EXLSERVICE HOLDINGS, INC. You should read the following discussion in connection with our unaudited consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . Some of the statements in the following discussion are forward looking statements. We have described in this Quarterly Report on Form 10-Q, the impact of the global Coronavirus Disease 2019 pandemic ("COVID-19") on our financial results for the quarter endedMarch 31, 2022 . See "Cautionary Note Regarding Forward-Looking Statements" below, and Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 for further information regarding risks and uncertainties relating to COVID-19.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the United States Private Securities Litigation Reform Act of
1995. You should not place undue reliance on these statements because they are
subject to numerous uncertainties and factors relating to our operations and
business environment, all of which are difficult to predict and many of which
are beyond our control. These statements often include words such as "may,"
"will," "should," "believe," "expect," "anticipate," "intend," "plan,"
"estimate" or similar expressions. These statements are based on assumptions
that we have made in light of our experience in the industry as well as our
perceptions of historical trends, current conditions, expected future
developments and other factors we believe are appropriate under the
circumstances. As you read and consider this Quarterly Report on Form 10-Q, you
should understand that these statements are not guarantees of performance or
results. They involve known and unknown risks, uncertainties and assumptions.
Although we believe that these forward-looking statements are based on
reasonable assumptions, you should be aware that many factors could affect our
actual financial results or results of operations and could cause actual results
to differ materially from those in the forward-looking statements. Many of the
following risks, uncertainties and other factors identified below have been, and
will be, amplified by the COVID-19 pandemic ("COVID-19"). These factors include
but are not limited to:
•the impact of COVID-19 and related response measures on our business, results
of operations and financial condition, including the impact of governmental
lockdowns and other restrictions on our operations and processes and those of
our clients and suppliers;
•our dependence on a limited number of clients in a limited number of industries and our ability to withstand the loss of a significant client;
•negative public reaction in the
•fluctuations in our earnings;
•our ability to attract and retain clients including in a timely manner;
•our ability to successfully consummate or integrate strategic acquisitions;
•our ability to accurately estimate and/or manage the costs;
•restrictions on immigration;
•our ability to hire and retain enough sufficiently trained employees to support our operations;
•our ability to grow our business or effectively manage growth and international operations;
•any changes in the senior management team;
•increasing competition in our industry;
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•telecommunications or technology disruptions or breaches, natural or other
disasters, medical epidemics or pandemics, or acts of violence or war;
•our ability to realize the entire book value of goodwill and other intangible assets from acquisitions;
•our ability to make accurate estimates and assumptions in connection with the preparation of our consolidated financial statements;
•failure to protect our intellectual property;
•regulatory, legislative and judicial developments, including changes to or the withdrawal of governmental fiscal incentives;
•changes in tax laws or decisions regarding repatriation of funds held abroad;
•ability to service debt or obtain additional financing on favorable terms;
•credit risk fluctuations in the market values of our investment and derivatives portfolios;
•legal liability arising out of customer contracts;
•technological innovation;
•our ability to meet our environmental, social and governance-related goals and targets;
•effects of political and economic conditions globally, particularly in the geographies where we operate;
•operational and information security failures arising as a result of remote work solutions adopted due to COVID-19;
•cyber security incidents, data breaches, or other unauthorized disclosure of sensitive or confidential client and employee data; and
•adverse outcome of our disputes with the tax authorities, in the geographies where we operate.
