351 Cost of revenues (1) 75,041 17,119 32,363 105,939 230,462 Gross profit (1) $ 41,157 $ 5,701 $ 23,672 $ 60,359 $ 130,889 Operating expenses 80,778 Foreign exchange gain, net, interest expense and other loss, net 1,323 Income tax expense 12,447 Gain from equity-method investment 108 Net income $ 39,095 (1) Exclusive of depreciation and amortization expense. Revenues and cost of revenues for the nine months ended September 30, 2023 and 2022, respectively, for each of the reportable segments, are as follows: 12 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) Nine months ended September 30, 2023 Insurance Healthcare Emerging Business Analytics Total Revenues, net $ 390,762 $ 80,036 $ 198,677 $ 547,135 $ 1,216,610 Cost of revenues (1) 253,081 52,882 111,414 343,314 760,691 Gross profit (1) $ 137,681 $ 27,154 $ 87,263 $ 203,821 $ 455,919 Operating expenses 271,430 Foreign exchange gain, net, interest expense and other income, net ( 2,598 ) Income tax expense 37,773 Gain from equity-method investment 157 Net income $ 144,275 (1) Exclusive of depreciation and amortization expense. Nine months ended September 30, 2022 Insurance Healthcare Emerging Business Analytics Total Revenues, net $ 328,021 $ 72,027 $ 160,655 $ 476,638 $ 1,037,341 Cost of revenues (1) 210,768 52,464 92,790 303,163 659,185 Gross profit (1) $ 117,253 $ 19,563 $ 67,865 $ 173,475 $ 378,156 Operating expenses 236,989 Foreign exchange gain, net, interest expense and other income, net 4,361 Income tax expense 34,774 Gain from equity-method investment 365 Net income $ 111,119 (1) Exclusive of depreciation and amortization expense. Revenues, net by service type, were as follows: Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Digital operations and solutions (1) $ 227,862 $ 195,053 $ 669,475 $ 560,703 Analytics services 183,109 166,298 547,135 476,638 Revenues, net $ 410,971 $ 361,351 $ 1,216,610 $ 1,037,341 (1) Digital operations and solutions include revenues of the Company’s Insurance, Healthcare and Emerging Business reportable segments. Refer to the reportable segment disclosure above. The Company attributes the revenues to regions based upon the location of its customers. 13 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Revenues, net United States $ 343,135 $ 310,652 $ 1,022,883 $ 891,551 Non-United States United Kingdom 46,327 34,131 131,549 98,994 Rest of World 21,509 16,568 62,178 46,796 Total Non-United States 67,836 50,699 193,727 145,790 Revenues, net $ 410,971 $ 361,351 $ 1,216,610 $ 1,037,341 Long-lived assets by geographic area, which consist of property and equipment, net and operating lease right-of-use assets were as follows: As of September 30, 2023 December 31, 2022 Long-lived assets United States $ 62,642 $ 60,709 India 44,811 50,118 Philippines 21,895 18,406 Rest of World 24,198 8,942 Long-lived assets $ 153,546 $ 138,175 4. Revenues, net Refer to Note 3 - Segment and Geographical Information to the unaudited consolidated financial statements for revenues disaggregated by reportable segments and geography. Contract balances The following table provides information about accounts receivable, contract assets and contract liabilities from contracts with customers: As of September 30, 2023 December 31, 2022 Accounts receivable, net $ 303,378 $ 259,222 Contract assets $ 11,086 $ 2,768 Contract liabilities: Deferred revenue (consideration received in advance) $ 11,285 $ 17,079 Consideration received for process transition activities $ 13,893 $ 5,423 Accounts receivable includes $ 152,425 and $ 126,027 as of September 30, 2023 and December 31, 2022, respectively, representing unbilled receivables. The Company has accrued the unbilled receivables for work performed in accordance with the terms of contracts with customers and considers no significant performance risk associated with its unbilled receivables. Contract assets represent upfront payments such as deal signing discounts or deal signing bonuses made to customers. These costs are amortized over the expected period of the benefit and are recorded as an adjustment to transaction price and reduced from revenues. The Company’s assessment did not indicate any impairment losses on its contract assets for the periods presented. 14 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) Contract liabilities represent that portion of deferred revenue for which payments have been received in advance from customers. The Company also defers revenues attributable to certain process transition activities for which costs have been capitalized by the Company as contract fulfillment costs. Consideration received from customers, if any, relating to such transition activities are classified under contract liabilities and are included within “Deferred revenue” and “Other non-current liabilities” in the consolidated balance sheets. The revenues are recognized as (or when) the performance obligation is fulfilled under the contract with customer. Revenue recognized during the three and nine months ended September 30, 2023 and 2022, which was included in the contract liabilities balance at the beginning of the respective periods: Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Deferred revenue (consideration received in advance) $ 690 $ 2,456 $ 16,682 $ 16,326 Consideration received for process transition activities $ 373 $ 706 $ 1,381 $ 1,370 Contract acquisition and fulfillment costs The following table provides details of the Company’s contract acquisition and fulfillment costs: Contract Acquisition Costs Three months ended Nine months ended Year ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 December 31, 2022 Opening Balance $ 2,183 $ 983 $ 1,095 $ 511 $ 511 Additions 115 78 1,591 805 1,014 Amortization ( 233 ) ( 73 ) ( 621 ) ( 328 ) ( 430 ) Closing Balance $ 2,065 $ 988 $ 2,065 $ 988 $ 1,095 Contract Fulfillment Costs Three months ended Nine months ended Year ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 December 31, 2022 Opening Balance $ 21,445 $ 10,167 $ 13,871 $ 5,795 $ 5,795 Additions 3,790 2,964 12,633 8,449 15,509 Amortization ( 878 ) ( 1,170 ) ( 2,147 ) ( 2,283 ) ( 7,433 ) Closing Balance $ 24,357 $ 11,961 $ 24,357 $ 11,961 $ 13,871 There was no impairment for contract acquisition and contract fulfillment costs as of September 30, 2023 and December 31, 2022. The capitalized costs are amortized over the expected period of benefit of the contract. Allowance for expected credit losses The Company evaluates the credit risk of its customers based on a combination of various financial and qualitative factors that may affect the ability of each customer to pay. The Company considered current and anticipated future economic conditions relating to the industries of the Company’s customers and the countries where it operates. In calculating expected credit loss, the Company also considered past payment trends, credit rating and other related credit information for its significant customers to estimate the probability of default in the future. 