What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-08-06 compared with 2020-05-07 · 533 added, 346 removed, 688 unchanged (56% of the section changed)

3 unchanged sentences

(In thousands, except share and per share amounts)

March 31, 2020

December 31, 2019

June 30, 2020 December 31, 2019

Current assets:

12 unchanged sentences

Intangible assets, net 66,296 73,982

Goodwill 348,110 349,529

Other assets 31,599 36,016

Investment in equity affiliate 3,063 2,484

Total assets $ 1,193,613 $ 1,183,088

Liabilities and stockholders’ equity

7 unchanged sentences

Income taxes payable, net 2,359 1,432

Current portion of finance lease liabilities

Total current liabilities 184,163 229,349

3 unchanged sentences

Deferred tax liabilities, net 705 966

Finance lease liabilities, less current portion

Other non-current liabilities 19,566 12,142

6 unchanged sentences

Common stock, $ 0.001 par value;

100,000,000 shares authorized, 38,813,775 shares issued and 34,315,996 shares outstanding as of March 31, 2020 and 38,480,654 shares issued and 34,185,241 shares outstanding as of December 31, 2019

100,000,000 shares authorized, 38,818,365 shares issued and 34,320,586 shares outstanding as of June 30, 2020 and 38,480,654 shares issued and 34,185,241 shares outstanding as of December 31, 2019

Additional paid-in capital 404,704 391,240

2 unchanged sentences

Total including shares held in treasury 883,212 858,290

4,497,779 shares as of March 31, 2020 and 4,295,413 shares as of December 31, 2019, held in treasury, at cost

4,497,779 shares as of June 30, 2020 and 4,295,413 shares as of December 31, 2019, held in treasury, at cost

( 202,284 ) ( 188,289 )

Stockholders’ equity 680,928 670,001

Total equity 680,928 670,001

Total liabilities and stockholders’ equity $ 1,193,613 $ 1,183,088

3 unchanged sentences

(In thousands, except share and per share amounts)

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Revenues, net $ 222,473 $ 243,509 $ 468,463 $ 483,082

Cost of revenues (1)

158,401 162,446 321,057 319,686

Gross profit (1)

64,072 81,063 147,406 163,396

Operating expenses:

13 unchanged sentences

Net income attributable to ExlService Holdings, Inc.

stockholders $ 8,429 $ 12,564 $ 30,840 $ 27,259

Earnings per share attributable to ExlService Holdings, Inc.

stockholders:

Basic $ 0.24 $ 0.36 $ 0.90 $ 0.79

Diluted $ 0.24 $ 0.36 $ 0.89 $ 0.78

Weighted-average number of shares used in computing earnings per share attributable to ExlService Holdings Inc.

stockholders:

Basic 34,486,202 34,451,671 34,443,884 34,413,455

Diluted 34,597,688 34,702,547 34,659,146 34,768,203

(1) Exclusive of depreciation and amortization expense.

3 unchanged sentences

(In thousands)

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Net income $ 8,429 $ 12,564 $ 30,840 $ 27,259

Other comprehensive (loss)/income:

Unrealized (loss)/gain on cash flow hedges

Foreign currency translation (loss)/gain

Unrealized gain/(loss) on cash flow hedges 7,721 3,268 ( 7,125 ) 9,205

Foreign currency translation gain/(loss) 6,534 1,017 ( 10,803 ) 4,403

Reclassification adjustments

Gain on cash flow hedges (1)

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

1,127 ( 884 ) 198 ( 1,555 )

Retirement benefits (2)

Income tax benefit/(expense) relating to above (3)

Total other comprehensive (loss)/income

Total comprehensive (loss) /income

97 ( 40 ) 198 ( 79 )

Income tax expense relating to above (3)

( 6,649 ) ( 507 ) ( 1,850 ) ( 2,865 )

Total other comprehensive income/(loss) $ 8,830 $ 2,854 $ ( 19,382 ) $ 9,109

Total comprehensive income $ 17,259 $ 15,418 $ 11,458 $ 36,368

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

Refer to Note 16 to the unaudited consolidated financial statements.