These and other factors are more fully discussed in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . These and other risks could cause actual results to differ materially from those implied by forward-looking statements in this Quarterly Report on Form 10-Q. The forward-looking statements made by us in this Quarterly Report on Form 10-Q, or elsewhere, speak only as of the date on which they were made. New risks and uncertainties come up from time to time, and it is impossible for us to predict those events or how they may affect us. We have no obligation to update any forward-looking statements in this Quarterly Report on Form 10-Q after the date of this Quarterly Report on Form 10-Q, except as required by federal securities laws. Executive Overview We are a leading 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, AI and ML, we create agile, scalable solutions and execute complex operations for the world's leading corporations in industries including insurance, healthcare, banking and financial services, media, and retail, among others. We deliver data analytics and digital operations and solutions to our clients, driving enterprise-scale business transformation initiatives that leverage our deep expertise in advanced analytics, AI, ML and cloud. We manage and report financial information through our four strategic business units: Insurance, Healthcare, Analytics and Emerging Business, which reflects how management reviews financial information and makes operating decisions. 39 -------------------------------------------------------------------------------- Table of Contents Our reportable segments are as follows: •Insurance, •Healthcare, •Analytics, and •Emerging Business. Our global delivery network, which includes highly trained industry and process specialists acrossthe United States ,Latin America ,South Africa ,Europe andAsia (primarilyIndia andthe Philippines ), is a key asset. We have operations centers inIndia ,the United States , theUnited Kingdom ,the Philippines ,Bulgaria ,Colombia ,South Africa ,Romania and theCzech Republic . OnDecember 16, 2021 , we completed the acquisition of Clairvoyant, a global data, AI, ML, and cloud services firm that helps organizations in their business transformation by maximizing the value of data through actionable insights. It provides data engineering, analytics, AI, ML, product engineering, and cloud-based solutions. The acquisition strengthens our Analytics capabilities by adding additional expertise in data engineering and cloud enablement, further supporting our clients in the insurance, healthcare, banking and financial services, and retail industries.
Continued impact of COVID-19 on Our Business
Over the course of 2020 and 2021, and continuing into first quarter of 2022, our clients, contractors, suppliers, and other partners adapted in order to conduct business activities in a COVID-19 environment. As the global economy continued to adapt to the impact of COVID-19, our clients are focused on receiving personalized customer experiences, optimizing costs and supporting resilient operating models. We remain committed to helping our clients adapt and thrive through the ongoing uncertainties caused by COVID-19 and, going forward, to the shifting business environment. Our remote working delivery capability steadily improved throughout 2021 and the first quarter of 2022. We are able to deliver a significant portion of our clients' current requirements in a remote work model given the intermittent lockdown restrictions in the locations in which we operate. However, certain clients have not authorized us to perform certain work remotely due to its sensitive nature. As ofMarch 31, 2022 , there have been minimal interruptions in our ability to provide our services and support to our clients. Working remotely has had relatively little impact on the productivity of our employees. We continue to work closely with our clients to provide consistent access to our services and have remained flexible to achieve client priorities. We continue to incur additional costs in order to ensure the continuity of our operations and support our remote work model. Such costs include purchase of desktops and laptops for our employees, software and internet connectivity devices, technology tools for productivity enhancement, transportation, and sanitization and cleaning costs of our offices and facilities. We also expect that we will continue to incur additional costs to monitor and improve operational efficiency of our remote work model, implement new information technology solutions and security measures to safeguard against information security risks and protect the health and safety of our employees as they gradually return to the office. We believe that these short-to-medium-term costs may benefit us in the long-term, as these steps have broadened our remote working capabilities, which has become a permanent feature in our future delivery model, as well as our business continuity plans. Based on our success of remote work model during the COVID-19 pandemic, we have implemented a new work standard under which employees in many of our locations, where permitted by local laws and regulations, and where the role and client requirements permit, will have the opportunity to choose between different work arrangements. These include working in a hybrid arrangement, where an employee can split time between working from the office and working from a pre-approved remote location, or a fully remote arrangement, where an employee can work entirely from a pre-approved remote location. We have begun to re-open some of our operation centers and offices globally with a focus on safety, while acting consistently with applicable local regulations. We anticipate that the ability to open these operations centers and offices will vary significantly from region to region based on a number of factors, including the availability of COVID-19 vaccines and the spread of future COVID-19 variants. Our operations centers and offices will not re-open fully until local authorities permit us to do so and our own criteria and conditions to ensure employee health and safety are satisfied. 40 -------------------------------------------------------------------------------- Table of Contents We believe our actions have been successful and that the pandemic, and our responses, have not significantly affected our business, results of operations, financial position and cash flow during the first quarter of 2022, however the full extent of the impact of the pandemic for the period beyond the first quarter of 2022 is currently uncertain and will depend on many factors that are not within our control.
For additional information and risks related to COVID-19, see Part I, Item 1A,
"Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended
Revenues
For the three months ended
We serve clients mainly inthe United States and theUnited Kingdom , with these two regions generating 85.8% and 10.0%, respectively, of our total revenues for the three months endedMarch 31, 2022 , and 85.8% and 9.5%, respectively, of our revenues for the three months endedMarch 31, 2021 . For the three months endedMarch 31, 2022 and 2021, our total revenues from our top ten clients accounted for 36.2% and 39.3% of our total revenues, respectively. Our revenue concentration with our top clients remains largely consistent year-over-year and we continue to develop relationships with new clients to diversify our client base. We believe that the loss of any of our top ten clients could have a material adverse effect on our financial performance.