15 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) As of September 30, 2023 December 31, 2022 Accounts receivable, including unbilled receivables $ 307,074 $ 260,554 Less: Allowance for expected credit losses ( 3,696 ) ( 1,332 ) Accounts receivable, net $ 303,378 $ 259,222 The movement in “Allowance for expected credit losses” on customer balances was as follows: Three months ended Nine months ended Year ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 December 31, 2022 Opening Balance $ 1,800 $ 844 $ 1,332 $ 573 $ 573 Additions 1,964 9 2,441 752 815 Reductions due to write-off of accounts receivables ( 70 ) — ( 78 ) ( 472 ) ( 60 ) Currency translation adjustments 2 2 1 2 4 Closing Balance $ 3,696 $ 855 $ 3,696 $ 855 $ 1,332 Concentration of credit risk To reduce credit risk, the Company conducts ongoing credit evaluations of its customers. No customer accounted for more than 10% of accounts receivable, net, as of September 30, 2023 and December 31, 2022. 5. Earnings Per Share Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding, adjusted for outstanding shares that are subject to repurchase during each period. Diluted earnings per share is computed using the weighted average number of common shares plus the potentially dilutive effect of common stock equivalents (outstanding stock options, restricted stock, restricted stock units and employee stock purchase plans) issued and outstanding at the reporting date, using the treasury stock method. Common stock equivalents that are anti-dilutive are excluded from the computation of weighted average shares outstanding. The following table sets forth the computation of basic and diluted earnings per share: Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Numerators: Net income $ 43,876 $ 39,095 $ 144,275 $ 111,119 Denominators (1) : Basic weighted average common shares outstanding 166,159,619 166,189,165 166,707,599 166,801,730 Dilutive effect of stock-based awards 1,528,755 2,699,580 1,884,013 2,366,455 Diluted weighted average common shares outstanding 167,688,374 168,888,745 168,591,612 169,168,185 Earnings per share attributable to ExlService Holdings, Inc. stockholders (1) : Basic $ 0.26 $ 0.24 $ 0.87 $ 0.67 Diluted $ 0.26 $ 0.23 $ 0.86 $ 0.66 Weighted average potentially dilutive shares considered anti-dilutive and not included in computing diluted earnings per share (1) 2,899,035 4,680 1,564,844 3,365 (1) Prior period information has been adjusted to reflect the 5 -for-1 forward stock split of the Company’s common stock effected in August 2023. Refer to Note 19 – Capital Structure to the unaudited consolidated financial statements for further details. 16 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) 6. Other Income, net Other income, net consists of the following: Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Gain on sale and mark-to-market on investments $ 1,337 $ 1,471 $ 4,076 $ 3,341 Interest and dividend income 2,106 1,457 5,480 3,674 Fair value changes of contingent consideration* ( 2,500 ) — ( 2,500 ) ( 1,000 ) Others, net ( 165 ) ( 667 ) ( 462 ) ( 1,517 ) Other income, net $ 778 $ 2,261 $ 6,594 $ 4,498 * Refer to Note 16 - Fair Value Measurements to the unaudited consolidated financial statements for further details. 7. Cash, Cash Equivalents and Restricted Cash For the purposes of unaudited statements of cash flows, cash, cash equivalents and restricted cash consist of the following: As of September 30, 2023 September 30, 2022 December 31, 2022 Cash and cash equivalents $ 122,655 $ 89,262 $ 118,669 Restricted cash (current) 3,257 7,013 4,897 Restricted cash (non-current) 2,047 1,996 2,055 Cash, cash equivalents and restricted cash $ 127,959 $ 98,271 $ 125,621 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 will mature one year after the balance sheet date. 8. Investments Investments consist of the following: As of September 30, 2023 December 31, 2022 Short-term investments Mutual funds $ 76,476 $ 110,964 Term deposits 75,105 68,063 Total Short-term investments $ 151,581 $ 179,027 Long-term investments Term deposits $ 1,078 $ 31,341 Investment in equity affiliate 4,195 3,438 Total Long-term investments $ 5,273 $ 34,779 Refer to Note 16 - Fair Value Measurements to the unaudited consolidated financial statements for further details. 17 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) 9. Property and Equipment Property and equipment, net consists of the following: As of Estimated useful lives (Years) September 30, 2023 December 31, 2022 Owned Assets: Network equipment and computers 3 - 5 $ 143,357 $ 130,218 Software 2 - 5 99,614 88,487 Leasehold improvements 3 - 8 39,470 42,890 Office furniture and equipment 3 - 8 19,407 20,211 Motor vehicles 2 - 5 727 605 Buildings 30 958 961 Land — 627 629 Capital work in progress — 15,674 14,459 319,834 298,460 Less: Accumulated depreciation and amortization ( 223,760 ) ( 216,132 ) 96,074 82,328 Right-of-use assets under finance leases: Network equipment and computers 58 82 Leasehold improvements 605 1,013 Office furniture and equipment 431 662 Motor vehicles 891 742 1,985 2,499 Less: Accumulated depreciation and amortization ( 1,330 ) ( 1,999 ) 655 500 Property and equipment, net $ 96,729 $ 82,828 Capital work in progress represents advances paid towards acquisition of property and equipment and costs incurred on internally developed software not yet ready for its intended use. During the three and nine months ended September 30, 2023, there were no material changes in estimated useful lives of property and equipment during the ordinary course of operations. The depreciation and amortization expense, excluding amortization of acquisition-related intangibles, recognized in the unaudited consolidated statements of income was as follows: Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Depreciation and amortization expense $ 8,426 $ 10,137 $ 26,682 $ 29,182 The effect of foreign exchange loss upon settlement of cash flow hedges recorded under depreciation and amortization expense, was as follows: Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Effect of foreign exchange loss $ ( 37 ) $ ( 126 ) $ ( 182 ) $ ( 64 ) 18 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) Internally developed software costs, included under Software, was as follows: As of September 30, 2023 December 31, 2022 Cost $ 42,585 $ 31,544 Less : Accumulated amortization ( 22,843 ) ( 16,134 ) Internally developed software, net $ 19,742 $ 15,410 The amortization expense on internally developed software recognized in the unaudited consolidated statements of income was as follows: Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Amortization expense $ 2,311 $ 1,832 $ 6,711 $ 4,414 As of September 30, 2023 and December 31, 2022, the Company believes no impairment exists because the long-lived asset's future undiscounted net cash flows expected to be generated exceeds its carrying value; however, there can be no assurance that long-lived assets will not be impaired in future periods. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which undiscounted cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount, the asset’s residual value, if any. It is reasonably possible that the judgments and estimates described above could change in future periods. 