Refer to Note 16 - 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 19 to the unaudited consolidated financial statements.

These are income tax benefit/(expense) recognized on cash flow hedges and retirement benefits.

Refer to Note 21 to the unaudited consolidated financial statements.

Refer to Note 19 - Employee Benefit Plans to the unaudited consolidated financial statements.

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

Refer to Note 21 - Income Taxes to the unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

For the three months ended March 31, 2020 and 2019

For the three months ended June 30, 2020 and 2019

(In thousands, except share and per share amounts)

Additional Paid-in Capital

Retained Earnings

Accumulated Other Comprehensive Loss

Treasury Stock

Balance as of January 1, 2020

Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Equity

Shares Amount Shares Amount

Balance as of March 31, 2020 38,813,775 $ 39 $ 396,939 $ 574,314 $ ( 113,104 ) ( 4,497,779 ) $ ( 202,284 ) $ 655,904

Stock issued against stock-based compensation plans 4,590 — 39 — — — — 39

1 unchanged sentence

Acquisition of treasury stock — — — — — — — —

Other comprehensive loss

Other comprehensive income — — — — 8,830 — — 8,830

Net income — — — 8,429 — — — 8,429

Balance as of June 30, 2020 38,818,365 $ 39 $ 404,704 $ 582,743 $ ( 104,274 ) ( 4,497,779 ) $ ( 202,284 ) $ 680,928

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

Shares Amount Shares Amount

Balance as of March 31, 2019 38,256,036 $ 38 $ 371,144 $ 498,939 $ ( 77,212 ) ( 3,890,599 ) $ ( 162,333 ) $ 259 $ 630,835

Additional Paid-in Capital

Retained Earnings

Accumulated Other Comprehensive Loss

Treasury Stock

Stock issued against stock-based compensation plans 39,047 — 316 — — — — — 316

Stock-based compensation — — 7,155 — — — — — 7,155

Acquisition of treasury stock — — — — — ( 198,160 ) ( 12,130 ) — ( 12,130 )

Non-controlling interest — — 18 — — — — ( 259 ) ( 241 )

Other comprehensive income — — — — 2,854 — — — 2,854

Net income — — — 12,564 — — — — 12,564

Balance as of June 30, 2019 38,295,083 $ 38 $ 378,633 $ 511,503 $ ( 74,358 ) ( 4,088,759 ) $ ( 174,463 ) $ — $ 641,353

EXLSERVICE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

For the six months ended June 30, 2020 and 2019

(In thousands, except share and per share amounts)

Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Equity

Shares Amount Shares Amount

Balance as of January 1, 2020 38,480,654 $ 39 $ 391,240 $ 551,903 $ ( 84,892 ) ( 4,295,413 ) $ ( 188,289 ) $ 670,001

2 unchanged sentences

Acquisition of treasury stock — — — — — ( 202,366 ) ( 13,995 ) ( 13,995 )

Other comprehensive loss — — — — ( 19,382 ) — — ( 19,382 )

Net income — — — 30,840 — — — 30,840

Balance as of June 30, 2020 38,818,365 $ 39 $ 404,704 $ 582,743 $ ( 104,274 ) ( 4,497,779 ) $ ( 202,284 ) $ 680,928

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

Shares Amount Shares Amount

Balance as of January 1, 2019 37,850,544 $ 38 $ 364,179 $ 484,244 $ ( 83,467 ) ( 3,628,068 ) $ ( 146,925 ) $ 250 $ 618,319

Stock issued against stock-based compensation plans 444,539 — 338 — — — — — 338

Stock-based compensation — — 14,111 — — — — — 14,111

Acquisition of treasury stock — — — — — ( 460,691 ) ( 27,538 ) — ( 27,538 )

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

Non-controlling interest — — 18 — — — — ( 250 ) ( 232 )

Other comprehensive loss

Balance as of March 31, 2019

Other comprehensive income — — — — 9,109 — — — 9,109

Net income — — — 27,259 — — — — 27,259

Balance as of June 30, 2019 38,295,083 $ 38 $ 378,633 $ 511,503 $ ( 74,358 ) ( 4,088,759 ) $ ( 174,463 ) $ — $ 641,353

See accompanying notes to unaudited consolidated financial statements.