Our Business
We provide data analytics and digital operations and solutions to our clients. We market our services to our existing and prospective clients through our sales and client management teams, which are aligned by key industry verticals and cross-industry domains such as finance and accounting. Our sales and client management teams operate primarily fromthe United States ,Europe andAustralia . Digital Operations and Solutions: We provide our clients with a range of digital operations and solutions from our Insurance, Healthcare and Emerging Business strategic business units, which are focused on solving complex industry problems such as the insurance claims lifecycle and financial transactions processing, and typically involve the use of agile delivery models to implement digital technologies and interventions like hyper-automation, customer experience transformation, advanced automation, robotics, enterprise architecture, end-to-end business function management and transformations. We either administer and manage these functions on an ongoing basis via longer-term arrangements or project work. For a portion of our digital operations and solutions, we hire and train employees to work at our operations centers on the relevant business operations, implement a process migration to these operations centers and then provide services either to the client or directly to the client's customers. Each client contract has different terms based on the scope, deliverables and complexity of the engagement. We also provide consulting services related to digital operations and solutions that include industry-specific digital transformational services as well as cross-industry finance and accounting services as part of the Emerging Business strategic business unit. We provide our services under contracts with our clients, which typically have terms of three or more years, with some being rolling contracts with no end dates. Typically, our clients can terminate these contracts with or without cause and with short notice periods. These contracts provide us with a relatively predictable revenue base for a substantial portion of our digital operations and solutions business. However, we have a long selling cycle for our services and the budget and approval processes of prospective clients make it difficult to predict the timing of entering into definitive agreements with new clients. Similarly, new license sales and implementation projects for our technology service platforms and other software-based services have a long selling cycle, however ongoing annual maintenance and support contracts for existing arrangements provide us with a relatively predictable revenue base. We charge for our services using various pricing models like time-and-material pricing, full-time-equivalent pricing, transaction-based pricing, outcome-based pricing, subscription-based pricing and other alternative pricing models. Outcome-based pricing arrangements are examples of non-linear pricing models where clients link revenues from platforms and solutions and the services we provide to usage or savings rather than the efforts deployed to provide these services. We continue to observe a shift in the industry pricing models toward transaction-based pricing, outcome-based pricing and other alternative pricing models. We believe this trend will continue and we use such alternative pricing models with some of our current clients and are seeking to move certain other clients from a full-time-equivalent pricing model to a transaction-based or other 41 -------------------------------------------------------------------------------- Table of Contents alternative pricing model. These alternative pricing models place the focus on operating efficiency in order to maintain or improve our gross margins. We have also observed that prospective larger clients are entering into multi-vendor relationships with regard to their outsourcing needs. We believe that the trend toward multi-vendor relationships will continue. A multi-vendor relationship allows a client to seek more favorable pricing and other contract terms from each vendor, which can result in significantly reduced gross margins from the provision of services to such client for each vendor. To the extent our large clients expand their use of multi-vendor relationships and are able to extract more favorable contract terms from other vendors, our gross margins and revenues may be reduced with regard to such clients if we are required to modify the terms of our relationships with such clients to meet competition. Analytics: Our analytics services focus on driving improved business outcomes for our clients by unlocking deep insights from data and create data driven solutions across all parts of our clients' business. We also provide care optimization and reimbursement optimization services, for our clients through our healthcare analytics solutions and services. We also offer integrated solutions to help our clients in cost containment by leveraging technology platforms, customizable and configurable analytics and expertise in healthcare reimbursements to help clients enhance their claim payment accuracy. Our teams deliver predictive and prescriptive analytics in the areas of customer acquisition and lifecycle management, risk underwriting and pricing, operational effectiveness, credit and operational risk monitoring and governance, regulatory reporting, payment integrity and care management and data management. We enhance, modernize and enrich structured and unstructured data and use a spectrum of advanced analytical tools and techniques, including our in-house ML and AI capabilities to create insights and improve decision making for our clients. Our Clairvoyant acquisition inDecember 2021 strengthens our analytics capabilities by adding additional expertise in data engineering and cloud enablement, further supporting our clients in the insurance, healthcare, banking and financial services, and retail industries. We actively cross-sell and, where appropriate, integrate our analytics services with other digital operations and solutions as part of a comprehensive offering for our clients. Our projects-based analytics services are cyclical and can be significantly affected by variations in business cycles. In addition, our projects-based analytics services are documented in contracts with terms generally not exceeding one year and may not produce ongoing or recurring business for us once the project is completed. These contracts also usually contain provisions permitting termination of the contract after a short notice period. The short-term nature and specificity of these projects could lead to fluctuations and uncertainties in the revenues generated from providing analytics services.