10. Goodwill and Other Intangible Assets Goodwill The following table sets forth details of changes in goodwill by reportable segment of the Company: Insurance Healthcare Emerging Business Analytics Total Balance as of January 1, 2023 $ 49,929 $ 21,875 $ 47,101 $ 286,732 $ 405,637 Currency translation adjustments 11 ( 2 ) ( 66 ) ( 1 ) ( 58 ) Balance as of September 30, 2023 $ 49,940 $ 21,873 $ 47,035 $ 286,731 $ 405,579 As of September 30, 2023, the Company performed an assessment to determine whether events or circumstances exist that may lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company considered current and forecasted economic and market conditions and qualitative factors, such as the Company’s performance during nine months of the current fiscal year, business forecasts for the remainder of the year, stock price movements, generation and availability of cash and expansion plans. The Company reviewed key assumptions, including revisions of projected future revenues for reporting units against the results of the annual impairment test performed during the fourth quarter of 2022. The Company did not identify any triggers or indications of potential impairment for its reporting units as of September 30, 2023. The recoverability of goodwill is dependent upon the continued growth of cash flows from the Company’s business activities. This growth is based on business forecasts and improvement in profitability of its reporting units. The Company continues to maintain its focus on cultivating long-term client relationships as well as attracting new clients. Other Intangible Assets Information regarding the Company’s intangible assets is set forth below: 19 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) As of September 30, 2023 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Finite-lived intangible assets: Customer relationships $ 99,146 $ ( 48,313 ) $ 50,833 Developed technology 3,490 ( 2,266 ) 1,224 Trade names and trademarks 1,700 ( 1,520 ) 180 Non-compete agreements 336 ( 158 ) 178 104,672 ( 52,257 ) 52,415 Indefinite-lived intangible assets: Trade names and trademarks 900 — 900 Total intangible assets $ 105,572 $ ( 52,257 ) $ 53,315 As of December 31, 2022 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Finite-lived intangible assets: Customer relationships $ 99,146 $ ( 39,848 ) $ 59,298 Developed technology 24,878 ( 20,902 ) 3,976 Trade names and trademarks 1,700 ( 1,303 ) 397 Non-compete agreements 336 ( 88 ) 248 126,060 ( 62,141 ) 63,919 Indefinite-lived intangible assets: Trade names and trademarks 900 — 900 Total intangible assets $ 126,960 $ ( 62,141 ) $ 64,819 The amortization expense recognized in the unaudited consolidated statements of income was as follows: Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Amortization expense $ 3,157 $ 4,243 $ 11,510 $ 12,875 Estimated future amortization expense related to finite-lived intangible assets as of September 30, 2023 was as follows: 2023 (October 1 - December 31) $ 3,147 2024 12,135 2025 10,699 2026 10,363 2027 9,364 2028 and thereafter 6,707 Total $ 52,415 20 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) 11. Other Current Assets Other current assets consist of the following: As of September 30, 2023 December 31, 2022 Advance income tax, net $ 26,630 $ 5,716 Receivables from statutory authorities 15,996 15,724 Prepaid expenses 15,066 18,132 Deferred contract fulfillment costs 3,091 1,178 Derivative instruments 2,757 1,526 Contract assets 2,286 904 Advances to suppliers 1,299 1,944 Others 3,572 5,855 Other current assets $ 70,697 $ 50,979 12. Other Assets Other assets consist of the following: As of September 30, 2023 December 31, 2022 Deferred contract fulfillment costs $ 21,266 $ 12,693 Contract assets 8,800 1,864 Deposits with statutory authorities 7,272 6,276 Lease deposits 5,828 6,621 Derivative instruments 2,265 820 Others 5,967 3,795 Other assets $ 51,398 $ 32,069 13. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following: As of September 30, 2023 December 31, 2022 Accrued expenses $ 55,071 $ 47,854 Payable to statutory authorities 19,067 20,430 Contingent consideration 15,600 5,000 Client liabilities 5,251 5,110 Derivative instruments 5,089 10,059 Accrued capital expenditures 3,978 4,032 Others 3,674 2,867 Accrued expenses and other current liabilities $ 107,730 $ 95,352 21 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) 14. Other Non-Current Liabilities Other non-current liabilities consist of the following: As of September 30, 2023 December 31, 2022 Retirement benefits $ 13,210 $ 12,982 Deferred transition revenue 11,807 4,408 Unrecognized tax benefits 2,329 2,329 Derivative instruments 1,534 6,218 Contingent consideration 589 13,689 Others 1,885 1,666 Other non-current liabilities $ 31,354 $ 41,292 15. Accumulated Other Comprehensive Income/(Loss) Accumulated other comprehensive income/(loss) (“AOCI”) consists of actuarial gain/(loss) on retirement benefits and foreign currency translation adjustments. In addition, the Company enters into foreign currency forward contracts and interest rate swaps, which are designated as cash flow hedges and net investment hedges, as applicable, in accordance with ASC Topic 815, Derivatives and Hedging . Cumulative changes in the fair values of cash flow hedges are recognized in AOCI on the Company’s consolidated balance sheets. The fair value changes are reclassified from AOCI to unaudited consolidated statements of income upon settlement of foreign currency forward contracts designated as cash flow hedges of a forecast transaction, whereas such changes for interest rate swaps are reclassified over the term of the contract. Fair value changes related to net investment hedges are included in AOCI and are reclassified to unaudited consolidated statements of income when a foreign operation is disposed or partially disposed. The following table sets forth the changes in AOCI during the nine months ended September 30, 2023 and 2022: Accumulated Other Comprehensive Income/(Loss) Foreign currency translation gain/(loss) Unrealized gain/(loss) on cash flow hedges Retirement benefits Total Balance as of January 1, 2023 $ ( 133,139 ) $ ( 11,303 ) $ 299 $ ( 144,143 ) Gains/(losses) recognized during the period ( 2,605 ) 8,242 — 5,637 Reclassification to net income (1) — 4,261 ( 70 ) 4,191 Income tax effects (2) 466 ( 2,900 ) ( 56 ) ( 2,490 ) Accumulated other comprehensive income/(loss) as of September 30, 2023 $ ( 135,278 ) $ ( 1,700 ) $ 173 $ ( 136,805 ) Balance as of January 1, 2022 $ ( 95,437 ) $ 8,420 $ ( 2,457 ) $ ( 89,474 ) Losses recognized during the period ( 49,371 ) ( 28,638 ) — ( 78,009 ) Reclassification to net income (1) — ( 1,881 ) 451 ( 1,430 ) Income tax effects (2) 8,898 5,948 ( 136 ) 14,710 Accumulated other comprehensive income/(loss) as of September 30, 2022 $ ( 135,910 ) $ ( 16,151 ) $ ( 2,142 ) $ ( 154,203 ) (1) Refer to Note 17 - Derivatives and Hedge Accounting and Note 20 - Employee Benefit Plans to the unaudited consolidated financial statements for reclassification to net income. (2) These are income tax effects recognized on cash flow hedges, retirement benefits and foreign currency translation gain/(loss). Refer to Note 22 - Income Taxes to the unaudited consolidated financial statements. 