2 unchanged sentences

(In thousands)

Three months ended March 31,

Six months ended June 30,

Cash flows from operating activities:

Adjustments to reconcile net income to net cash (used for)/provided by operating activities:

Net income $ 30,840 $ 27,259

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization expense 24,806 26,532

3 unchanged sentences

Unrealized foreign exchange (gain)/loss, net ( 3,316 ) 1,967

Deferred income tax expense

Deferred income tax expense/(benefit) ( 663 ) ( 2,631 )

Allowance for expected credit losses 389 281

2 unchanged sentences

Impairment charges — 3,167

Others, net ( 1,204 ) 961

Change in operating assets and liabilities:

2 unchanged sentences

Advance income tax, net 4,446 1,345

Other assets 3,046 126

Accounts payable 1,943 ( 2,114 )

3 unchanged sentences

Operating lease liabilities ( 12,831 ) ( 13,749 )

Net cash (used for)/provided by operating activities

Net cash provided by operating activities 58,907 47,717

Cash flows from investing activities:

1 unchanged sentence

Investment in equity affiliate ( 700 ) —

Purchase of non-controlling interest — ( 241 )

Purchase of investments ( 49,027 ) ( 68,188 )

Proceeds from redemption of investments 72,844 91,669

Net cash provided by/(used for) investing activities

Net cash provided by investing activities 1,066 953

Cash flows from financing activities:

5 unchanged sentences

Proceeds from exercise of stock options 960 338

Net cash provided by financing activities

Net cash used for financing activities ( 13,369 ) ( 61,114 )

Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 2,873 ) ( 240 )

5 unchanged sentences

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

16 unchanged sentences

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

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

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

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

2 unchanged sentences

In conjunction with the new reporting structure, the Company has recast certain prior period amounts, wherever applicable, to conform to the way the Company internally manages and monitors segment performance.

This change primarily impacted Note 3 - Segment and Geographical Information and Note 9 - Goodwill to the unaudited consolidated financial statements, with no impact on the unaudited consolidated balance sheets, statements of income, comprehensive (loss)/income, equity and cash flows.

(b) Use of Estimates

The preparation of the unaudited consolidated financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the unaudited consolidated statements of income during the reporting period.

Although these estimates are based on management’s best assessment of the current business

This change primarily impacted Note 3 - Segment and Geographical Information and Note 9 - Goodwill and Intangible Assets to the unaudited consolidated financial statements, with no impact on the unaudited consolidated balance sheets, statements of income, comprehensive (loss)/income, equity and cash flows.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

environment, actual results may be different from those estimates.

(b) Use of Estimates

The preparation of the unaudited consolidated financial statements in conformity with U.S.

Although these estimates are based on management’s best assessment of the current business environment, actual results may be different from those estimates.

The significant estimates and assumptions that affect the unaudited consolidated financial statements include, but are not limited to, allowance for expected credit losses, expected recoverability from customers with contingent fee arrangements, recoverability of dues from statutory authorities, assets and obligations related to employee benefit plans, deferred tax valuation allowances, income-tax uncertainties and other contingencies, valuation of derivative financial instruments, assumptions used to calculate stock-based compensation expense, assumptions used to determine the incremental borrowing rate to calculate lease liabilities and right-of-use (“ROU”) assets, lease term to calculate lease cost, depreciation and amortization periods, purchase price allocation, recoverability of long-lived assets including goodwill and intangibles, and estimated costs to complete fixed price contracts.