We anticipate that revenues from our analytics services will grow as we expand our service offerings and client base, both organically and through acquisitions.
Critical Accounting Policies and Estimates
There have been no significant changes in our critical accounting policies and estimates during the three months endedMarch 31, 2022 , as compared to the critical accounting policies and estimates referred in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under "Critical Accounting Policies and Estimates" and Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . 42 --------------------------------------------------------------------------------
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Results of Operations
The following table summarizes our results of operations for the three months
ended
Three months ended March 31,
2022 2021
(dollars in millions)
Revenues, net $ 329.2 $ 261.4
Cost of revenues(1) 207.5 158.8
Gross profit(1) 121.7 102.6
Operating expenses:
General and administrative expenses 39.9 30.7
Selling and marketing expenses 24.2 18.2
Depreciation and amortization expense 13.6 12.1
Total operating expenses 77.7 61.0
Income from operations 44.0 41.6
Foreign exchange gain, net 1.8 0.4
Interest expense (0.9) (2.5)
Other income, net 2.4 1.4
Income before income tax expense and earnings from equity affiliates
47.3 40.9
Income tax expense 11.2 9.0
Income before earnings from equity affiliates 36.1 31.9
Gain from equity-method investment 0.1 -
Net income attributable to
36.2
(1) Exclusive of depreciation and amortization expense.
Due to rounding, the numbers presented in the tables included in this Part I,
Item 2, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" may not add up precisely to the totals provided.
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Three Months Ended
Revenues.
The following table summarizes our revenues by reportable segments for the three
months ended
Three months ended March 31, Percentage
2022 2021 Change change
(dollars in millions)
Insurance $ 103.3 $ 91.1 $ 12.2 13.3 %
Healthcare 26.2 30.3 (4.1) (13.6) %
Emerging Business 50.7 37.7 13.0 34.7 %
Analytics 149.0 102.3 46.7 45.7 %
Total revenues, net $ 329.2 $ 261.4 $ 67.8 25.9 %
Revenues for the three months ended March 31, 2022 were $329.2 million , up $67.8
million , or 25.9%, compared to the three months ended March 31, 2021 , driven
primarily by revenue growth in Analytics.
Revenue growth in Insurance of $12.2 million was primarily driven by expansion
of business from our new and existing clients aggregating to $12.7 million . This
was partially offset by $0.5 million mainly attributable to the depreciation of
the Australian dollar and the Indian rupee against the U.S. dollar during the
three months ended March 31, 2022 , compared to the three months ended March 31,
2021 . Insurance revenues were 31.4% and 34.9% of our total revenues during the
three months ended March 31, 2022 and March 31, 2021 , respectively.
Revenue decline in Healthcare of $4.1 million was primarily driven by
termination of certain client contracts aggregating to $7.2 million , partially
offset by expansion of business from our existing clients aggregating to $3.1
million during the three months ended March 31, 2022 . Healthcare revenues were
7.9% and 11.6% of our total revenues during the three months ended March 31,
2022 and March 31, 2021 , respectively.
Revenue growth in Emerging Business of $13.0 million was primarily driven by
expansion of business from our new and existing clients of $13.6 million . This
was partially offset by $0.6 million mainly attributable to the depreciation of
the U.K. pound sterling and the Indian rupee against the U.S. dollar during the
three months ended March 31, 2022 , compared to the three months ended March 31,
2021 . Emerging Business revenues were 15.4% and 14.4% of our total revenues
during the three months ended March 31, 2022 and March 31, 2021 , respectively.