22 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) 16. Fair Value Measurements Assets and Liabilities Measured at Fair Value The following table sets forth the Company’s assets and liabilities that were recognized at fair value: Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Other Unobservable Inputs As of September 30, 2023 (Level 1) (Level 2) (Level 3) Total Assets Cash equivalents - Money market funds (1) $ 17,718 $ — $ — $ 17,718 Mutual funds (2) 76,476 — — 76,476 Derivative financial instruments — 5,022 — 5,022 Total $ 94,194 $ 5,022 $ — $ 99,216 Liabilities Derivative financial instruments $ — $ 6,623 $ — $ 6,623 Contingent consideration (3) — — 16,189 16,189 Total $ — $ 6,623 $ 16,189 $ 22,812 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 Assets Cash equivalents - Money market funds (1) $ 1,137 $ — $ — $ 1,137 Mutual funds (2) 110,964 — — 110,964 Derivative financial instruments — 2,346 — 2,346 Total $ 112,101 $ 2,346 $ — $ 114,447 Liabilities Derivative financial instruments $ — $ 16,277 $ — $ 16,277 Contingent consideration (3) — — 18,689 18,689 Total $ — $ 16,277 $ 18,689 $ 34,966 (1) Represents money market funds which are carried at the fair value option under ASC Topic 825 “Financial Instruments”. (2) Represents those short-term investments which are carried at the fair value option under ASC Topic 825 “Financial Instruments”. (3) Contingent consideration is presented under “Accrued Expenses and Other Current Liabilities” and “Other Non-Current Liabilities,” as applicable, in the consolidated balance sheets. Fair Value of Derivative Financial Instruments: The Company’s derivative financial instruments consist of foreign currency forward contracts and interest rate swaps. Fair values for derivative financial instruments are based on independent sources including highly rated financial institutions and are classified as Level 2. Refer to Note 17 - Derivatives and Hedge Accounting to the unaudited consolidated financial statements for further details. 23 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) Fair Value of Contingent Consideration: The fair value measurement of contingent consideration is determined using Level 3 inputs. The Company’s contingent consideration represents a component of the total purchase consideration for business acquisitions. The measurement is calculated using unobservable inputs based on the Company’s own assessment of achievement of certain performance goals. The Company estimated the fair value of the contingent consideration based on the Monte Carlo simulation model and scenario-based method. The following table summarizes the changes in the fair value of contingent consideration: Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Opening balance $ 13,689 $ 11,439 $ 18,689 $ 9,000 Acquisitions — — — 1,439 Fair value changes 2,500 — 2,500 1,000 Payments — — ( 5,000 ) — Closing balance $ 16,189 $ 11,439 $ 16,189 $ 11,439 During the three and nine months ended September 30, 2023 and 2022, there were no transfers among Level 1, Level 2 and Level 3. Financial Instruments Not Carried at Fair Value : The Company’s other financial instruments not carried at fair value consist primarily of cash and cash equivalents (except investments in money market funds, as disclosed above), short-term investments (except investments in mutual funds, as disclosed above), restricted cash, accounts receivable, net, long-term investments, accrued capital expenditures, accrued expenses, client liabilities and interest payable on borrowings for which fair values approximate their carrying amounts. The carrying value of the Company’s outstanding revolving credit facility approximates its fair value because the Company’s interest rate yield is near current market rates for comparable debt instruments. 17. Derivatives and Hedge Accounting The Company uses derivative instruments to mitigate cash flow volatility from risk of fluctuations in foreign currency exchange rates and interest rates. The Company enters into foreign currency forward contracts to hedge cash flow risks from forecasted transactions denominated in certain foreign currencies, and interest rate swaps to hedge cash flow risks from its revolving credit facility having variable interest rate obligations. These contracts qualify as cash flow hedges under ASC Topic 815, Derivatives and Hedging , and are with counterparties that are highly rated financial institutions. For derivatives in cash flow hedging relationships as of September 30, 2023 and December 31, 2022, the Company had outstanding foreign currency forward contracts totaling $ 797,400 and $ 841,620 , respectively and interest rate swaps totaling $ 75,000 , each. The Company estimates that approximately $ 2,399 of derivative losses, net, excluding tax effects, included in AOCI, representing changes in the value of cash flow hedges based on exchange rates prevailing as of September 30, 2023, could be reclassified into earnings within the next twelve months. As of September 30, 2023, the maximum outstanding term of the cash flow hedges was approximately 36 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, Derivatives and Hedging . Changes in the fair value of these financial instruments are recognized in the unaudited consolidated statements of income and are included in the foreign exchange gain/(loss) line item. The Company’s primary exchange rate exposure is with the Indian rupee, the Philippine peso and the U.K. pound sterling (GBP). The Company also has exposure to Colombian pesos (COP), the Euro (EUR), South African rand (ZAR), the Australian dollar (AUD), the Canadian dollar (CAD) and other local currencies in which it operates. 24 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) The following table sets forth the aggregate notional principal amounts of outstanding foreign currency forward contracts for derivatives not designated as hedging instruments: As of Foreign currency forward contracts denominated in: September 30, 2023 December 31, 2022 U. S. dollar (USD) 175,445 163,990 U.K. pound sterling (GBP) 10,435 8,351 Euro (EUR) 3,531 1,956 Australian dollar (AUD) 3,991 1,951 South African rand (ZAR) 122,188 — Colombian peso (COP) 2,286,550 — The following table sets forth the fair value of the foreign currency forward contracts and interest rate swaps and their location on the consolidated balance sheets: Derivatives in cash flow hedging relationships Derivatives not designated as hedging instruments As of As of September 30, 2023 December 31, 2022 September 30, 2023 December 31, 2022 Assets: Other current assets $ 2,542 $ 1,271 $ 215 $ 255 Other assets $ 2,265 $ 820 $ — $ — Liabilities: Accrued expenses and other current liabilities $ 4,941 $ 10,044 $ 148 $ 15 Other non-current liabilities $ 1,534 $ 6,218 $ — $ — The following table sets forth the effect of foreign currency forward contracts and interest rate swaps on AOCI and the unaudited consolidated statements of income: Three months ended September 30, Nine months ended September 30, Derivative financial instruments: 2023 2022 2023 2022 Unrealized gain/(loss) recognized in AOCI Derivatives in cash flow hedging relationships $ ( 7,903 ) $ ( 13,489 ) $ 