As of June 30, 2020, the extent to which the global Coronavirus Disease 2019 pandemic (“COVID-19”) will ultimately impact the Company's business depends on numerous dynamic factors, which the Company still cannot reliably predict.

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

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

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

Operating leases are recorded in "operating lease right-of-use ("ROU") assets", "current portion of operating lease liabilities" and "operating lease liabilities, less current portion" in the Company's unaudited consolidated balance sheets.

Finance leases are recorded in "property and equipment", "current portion of finance lease liabilities" and "finance lease liabilities, less current portion" in the Company's unaudited consolidated balance sheets.

Operating leases are recorded in "operating lease right-of-use assets", "current portion of operating lease liabilities" and "operating lease liabilities, less current portion" in the Company's unaudited consolidated balance sheets.

Finance leases are recorded in "property and equipment", and current and non-current portion of finance lease liabilities are presented within “accrued expenses and other current liabilities” and “other non-current liabilities,” respectively in the Company's unaudited consolidated balance sheets.

ROU assets represent the Company’s right to use an underlying asset during the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.

4 unchanged sentences

The Company has lease agreements with lease and non-lease components, which are accounted for separately.

The Company accounts for lease-related concessions to mitigate the economic effects of COVID-19 on lessees in accordance with guidance in Topic 842, Leases , to determine, on a lease-by-lease basis, whether the concession provided by lessor should be accounted for as a lease modification.

The Company accounts for a modification as a separate contract when it grants an additional right of use not included in the original lease and the increase is commensurate with the standalone price for the additional right of use, adjusted for the circumstances of the particular contract.

Modifications which are not accounted for as a separate contract are reassessed as of the effective date of the modification based on its modified terms and conditions and the facts and circumstances as of that date.

On January 1, 2019 , the date of initial application, the Company adopted Leases (Topic 842) using the modified retrospective method.

On January 1, 2019, the date of initial application, the Company adopted Topic 842, Leases , using the modified retrospective method.

The modified retrospective method provides a method of recognizing those leases which had not expired as of the date of adoption of January 1, 2019.

The adoption resulted in the recognition of ROU assets of $ 80,328 (net of deferred rent of $ 8,626 ) and lease liabilities of $ 88,954 for operating leases as of January 1, 2019.

The Company's accounting for finance leases remained substantially unchanged.

The Company's accounting for finance leases remained substantially

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2020

(In thousands, except share and per share amounts)

The adoption had no impact on opening balance of retained earnings.

Refer to Note 20 to the unaudited consolidated financial statements for details.

Refer to Note 20 - Leases to the unaudited consolidated financial statements for details.

(d) Recent Accounting Pronouncements

9 unchanged sentences

Facilitation of the Effects of Reference Rate Reform on Financial Reporting .

This ASU provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

(In thousands, except share and per share amounts)

interbank offered rates and LIBOR.

The ASU provides practical expedients and exceptions for applying U.S.

11 unchanged sentences

Further, the impact of adoption of this guidance did not have a material effect on the Company's accounting policies, processes, and systems.

Refer to Note 4 to the unaudited consolidated financial statements for details.

Refer to Note 4 - Revenues, net to the unaudited consolidated financial statements for details.

In August 2018, FASB issued ASU No.

12 unchanged sentences

The adoption of this ASU effective January 1, 2020 did not have any material effect on the Company’s unaudited consolidated financial statements.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2020

(In thousands, except share and per share amounts)

In April 2019, FASB issued ASU No.

10 unchanged sentences

Targeted Transition Relief.

This ASU provides entities with the option to irrevocably elect the fair value option, on an instrument-by-instrument

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

(In thousands, except share and per share amounts)

basis in accordance with Subtopic 825-10, for certain financial instruments that are within the scope of Subtopic 326-20, upon adopting Topic 326.