Revenue growth in Analytics of $46.7 million was attributable to the higher
volumes in our annuity and project based engagements from our new and existing
clients of $36.9 million , and contribution from our acquisition of Clairvoyant
in December 2021 of $10.2 million . This was partially offset by $0.4 million
mainly attributable to the depreciation of the U.K. pound sterling against the
U.S. dollar during the three months ended March 31, 2022 , compared to the three
months ended March 31, 2021 . Analytics revenues were 45.3% and 39.1% of our
total revenues during the three months ended March 31, 2022 and March 31, 2021 ,
respectively.
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Cost of Revenues and Gross Margin: The following table sets forth cost of revenues and gross margin of our reportable segments.
Cost of Revenues Gross Margin
Three months ended March 31, Percentage change Three months ended March 31, Change
2022 2021 Change 2022 2021
(dollars in millions)
Insurance $ 65.1 $ 56.1 $ 9.0 16.0 % 37.0 % 38.5 % (1.5) %
Healthcare 17.6 17.4 0.2 1.5 % 32.5 % 42.5 % (10.0) %
Emerging Business 29.2 20.8 8.4 40.2 % 42.4 % 44.7 % (2.3) %
Analytics 95.6 64.5 31.1 48.2 % 35.9 % 37.0 % (1.1) %
Total $ 207.5 $ 158.8 $ 48.7 30.7 % 37.0 % 39.2 % (2.2) %
For the three months ended March 31, 2022 , cost of revenues was $207.5 million ,
compared to $158.8 million for the three months ended March 31, 2021 , an
increase of $48.7 million , or 30.7%. Our gross margin for the three months ended
March 31, 2022 was 37.0%, compared to 39.2% for the three months ended March 31,
2021 , a decrease of 220 basis points ("bps").
The increase in cost of revenues in Insurance of $9.0 million during the three
months ended March 31, 2022 was primarily due to increases in employee-related
costs of $8.2 million on account of higher headcount, performance incentives and
wage inflation, and higher technology costs of $1.3 million on account of
increased leverage of remote work model, partially offset by foreign exchange
gain, net of hedging of $0.5 million . Gross margin in Insurance decreased by 150
bps during the three months ended March 31, 2022 , compared to the three months
ended March 31, 2021 , primarily due to higher employee-related costs during the
three months ended March 31, 2022 , compared to the three months ended March 31,
2021 .
The increase in cost of revenues in Healthcare of $0.2 million during the three
months ended March 31, 2022 was primarily due to increases in employee-related
costs of $0.6 million on account of wage inflation and higher performance
incentives, partially offset by lower travel costs of $0.4 million . Gross margin
in Healthcare decreased by 1,000 bps during the three months ended March 31,
2022 , compared to the three months ended March 31, 2021 , primarily due to lower
revenues and higher operating expenses associated with the termination of client
contracts during the three months ended March 31, 2022 , compared to the three
months ended March 31, 2021 .
The increase in cost of revenues in Emerging Business of $8.4 million during the
three months ended March 31, 2022 was primarily due to increases in
employee-related costs of $7.5 million on account of higher headcount,
performance incentives and wage inflation, higher technology costs of $1.2
million on account of increased leverage of remote work model and higher travel
costs $0.5 million , partially offset by foreign exchange gain, net of hedging
$0.8 million . Gross margin in Emerging Business decreased by 230 bps during the
three months ended March 31, 2022 , compared to the three months ended March 31,
2021 , primarily due to lower margins in certain new clients due to ramp-ups and
higher employee-related costs during the three months ended March 31, 2022 ,
compared to the three months ended March 31, 2021 .
The increase in cost of revenues in Analytics of $31.1 million during the three
months ended March 31, 2022 was primarily due to increases in employee-related
costs of $28.1 million on account of higher headcount, performance incentives
and wage inflation, including incremental cost related to our acquisition of
Clairvoyant in December 2021 of $7.0 million . The remaining increase was
attributable to higher travel costs $1.0 million , higher technology costs of
$0.5 million on account of increased leverage of remote work model and higher
other operating costs of $2.4 million . This was partially offset by foreign
exchange gain, net of hedging of $0.9 million . Gross margin in Analytics
decreased by 110 bps during the three months ended March 31, 2022 , compared to
the three months ended March 31, 2021 , primarily due to higher employee-related
costs during the three months ended March 31, 2022 , compared to the three months
ended March 31, 2021 .
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Selling, General and Administrative ("SG&A") Expenses.