8,242 $ ( 28,638 ) Gain/(loss) recognized in unaudited consolidated statements of income Derivatives not designated as hedging instruments $ ( 1,584 ) $ ( 4,889 ) $ 574 $ ( 11,245 ) 25 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) The following table sets forth the location and amount of gain/(loss) recognized in unaudited consolidated statements of income for derivatives in cash flow hedging relationships and derivatives not designated as hedging instruments: Three months ended September 30, 2023 2022 As per unaudited consolidated statements of income Gain/(loss) on derivative financial instruments As per unaudited consolidated statements of income Gain/(loss) on derivative financial instruments Derivatives in cash flow hedging relationships Location in unaudited consolidated statements of income where gain/(loss) was reclassified from AOCI Cost of revenues $ 256,002 $ ( 252 ) $ 230,462 $ ( 1,381 ) General and administrative expenses $ 52,213 18 $ 42,519 ( 109 ) Selling and marketing expenses $ 30,943 — $ 23,879 ( 6 ) Depreciation and amortization expense $ 11,583 ( 19 ) $ 14,380 ( 71 ) Interest expense $ 3,405 221 $ 2,442 — Total before tax ( 32 ) ( 1,567 ) Income tax effects on above ( 64 ) 133 Net of tax $ ( 96 ) $ ( 1,434 ) Derivatives not designated as hedging instruments Location in unaudited consolidated statements of income where gain/(loss) was recognized Foreign exchange gain/(loss), net $ 409 $ ( 1,584 ) $ 1,504 $ ( 4,889 ) $ 409 $ ( 1,584 ) $ 1,504 $ ( 4,889 ) 26 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) The following table sets forth the location and amount of gain/(loss) recognized in unaudited consolidated statements of income for derivatives in cash flow hedging relationships and derivatives not designated as hedging instruments: Nine months ended September 30, 2023 2022 As per unaudited consolidated statements of income Gain/(loss) on derivative financial instruments As per unaudited consolidated statements of income Gain/(loss) on derivative financial instruments Derivatives in cash flow hedging relationships Location in unaudited consolidated statements of income where gain/(loss) was reclassified from AOCI Cost of revenues $ 760,691 $ ( 4,148 ) $ 659,185 $ 1,396 General and administrative expenses $ 144,564 ( 357 ) $ 122,898 366 Selling and marketing expenses $ 88,674 ( 32 ) $ 72,034 23 Depreciation and amortization expense $ 38,192 ( 185 ) $ 42,057 96 Interest expense $ 10,030 461 $ 4,820 — Total before tax ( 4,261 ) 1,881 Income tax effects on above 701 ( 802 ) Net of tax $ ( 3,560 ) $ 1,079 Derivatives not designated as hedging instruments Location in unaudited consolidated statements of income where gain/(loss) was recognized Foreign exchange gain/(loss), net $ 838 $ 574 $ 4,683 $ ( 11,245 ) $ 838 $ 574 $ 4,683 $ ( 11,245 ) 18. Borrowings The following table summarizes the Company’s debt position: As of September 30, 2023 December 31, 2022 Revolving credit facility Current portion of long-term borrowings $ 50,000 $ 30,000 Long-term borrowings 160,000 220,000 Total borrowings $ 210,000 $ 250,000 Unamortized debt issuance costs for the Company’s revolving credit facility of $ 972 and $ 1,177 as of September 30, 2023 and December 31, 2022, respectively, are presented under “Other current assets” and “Other assets,” as applicable in the consolidated balance sheets. 27 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) Credit Agreement The Company held a $ 300,000 revolving credit facility pursuant to its credit agreement (the “Credit Agreement”), dated as of November 21, 2017 with certain lenders and Citibank N.A. as Administrative Agent. The 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 its 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. The revolving credit facility carried an effective interest rate as shown below: Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Effective Interest Rate 6.5 % 3.4 % 6.2 % 2.3 % As of September 30, 2023 and December 31, 2022, the Company was in compliance with all financial and non-financial covenants listed under the revolving credit facility. Expected payments for all of the Company’s borrowings as of September 30, 2023 were as follows: Revolving credit facility Principal Payments Interest Payments* 2023 (October 1 - December 31) $ 35,000 $ 3,029 2024 15,000 10,659 2025 — 10,069 2026 — 10,069 2027 160,000 3,776 Total $ 210,000 $ 37,602 * Interest payments are based on interest rate prevailing as of September 30, 2023. 28 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) Letters of Credit In the ordinary course of business, the Company provides standby letters of credit to third parties primarily for facility leases. As of each of September 30, 2023 and December 31, 2022, the Company had outstanding letters of credit of $ 461 , that were not recognized in the consolidated balance sheets. 19. Capital Structure Common Stock The Company has one class of common stock outstanding. Stock Split On June 20, 2023, the Company’s stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation, which upon filing with the State of Delaware on August 1, 2023, and effectiveness thereof, effected a 5 -for-1 forward stock split of the Company’s common stock (the “2023 Stock Split”) and an increase in the number of authorized shares of the Company’s common stock from 100,000,000 shares to 400,000,000 shares. The par value of each share of common stock, $ 0.001 , remained unchanged. Pursuant to the 2023 Stock Split, each stockholder of record on July 25, 2023 holding shares of the Company’s common stock received four additional shares of the Company’s common stock for every one share held. The additional shares were distributed after the close of business on August 1, 2023. The common shares began trading on the Nasdaq Global Select Market on a post-split basis on August 2, 2023. All share count and per share amounts in the unaudited consolidated financial statements have been retrospectively adjusted from January 1, 2022 to reflect the 2023 Stock Split as if it occurred at the beginning of the earliest period presented. An amount equal to the par value of the increased shares resulting from the 2023 Stock Split was reclassified from “Additional paid-in capital” to “Common stock.” Share Repurchases The Company purchased shares of its common stock from employees in connection with withholding tax payments related to the vesting of restricted stock units and performance-based restricted stock units, as below: Shares repurchased Total consideration Weighted average purchase price per share (1) Three months ended September 30, 2023 45,267 $ 1,324 $ 29.25 Three months ended September 30, 2022 — $ — $ — Nine months ended September 30, 2023 237,047 $ 7,853 $ 33.13 Nine months ended September 30, 2022 136,095 $ 3,191 $ 23.45 (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 October 5, 2021, the Company’s board of directors authorized a $ 300,000 common stock repurchase program beginning January 1, 2022 (the “2022 Repurchase Program”). Under the 2022 Repurchase Program, shares may be purchased by the Company from time to time from the open market and through private transactions, or otherwise, as determined by the Company’s management as market conditions warrant. Repurchases may be discontinued at any time by the management. The Company purchased shares of its common stock, for a total consideration including commissions, under the 2022 Repurchase Program, as below: 29 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) Shares repurchased Total consideration Weighted average purchase price per share Three months ended September 30, 2023 975,774 $ 28,636 $ 29.35 Three months ended September 30, 2022 384,045 $ 11,521 $ 30.00 Nine months ended September 30, 2023 3,001,619 $ 93,483 $ 31.14 Nine months ended September 30, 2022 2,519,290 $ 68,521 $ 27.20 Repurchased shares have been recorded as treasury shares and will be held until the Company’s board of directors designates that these shares be retired or used for other purposes. 