This ASU provides entities with the option to irrevocably elect the fair value option, on an instrument-by-instrument basis in accordance with Subtopic 825-10, for certain financial instruments that are within the scope of Subtopic 326-20, upon adopting Topic 326.

The fair value option election does not apply to held-to-maturity debt securities.

11 unchanged sentences

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

• Healthcare,

• Emerging Business, and

1 unchanged sentence

The chief operating decision maker (“CODM”) generally reviews financial information such as revenues, cost of revenues and gross profit, disaggregated by the operating segments to allocate an overall budget among the operating segments.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2020

(In thousands, except share and per share amounts)

The Company does not allocate and therefore the CODM does not evaluate, certain operating expenses, interest expense or income taxes by segment.

1 unchanged sentence

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

Revenues and cost of revenues for the three months ended June 30, 2020 and 2019, respectively, for each of the reportable segments, are as follows:

Three months ended June 30, 2020

Insurance Healthcare Emerging Business Analytics Total

Revenues, net $ 81,281 $ 24,978 $ 34,535 $ 81,679 $ 222,473

Cost of revenues (1)

59,113 19,640 22,416 57,232 158,401

Gross profit (1)

$ 22,168 $ 5,338 $ 12,119 $ 24,447 $ 64,072

Operating expenses 54,206

Foreign exchange gain, interest expense and other income, net 2,701

Income tax expense 4,072

Loss from equity-method investment 66

Net income $ 8,429

(1) Exclusive of depreciation and amortization expense.

Three months ended June 30, 2019

Insurance Healthcare Emerging Business Analytics Total

Revenues, net $ 85,581 $ 21,730 $ 48,327 $ 87,871 $ 243,509

Cost of revenues (1)

59,414 17,749 27,852 57,431 162,446

Gross profit (1)

$ 26,167 $ 3,981 $ 20,475 $ 30,440 $ 81,063

Operating expenses 67,207

Foreign exchange gain, interest expense and other income, net 1,440

Income tax expense 2,670

Loss from equity-method investment 62

Net income $ 12,564

(1) Exclusive of depreciation and amortization expense.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

Revenues and cost of revenues for the three months ended March 31, 2020 and 2019 , respectively, for each of the reportable segments, are as follows:

Three months ended March 31, 2020

Emerging Business

Revenues and cost of revenues for the six months ended June 30, 2020 and 2019, respectively, for each of the reportable

segments, are as follows:

Six months ended June 30, 2020

Insurance Healthcare Emerging Business Analytics Total

Revenues, net $ 165,020 $ 52,007 $ 77,326 $ 174,110 $ 468,463

Cost of revenues (1)

118,078 39,233 47,898 115,848 321,057

Gross profit (1)

$ 46,942 $ 12,774 $ 29,428 $ 58,262 $ 147,406

Operating expenses 110,053

2 unchanged sentences

Loss from equity-method investment 121

Three months ended March 31, 2019

Emerging Business

Net income $ 30,840

(1) Exclusive of depreciation and amortization expense.

Six months ended June 30, 2019

Insurance Healthcare Emerging Business Analytics Total

Revenues, net $ 166,867 $ 43,978 $ 97,405 $ 174,832 $ 483,082

Cost of revenues (1)

114,657 35,551 55,145 114,333 319,686

Gross profit (1)

$ 52,210 $ 8,427 $ 42,260 $ 60,499 $ 163,396

Operating expenses 132,679

2 unchanged sentences

Loss from equity-method investment 129

Net income $ 27,259

(1) Exclusive of depreciation and amortization expense.

Revenues, net by service type, were as follows:

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

BPM and related services (1)

$ 140,794 $ 155,638 $ 294,353 $ 308,250

Analytics services 81,679 87,871 174,110 174,832

4 unchanged sentences

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

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

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Revenues, net

6 unchanged sentences

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

March 31, 2020

December 31, 2019

June 30, 2020 December 31, 2019

Long-lived assets

India $ 101,073 $ 78,244

United States 50,121 52,375

Philippines 28,558 26,006

Rest of World 8,885 8,913

1 unchanged sentence

Revenues, net

Refer to Note 3 to the unaudited consolidated financial statements for revenues disaggregated by reportable segments and geography.