Three months ended March 31, Change Percentage
2022 2021 change
(dollars in millions)
General and administrative expenses $ 39.9 $ 30.7 $ 9.2 30.1 %
Selling and marketing expenses 24.2 18.2 6.0 32.5 %
Selling, general and administrative expenses $ 64.1 $ 48.9 $ 15.2 31.0 %
As a percentage of revenues 19.5 % 18.7 %
The increase in SG&A expenses of $15.2 million was primarily due to higher
employee-related costs of $13.0 million on account of higher headcount,
performance incentives and wage inflation, including incremental cost related to
our acquisition of Clairvoyant in December 2021 , increase in technology cost of
$0.7 million on account of continued investments in digital capabilities, higher
travel costs $0.6 million and other operating costs of $1.5 million , partially
offset by foreign exchange gain, net of hedging of $0.6 million .
Depreciation and Amortization.
Three months ended March 31, Change Percentage
2022 2021 change
(dollars in millions)
Depreciation expense $ 9.1 $ 8.7 $ 0.4 4.3 %
Intangible amortization expense 4.5 3.4 1.1 33.5 %
Depreciation and amortization expense $ 13.6 $ 12.1 $ 1.5 12.4 %
As a percentage of revenues 4.1 % 4.6 %
The increase in intangibles amortization expense of$1.1 million was primarily due to amortization of intangibles associated with our acquisition of Clairvoyant inDecember 2021 , partially offset by decrease in intangibles amortization expense due to end of useful lives for certain intangible assets during the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 . The increase in depreciation expense of$0.4 million was primarily due to depreciation related to our investments in new operating centers and internally developed software of$0.5 million , partially offset by foreign exchange gain, net of hedging$0.1 million , during the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 . Income from Operations. Income from operations increased by$2.4 million , or 5.8%, from$41.6 million for the three months endedMarch 31, 2021 to$44.0 million for the three months endedMarch 31, 2022 , primarily due to higher revenues, partially offset by higher cost of revenues and higher SG&A expenses during the three months endedMarch 31, 2022 . As a percentage of revenues, income from operations decreased from 15.9% for the three months endedMarch 31, 2021 to 13.4% for the three months endedMarch 31, 2022 . Foreign Exchange Gain/(Loss). Foreign exchange gains and losses are primarily attributable to the movement of theU.S. dollar against the Indian rupee, theU.K. pound sterling, the Philippine peso and the South African ZAR during the three months endedMarch 31, 2022 . The average exchange rate of theU.S. dollar against the Indian rupee increased from 73.17 during the three months endedMarch 31, 2021 to 75.25 during the three months endedMarch 31, 2022 . The average exchange rate of theU.K. pound sterling against theU.S. dollar decreased from 1.38 during the three months endedMarch 31, 2021 to 1.33 during the three months endedMarch 31, 2022 . The average exchange rate of theU.S. dollar against the Philippine peso increased from 48.39 during the three months endedMarch 31, 2021 to 51.32 during the three months endedMarch 31, 2022 . The average exchange rate of theU.S. dollar against the South African ZAR increased from 15.02 during the three months endedMarch 31, 2021 to 15.15 during the three months endedMarch 31, 2022 . We recorded a net foreign exchange gain of$1.8 million for the three months endedMarch 31, 2022 compared to the net foreign exchange gain of$0.4 million for the three months endedMarch 31, 2021 . 46 -------------------------------------------------------------------------------- Table of Contents Interest expense. Interest expense decreased from$2.5 million for the three months endedMarch 31, 2021 to$0.9 million for the three months endedMarch 31, 2022 , primarily due to settlement of outstanding obligations under the Notes (as defined under Note 17 - Borrowings-Convertible Senior Notes to our unaudited consolidated financial statements") onAugust 27, 2021 , and lower effective interest rates of 1.3% under our Credit Facility during the three months endedMarch 31, 2022 , compared to 2.0% during the three months endedMarch 31, 2021 . Other Income, net. Three months ended March 31, Percentage 2022 2021 Change change (dollars in millions) Gain on sale and mark-to-market of mutual funds and money market funds$ 1.2 $ 1.1 $ 0.1 12.1 % Interest and dividend income 1.4 0.6 0.8 127.6 % Other, net (0.2) (0.3) 0.1 (33.9) % Other income, net$ 2.4 $ 1.4 $ 1.0 71.0 % Other income, net increased by$1.0 million , from$1.4 million for the three months endedMarch 31, 2021 to$2.4 million for the three months endedMarch 31, 2022 , primarily due to interest on income tax refunds of$0.7 million during the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 . Income Tax Expense. The effective tax rate increased from 21.9% during the three months endedMarch 31, 2021 to 23.7% during the three months endedMarch 31, 2022 . We recorded income tax expense of$11.2 million and$9.0 million for the three months endedMarch 31, 2022 and 2021, respectively. The increase in income tax expense was primarily as a result of higher profit during the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , and an increase in non-deductible expenses, partially offset by higher excess tax benefits during the three months endedMarch 31, 2022 . Net Income. Net income increased from$31.9 million for the three months endedMarch 31, 2021 to$36.2 million for the three months endedMarch 31, 2022 , primarily due to increase in income from operations of$2.4 million , lower interest expense of$1.6 million , higher foreign exchange gain, net of$1.5 million , higher other income, net of$1.0 million , partially offset by higher income tax expense of$2.2 million . As a percentage of revenues, net income decreased from 12.2% for the three months endedMarch 31, 2021 to 11.0% for the three months endedMarch 31, 2022 .