20. Employee Benefit Plans The Company’s Gratuity Plan in India (the “India Plan”) provides for a lump sum payment to vested employees on retirement or upon termination of employment in an amount based on the respective employee’s salary and years of employment with the Company. In addition, the Company’s subsidiary operating in the Philippines conforms to the minimum regulatory benefit, which provide for lump sum payment to vested employees on retirement from employment in an amount based on the respective employee’s salary and years of employment with the Company (the “Philippines Plan”). Liabilities with regard to the India Plan and the Philippines Plan are determined by actuarial valuation using the projected unit credit method. Current service costs for these plans are accrued in the year to which they relate. Actuarial gains or losses or prior service costs, if any, resulting from amendments to the plans are recognized and amortized over the remaining period of service of the employees. 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 expects to earn a return of approximately 7.2 % per annum on the India Plan for the year ending on December 31, 2023. Change in Plan Assets Plan assets as of January 1, 2023 $ 14,449 Actual return 853 Employer contribution 2,921 Benefits paid* ( 1,015 ) Effect of exchange rate changes ( 78 ) Plan assets as of September 30, 2023 $ 17,130 * Benefits payments were substantially made through the plan assets during the nine months ended September 30, 2023. Components of net periodic benefit costs recognized in unaudited consolidated statements of income and actuarial (gain)/loss reclassified from AOCI, were as follows: 30 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Service cost $ 947 $ 921 $ 2,856 $ 2,869 Interest cost 392 302 1,180 938 Expected return on plan assets ( 261 ) ( 215 ) ( 788 ) ( 664 ) Amortization of actuarial (gain)/loss, gross of tax ( 22 ) 147 ( 70 ) 451 Net gratuity cost $ 1,056 $ 1,155 $ 3,178 $ 3,594 Amortization of actuarial (gain)/loss, gross of tax $ ( 22 ) $ 147 $ ( 70 ) $ 451 Income tax effects on above ( 19 ) ( 44 ) ( 56 ) ( 136 ) Amortization of actuarial (gain)/loss, net of tax $ ( 41 ) $ 103 $ ( 126 ) $ 315 The Company maintains several 401(k) plans (the “401(k) Plans”) under Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”), covering all eligible employees, as defined in the Code as a defined social security contribution plan. The Company may make discretionary contributions of up to a maximum of 3.0 % of employee compensation within certain limits. The Company’s accrual for contribution to the 401(k) Plans was as follows: Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Contribution to the 401(k) Plans $ 1,240 $ 1,097 $ 4,804 $ 4,140 The Company’s contribution for various defined social security contribution plans on behalf of employees in foreign subsidiaries of the Company was as follows: Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Contributions to the defined social security contribution plans $ 5,841 $ 4,660 $ 16,837 $ 13,422 21. Leases The Company conducts its operations using facilities leased under operating lease agreements that expire at various dates. The Company finances its use of certain motor vehicles and other equipment under various lease arrangements provided by financial institutions. The lease agreements do not contain any covenants to impose any restrictions except for market-standard practice for similar lease arrangements. The Company had performed an evaluation of its contracts with suppliers in accordance with ASC Topic 842, Leases , and had determined that, except for leases for office facilities, motor vehicles and other equipment as described above, none of the Company’s contracts contain a lease. As part of the Company’s efforts to optimize its existing network of operations centers, the Company continued to evaluate its office facilities to determine where it can exit or consolidate its use of office space. 31 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) Supplemental balance sheet information As of September 30, 2023 December 31, 2022 Operating Lease Operating lease right-of-use assets, net $ 56,817 $ 55,347 Operating lease liabilities - Current $ 14,008 $ 14,978 Operating lease liabilities - Non-current 48,445 48,155 Total operating lease liabilities $ 62,453 $ 63,133 Finance Lease Property and equipment, gross $ 1,985 $ 2,499 Accumulated depreciation ( 1,330 ) ( 1,999 ) Property and equipment, net $ 655 $ 500 Finance lease liabilities - Current $ 171 $ 164 Finance lease liabilities - Non-current 505 355 Total finance lease liabilities $ 676 $ 519 The components of lease cost, which are included in the Company’s unaudited consolidated statements of income, are as follows: Lease cost Three months ended September 30, Nine months ended September 30, Finance lease: 2023 2022 2023 2022 Amortization of right-of-use assets $ 50 $ 28 $ 127 $ 116 Interest on lease liabilities 25 14 63 42 75 42 190 158 Operating lease (a) 4,839 5,360 15,171 17,365 Variable lease costs 1,170 1,298 3,334 3,827 Total lease cost $ 6,084 $ 6,700 $ 18,695 $ 21,350 (a) Includes short-term leases, which are immaterial. Supplemental cash flow and other information related to leases are as follows: Nine months ended September 30, 2023 2022 Cash payments for amounts included in the measurement of lease liabilities : Operating cash outflows for operating leases $ 15,622 $ 17,831 Operating cash outflows for finance leases $ 63 $ 42 Financing cash outflows for finance leases $ 120 $ 108 Right-of-use assets obtained in exchange for new operating lease liabilities $ 13,477 $ 3,519 Right-of-use assets obtained in exchange for new finance lease liabilities $ 285 $ 218 Weighted average remaining lease term (in years) Finance lease 3.1 years 2.7 years Operating lease 5.6 years 5.5 years Weighted average discount rate Finance lease 14.2 % 14.4 % Operating lease 7.4 % 7.0 % 32 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) The Company modified certain of its operating leases, resulting in a net decrease of its lease liabilities by $ 1,876 and a net increase of its lease liabilities by $ 209 , during the nine months ended September 30, 2023 and 2022, respectively, with a corresponding adjustment to ROU assets. As of September 30, 2023 and December 31, 