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:

March 31, 2020

December 31, 2019

June 30, 2020 December 31, 2019

Accounts receivable, net $ 157,505 $ 171,864

3 unchanged sentences

Consideration received for process transition activities $ 2,579 $ 3,036

Accounts receivable includes $ 74,386 and $ 73,920 as of March 31, 2020 and December 31, 2019 , respectively, representing unbilled receivables.

Accounts receivable includes $ 71,489 and $ 73,920 as of June 30, 2020 and December 31, 2019, respectively, representing unbilled receivables.

The Company has accrued the unbilled receivables for work performed in accordance with the terms of contracts with customers and considers no significant performance risk associated with its unbilled receivables.

1 unchanged sentence

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

7 unchanged sentences

The revenues are recognized as (or when) the performance obligation is fulfilled under the contract with customer.

Revenue recognized during the three months ended March 31, 2020 and 2019 that was included in the contract liabilities balance at the beginning of the period was $ 5,968 and $ 2,777 , respectively.

Revenue recognized during the three and six months ended June 30, 2020 and 2019, which was included in the contract liabilities balance at the beginning of the respective periods:

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Revenue recognized $ 2,226 $ 1,450 $ 8,194 $ 4,226

Contract acquisition and fulfillment costs

Contract Acquisition Costs

Three months ended Six months ended Year ended

June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 December 31, 2019

Opening Balance $ 1,215 $ 513 $ 1,307 $ 713 $ 713

Addition 187 — 187 — 1,222

Amortization ( 132 ) ( 44 ) ( 224 ) ( 244 ) ( 628 )

Closing Balance $ 1,270 $ 469 $ 1,270 $ 469 $ 1,307

Contract Fulfillment Costs

Quarter Ended

March 31, 2020

March 31, 2019

December 31, 2019

March 31, 2020

March 31, 2019

December 31, 2019

Three months ended Six months ended Year ended

June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 December 31, 2019

Opening Balance $ 6,916 $ 4,472 $ 7,255 $ 4,051 $ 4,051

Addition 363 1,441 647 2,167 4,652

Amortization ( 499 ) ( 305 ) ( 1,122 ) ( 610 ) ( 1,448 )

Closing Balance $ 6,780 $ 5,608 $ 6,780 $ 5,608 $ 7,255

There was no impairment for contract acquisition and contract fulfillment costs as of March 31, 2020 and December 31, 2019.

There was no impairment for contract acquisition and contract fulfillment costs as of June 30, 2020 and December 31, 2019.

The capitalized costs are amortized on a straight line basis over the life of the contract.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2020

(In thousands, except share and per share amounts)

Allowance for expected credit losses

1 unchanged sentence

Accounts receivable and contract assets are in the scope for which assessment is made.

In compliance with the guidance, the allowance for credit losses recognized based on historical loss experience is adjusted to reflect current and estimated future economic conditions.

The Company evaluates the credit risk of its customers based on a combination of various financial and qualitative factors that may affect the ability of each customer to pay.

The Company considered current and anticipated future economic conditions relating to the industries of the Company’s customers and the countries where it operates.

In calculating expected credit loss, the Company also considered past payment trends, credit rating and other related credit information for its significant customers to estimate the probability of default in the future and estimates relating to the possible effects resulting from global Coronavirus Disease 2019 pandemic (“COVID-19”).

The Company applied the expected credit loss model to assess any required allowance;

and used a provision matrix devised based on historical trends of losses across aging categories to calculate the expected credit loss allowance for trade receivables and unbilled receivables.