Liquidity and Capital Resources
Three months ended March 31,
2022 2021
(dollars in millions)
Opening cash, cash equivalents and restricted cash $ 143.8 $ 225.5
Net cash (used for)/provided by operating activities (26.9) 15.2
Net cash used for investing activities (4.7) (26.0)
Net cash provided by/(used for) financing activities 3.6 (29.0)
Effect of exchange rate changes (0.8) (1.0)
Closing cash, cash equivalents and restricted cash $
115.0
As ofMarch 31, 2022 and 2021, we had$269.2 million and$375.8 million , respectively, in cash, cash equivalents and short-term investments, of which$232.6 million , and$337.5 million , respectively, is located in foreign jurisdictions that upon distribution may be subject to withholding and other taxes. We periodically evaluate opportunities regarding distribution to fund our operations inthe United States and other geographies, and as and when we decide to distribute, we may have to accrue additional taxes in accordance with local tax laws, rules and regulations in the relevant foreign jurisdictions. The distributions do not constitute a change in our permanent reinvestment assertion. We base our decision to continue to indefinitely reinvest earnings in relevant foreign jurisdictions on our estimate of the working capital required to support our operations in foreign geographies and periodically review our capital initiatives to support and expand our global operations, as well as whether there 47 --------------------------------------------------------------------------------
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exists an economically viable rate of return on our investments made in relevant
foreign jurisdictions as compared to those made in
Operating Activities:
Net cash used for operating activities was$26.9 million for the three months endedMarch 31, 2022 compared to net cash provided by operating activities of$15.2 million for the three months endedMarch 31, 2021 , reflecting higher working capital needs, offset by higher cash earnings. The major drivers contributing to the decrease of$42.1 million included the following: •Changes in accounts receivable, including unbilled receivable and advance billings, contributed to a lower cash flow of$12.0 million in the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . The decrease was a result of the higher accounts receivable resulting from revenue growth. Lower cash flows were also affected by our accounts receivable days sales outstanding, which increased to 64 days as ofMarch 31, 2022 from 54 days as ofMarch 31, 2021 . •Decrease in accrued employee costs, offset by an increase in accrued expenses and other liabilities contributed to a lower cash flow of$31.3 million in the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . The decrease was primarily due to higher payment (net of accruals) of annual performance incentives of$36.7 million , offset by higher employee costs accruals of$2.6 million and higher accrued expenses due to an increase in our cost base to support revenue growth of$2.8 million . •Increase in net income of$4.3 million in the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 , was primarily due to an increase in income from operations of$2.4 million driven by higher revenues, higher other income, net of$2.4 million and lower interest expense of$1.6 million , partially offset by higher income tax expense of$2.2 million . •Other drivers decreasing cash flows in the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 included: income tax payments, net of refunds, of$3.0 million , primarily due to higher advance income tax payments on higher net income. Investing Activities: Cash flows used for investing activities were$4.7 million for the three months endedMarch 31, 2022 as compared to cash flows used for investing activities of$26.0 million for the three months endedMarch 31, 2021 . The decrease of$21.3 million was primarily due to higher net redemption of investments of$12.7 million during the three months endedMarch 31, 2022 as compared to net purchase of investments of$13.5 million during the three months endedMarch 31, 2021 . This was partially offset by higher capital expenditures for purchase of long-lived assets, including investments in infrastructure, technology assets, software and product developments of$3.5 million during the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 , and payment of a portion of purchase consideration for our acquisition of Clairvoyant inDecember 2021 of$1.4 million , during the three months endedMarch 31, 2022 . Financing Activities: Cash flows provided by financing activities were$3.6 million during the three months endedMarch 31, 2022 as compared to cash flows used for financing activities of$29.0 million during the three months endedMarch 31, 2021 . The increase of$32.6 million was primarily due to net proceeds of$35.0 million under our revolving Credit Facility during the three months endedMarch 31, 2022 . This was partially offset by higher purchases of treasury stock by$2.4 million under our share repurchase program during the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 . We expect to use cash from operating activities to maintain and expand our business by making investments, primarily related to new facilities and capital expenditures associated with leasehold improvements to build our facilities, digital capabilities and purchase telecommunications equipment and computer hardware and software in connection with managing client operations.