2022, the Company did not have any significant leases that have not yet commenced but that create significant rights and obligations for the Company. Maturities of lease liabilities as of September 30, 2023 were as follows: Operating Leases Finance Leases 2023 (October 1 - December 31) $ 4,632 $ 72 2024 17,468 241 2025 13,220 198 2026 12,322 167 2027 9,779 148 2028 and thereafter 20,584 65 Total lease payments 78,005 891 Less: Imputed interest 15,552 215 Present value of lease liabilities $ 62,453 $ 676 Maturities of lease liabilities as of December 31, 2022 were as follows: Operating Leases Finance Leases 2023 $ 18,711 $ 228 2024 14,846 162 2025 10,037 114 2026 8,941 88 2027 6,474 79 2028 and thereafter 19,624 — Total lease payments 78,633 671 Less: Imputed interest 15,500 152 Present value of lease liabilities $ 63,133 $ 519 22. Income Taxes The Company determines the tax provision for interim periods using an estimate of its annual effective tax rate. Each quarter, the Company updates its estimate of annual effective tax rate, and if its estimated tax rate changes, the Company makes a cumulative adjustment. The effective tax rate increased from 24.2 % during the three months ended September 30, 2022 to 24.4 % during the three months ended September 30, 2023. The Company recorded income tax expense of $ 14,161 and $ 12,447 for the three months ended September 30, 2023 and 2022, respectively. The increase in income tax expense was primarily as a result of higher profit during the three months ended September 30, 2023, compared to the three months ended September 30, 2022, and an increase in non-deductible expenses during the three months ended September 30, 2023, partially offset by higher excess tax benefits related to stock-based compensation, and higher tax credits during the three months ended September 30, 2023, compared to the three months ended September 30, 2022. The effective tax rate decreased from 23.9 % during the nine months ended September 30, 2022 to 20.8 % during the nine months ended September 30, 2023. The Company recorded income tax expense of $ 37,773 and $ 34,774 for the nine months ended September 30, 2023 and 2022, respectively. The increase in income tax expense was primarily as a result of higher profit during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, and an increase in 33 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) non-deductible expenses, partially offset by higher excess tax benefits related to stock-based compensation, and higher tax credits during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. During the nine months ended September 30, 2023, the Company’s subsidiaries in India, the United Kingdom and Australia repatriated $ 76,000 (net of $ 4,015 withholding taxes), $ 15,598 and $ 9,081 , respectively, to the United States. These distributions do not constitute a change in the Company’s permanent reinvestment assertion. Deferred income taxes recognized in AOCI were as follows: Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Deferred taxes benefit / (expense) recognized on: Unrealized gain/(loss) on cash flow hedges $ 1,370 $ 2,348 $ ( 2,199 ) $ 5,146 Reclassification adjustment for cash flow hedges 64 ( 133 ) ( 701 ) 802 Reclassification adjustment for retirement benefits ( 19 ) ( 44 ) ( 56 ) ( 136 ) Foreign currency translation adjustments 1,602 7,919 466 8,898 Total $ 3,017 $ 10,090 $ ( 2,490 ) $ 14,710 23. Stock-Based Compensation Prior period information has been adjusted to reflect the 5 -for-1 forward stock split of the Company’s common stock effected in August 2023. Refer to Note 19 – Capital Structure to the unaudited consolidated financial statements for further details. Stock-based compensation expense by nature of function, as below, are included in the unaudited consolidated statements of income: Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Cost of revenues $ 4,038 $ 2,713 $ 10,945 $ 8,485 General and administrative expenses 6,544 5,237 15,579 14,937 Selling and marketing expenses 6,485 4,236 16,461 13,328 Total $ 17,067 $ 12,186 $ 42,985 $ 36,750 Income tax benefit related to stock-based compensation (1) $ 4,340 $ 2,833 $ 16,959 $ 8,855 (1) Includes $ 462 and ($ 92 ) during the three months ended September 30, 2023 and 2022, respectively, and $ 13,172 and $ 3,532 during the nine months ended September 30, 2023 and 2022, respectively, related to discrete benefits recognized in income tax expense in accordance with ASU No. 2016-09, Compensation - Stock Compensation. As of September 30, 2023 and December 31, 2022, the Company had 3,284,270 and 6,623,775 shares, respectively, available for grant under the 2018 Omnibus Incentive Plan. 34 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) Stock Options Stock options activity under the Company’s stock-based compensation plans is shown below: Number of Stock Options Weighted Average Exercise Price Aggregate Intrinsic Value Weighted Average Remaining Contractual Life (Years) Outstanding as of December 31, 2022 15,465 $ 5.52 $ 439 1.0 Granted 1,790,695 30.14 — 9.7 Exercised ( 15,465 ) 5.52 384 — Forfeited — — — — Outstanding as of September 30, 2023 1,790,695 $ 30.14 $ — 9.7 Vested and exercisable as of September 30, 2023 — $ — $ — — Weighted average grant date fair value of per unit of stock option granted during the period $ 12.03 Stock options granted under the 2018 Omnibus Incentive Plan during the three and nine months ended September 30, 2023, have a contractual period of ten years and vest ratably over four years . The fair value of each stock option granted to employees is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: Nine months ended September 30, 2023 Dividend yield — Expected life (years) 6.25 Risk free interest rate for expected life 3.8 % Volatility for expected life 32.4 % The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. As of September 30, 2023, unrecognized compensation cost of $ 20,070 is expected to be expensed over a weighted average period of 3.8 years. The total grant date fair value of stock options exercised during the nine months ended September 30, 2023 and 2022, was $ 30 and $ nil , respectively. 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. Restricted stock unit activity under the SMP is shown below: Restricted Stock Units (SMP) Number Weighted Average Fair Value Outstanding as of December 31, 2022 238,115 $ 24.95 Granted — — Vested — — Forfeited ( 20,885 ) 24.95 Outstanding as of September 30, 2023 217,230 $ 24.95 35 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) As of September 30, 2023, unrecognized compensation cost of $ 2,710 is expected to be expensed over a weighted average period of 1.5 years. Restricted Stock Units Restricted stock unit activity under the Company’s stock-based compensation plans is shown below: Restricted Stock Units Number Weighted Average Fair Value Outstanding as of December 31, 2022* 4,615,630 $ 19.74 Granted 1,193,615 34.27 Vested ( 1,779,745 ) 18.48 Forfeited ( 332,035 ) 21.30 Outstanding as of September 30, 2023* 3,697,465 $ 24.89 * As of September 30, 2023 and December 31, 2022 restricted stock units vested for which the underlying common stock is yet to be issued are 652,640 and 872,450 respectively. As of September 30, 2023, unrecognized compensation cost of $ 66,970 is expected to be expensed over a weighted average period of 2.5 years. Performance Based Stock Awards Under the 2018 Plan, the Company grants performance-based restricted stock units (“PRSUs”) to executive officers and other specified employees. During the nine months ended September 30, 2023, 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 a 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”). PRSU activity under the Company’s stock plans is shown below: Revenue Based PRSUs Market Condition Based PRSUs Number Weighted Average Fair Value Number Weighted Average Fair Value Outstanding as of December 31, 2022 247,955 $ 24.00 893,560 $ 26.94 Granted 219,740 34.56 329,245 44.72 Vested ( 245 ) 25.94 ( 365 ) 33.55 Forfeited ( 27,495 ) 25.59 ( 87,010 ) 28.33 Outstanding as of September 30, 2023 439,955 $ 29.17 1,135,430 $ 31.99 As of September 30, 2023, unrecognized compensation cost of $ 29,509 is expected to be expensed over a weighted average period of 1.9 years. Employee Stock Purchase Plan On June 21, 2022, at the annual meeting of stockholders of the Company, the Company’s stockholders approved the ExlService Holdings, Inc. 2022 Employee Stock Purchase Plan (the “2022 ESPP”). The 2022 ESPP allows eligible employees to purchase the Company’s shares of common stock through payroll deductions at a pre-specified discount to the lower of closing price of the Company’s common shares on the date of offering or the last business day of each purchase interval. The dollar amount of shares of common stock that can be purchased under the 2022 ESPP must not exceed 15 % of the participating employee’s compensation during the offering period, subject to a cap of 36 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) $ 25 per employee per calendar year. The Company has reserved 4,000,000 shares of common stock for issuance under the 2022 ESPP. The third offering period under the 2022 ESPP commenced on July 1, 2023 with a term of six months . Activity under the Company’s 2022 ESPP is shown below: Number Total Proceeds Received Shares available for issuance as of December 31, 2022 4,000,000 Issuance of common stock related to the: First offering period ( 38,180 ) $ 1,013 Second offering period ( 130,495 ) $ 3,548 Shares available for issuance as of September 30, 2023 3,831,325 Contributions received for the third offering period up to September 30, 2023 $ 1,112 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: Second offering period of January 1, 2023 to June 30, 2023 Third offering period of July 1, 2023 to December 31, 2023 Dividend yield — — Expected life (years) 0.5 0.5 Risk free interest rate for expected life 4.7 % 5.4 % Volatility for expected life 38.9 % 25.5 % Discount for illiquidity 10.3 % 8.9 % 24. Related Party Disclosures In April 2022, the Company entered into a service contract for providing analytics services to The Vanguard Group Inc. which beneficially owns more than 10% of the Company’s common stock as of September 30, 2023. During the three months ended September 30, 2023 and 2022, the Company recognized revenues, net of $ 354 and $ 814 , respectively, related to this service contract. During the nine months ended September 30, 2023 and 2022, the Company recognized revenues, net of $ 1,684 and $ 1,388 , respectively, related to this service contract. The Company had outstanding accounts receivable, net of $ 240 and $ 856 , related to this service contract as of September 30, 2023 and December 31, 2022, respectively. 25. Commitments and Contingencies Capital Commitments As of September 30, 2023, the Company had committed to spend approximately $ 9,400 under agreements to purchase property and equipment. This amount is net of capital advances paid which are recognized in unaudited consolidated balance sheets as “Capital work in progress” under “Property and equipment, net.” On June 15, 2023, the Company, along with other limited partners, entered into a limited partnership agreement with the general partner, PNP Financial Services Fund GP I, LLC and initial limited partner and outgoing partner, to form a partnership with the name Plug and Play Financial Services Fund I, L.P. (the “Partnership”) for the primary purpose of making investments 37 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) in growth-stage technology companies. During the three months ended September 30, 2023, the Company invested $ 600 in the Partnership and is committed under the Partnership to make further investments up to an amount of $ 3,400 . Other Commitments Certain units of the Company’s Indian subsidiaries were established as 100 % Export-Oriented units or under the Software Technology Parks of India or Special Economic Zone scheme promulgated by the Government of India. These units are exempt from customs, central excise duties, and levies on imported and indigenous capital goods, stores, and spares. The Company has undertaken to pay custom duties, service taxes, levies, and liquidated damages payable, if any, in respect of imported and indigenous capital goods, stores and spares consumed duty free, in the event that certain terms and conditions are not fulfilled. The Company believes, however, that these units have in the past satisfied, and will continue to satisfy, the required conditions. The Company’s operations centers in the Philippines are registered 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 complied, and intends to continue compliance, with the requirements to avail itself of the incentives. Contingencies The transfer pricing regulations in the countries in which the Company operates 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 September 30, 2023 and December 31, 2022 is $ 36,682 and $ 37,088 , respectively. The Company has made payments and/or provided bank guarantees against these demands in the amounts of $ 7,242 and $ 7,532 , as of September 30, 2023 and December 31, 2022, 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 demands for tax years 2015 and 2017, in the amounts of $ 5,504 and $ 5,526 , as of September 30, 2023 and December 31, 2022, respectively. The GST authorities rejected the Company’s refunds claims in the amounts of $ 4,203 and $ 3,866 as of September 30, 2023 and December 31, 2022, respectively. The Company has filed appeals against these matters and believes that it is more likely than not that upon final examination its position will be sustained based on its technical merits. Accordingly, no provision was recognized as of September 30, 2023 and December 31, 2022, 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. 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 relating to employee benefits during employment and post-employment benefits. 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. 38 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2023 (In thousands, except per share amount and share count) 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 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. 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. 39 Table of Contents