We incurred
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In connection with any tax assessment orders that have been issued or may be
issued against us or our subsidiaries, we may be required to deposit additional
amounts with respect to such assessment orders (see Note 23 - Commitments and
Contingencies to our unaudited consolidated financial statements herein for
further details). We anticipate that we will continue to rely upon cash from
operating activities to finance our working capital needs, capital expenditures
and smaller acquisitions. If we have significant growth through acquisitions, we
may need to obtain additional financing.
We believe that our existing cash, cash equivalents and short-term investments
and sources of liquidity will be sufficient to satisfy our cash requirements
over the next 12 months. Our future cash requirements will depend on many
factors, including our rate of revenue growth, our investments in strategic
initiatives, applications or technologies, operation centers and acquisition of
complementary businesses, continued purchases under our board-authorized stock
repurchase program, which may require the use of significant cash resources
and/or additional financing. Although we anticipate that we will continue to
rely upon cash from operating activities to finance most of our above mentioned
requirements, if we have significant growth through acquisitions, we may need to
obtain additional financing.
In the normal course of business, we enter into contracts and commitments that
obligate us to make payments in the future. These obligations include
borrowings, including interest obligations, purchase commitments, operating and
finance lease commitments, employee benefit payments under Gratuity plans and
uncertain tax positions. See Note 17 - Borrowings, Note 20 - Leases, and Note 23
- Commitments and Contingencies to our unaudited consolidated financial
statements herein for further information on material cash requirements from
known contractual and other obligations.
In the ordinary course of business, we provide standby letters of credit to
third parties primarily for facility leases. As of March 31, 2022 and
December 31, 2021 , we had outstanding letters of credit of $0.5 million , each,
that were not recognized in our consolidated balance sheets. These are not
reasonably likely to have a current or future material effect on our financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources. We had no other off-balance sheet
arrangements or obligations.
The Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") allows
employers to defer the payment of the employer share of Federal Insurance
Contributions Act ("FICA") taxes for the period from April 1, 2020 and ending
December 31, 2020 . The deferred amount is payable as follows: (1) 50% of the
deferred amount was paid on or before December 31, 2021 and (2) the remaining
50% of the deferred amount will be paid on or before December 31, 2022 . Our
deferred contributions, net of payments to FICA was $3.1 million as of March 31,
2022 and December 31, 2021 , each, which will be paid on or before December 31,
2022 .
Financing Arrangements (Debt Facility)
The following tables summarizes our debt facility balances as ofMarch 31, 2022 andDecember 31, 2021 . As of March 31, 2022 As of December 31, 2021 (dollars in millions) (dollars in millions) Revolving Credit Total Revolving Credit Total facility facility
Current portion of long-term borrowings $ 35.0$ 35.0 $ 260.0$ 260.0 Long-term borrowings $ 260.0$ 260.0 $ - $ - Total borrowings $ 295.0$ 295.0 $ 260.0$ 260.0 Unamortized debt issuance costs for our revolving Credit Facility of$0.2 million as ofMarch 31, 2022 andDecember 31, 2021 , each, are presented under "Other current assets" and "Other assets," as applicable in our consolidated balance sheets.
See Note 17 - Borrowings to our unaudited consolidated financial statements
herein for further details on our debt facilities, including our amended and
restated credit facility entered into subsequent to
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, see Note 2-"Recent Accounting Pronouncements" to our unaudited consolidated financial statements contained herein.
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