This matrix takes into account available external and internal credit risk information such as ratings from international credit rating agencies and the Company's historical collection experience from customers.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

(In thousands, except share and per share amounts)

The duration and severity of COVID-19 and continued market volatility is highly uncertain and, as such, the impact on expected losses is subject to significant judgment, including but not limited to changes in customers’ credit rating, and may cause variability in the Company’s allowance for credit losses in future periods.

As of January 1, 2020 the Company’s provision for doubtful receivables was $ 1,163 , which was based on previous U.S.

GAAP standards.

There was no material impact on provision when calculated by applying Topic ASC 326 guidelines.

March 31, 2020

January 1, 2020

There was no material impact on provision when calculated by applying the Topic 326 guidance.

June 30, 2020 January 1, 2020

Accounts receivable, including unbilled receivables $ 158,939 $ 173,027

1 unchanged sentence

Accounts receivable, net $ 157,505 $ 171,864

The movement in allowance for lifetime expected credit loss on customer balances for the quarters ended March 31, 2020 and December 31, 2019 was as follows:

March 31, 2020

December 31, 2019

The movement in allowance for current expected credit loss on customer balances for the three and six months ended June 30, 2020 and 2019 and year ended December 31, 2019 was as follows:

Three months ended Six months ended Year ended

June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 December 31, 2019

Balance at the beginning of the period $ 1,346 $ 1,255 $ 1,163 $ 956 $ 956

8 unchanged sentences

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

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

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

Three months ended March 31,

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

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Net income $ 8,429 $ 12,564 $ 30,840 $ 27,259

Denominators:

4 unchanged sentences

stockholders:

Basic $ 0.24 $ 0.36 $ 0.90 $ 0.79

Diluted $ 0.24 $ 0.36 $ 0.89 $ 0.78

Weighted average potentially dilutive shares considered anti-dilutive and not included in computing diluted earnings per share 638,318 69 404,315 212,751

1 unchanged sentence

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

March 31, 2020

March 31, 2019

June 30, 2020 June 30, 2019

Cash and cash equivalents $ 163,619 $ 84,842

4 unchanged sentences

Other income, net consists of the following:

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Gain on sale and mark-to-market of mutual funds, net $ 3,109 $ 3,318 $ 5,166 $ 6,844

Interest income 632 697 1,164 1,493

Others, net 484 87 424 188

Other income, net $ 4,225 $ 4,102 $ 6,754 $ 8,525

1 unchanged sentence

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

1 unchanged sentence

Property and equipment, net consists of the following:

Estimated useful lives

March 31, 2020

December 31, 2019

Estimated useful lives As of

(Years) June 30, 2020 December 31, 2019

Owned Assets:

Network equipment and computers 3 - 5

$ 96,759 $ 98,309

Software 3 - 5

90,746 79,746

Leasehold improvements 3 - 8

44,328 44,982

Office furniture and equipment 3 - 8

20,675 22,046

Motor vehicles 2 - 5

Buildings 30 1,053 1,114

Land — 689 729

Capital work in progress — 10,784 10,309

265,612 257,836

Accumulated depreciation and amortization ( 174,333 ) ( 179,331 )

$ 91,279 $ 78,505

Right-of-use assets under finance leases:

5 unchanged sentences

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

During the three months ended March 31, 2020 , there were no changes in estimated useful lives of property and equipment.

During the three and six months ended June 30, 2020, there were no changes in estimated useful lives of property and equipment.

The depreciation and amortization expense, excluding amortization of acquisition-related intangibles, recognized in the unaudited consolidated statements of income was as follows:

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Depreciation and amortization expense $ 8,975 $ 7,198 $ 17,271 $ 15,337

The depreciation and amortization set forth above includes the effect of foreign exchange gain upon settlement of cash flow hedges, amounting to $ 22 and $ 57 for the three months ended March 31, 2020 and 2019 , respectively.

Refer to Note 16 to the unaudited consolidated financial statements for further details.

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

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Effect of foreign exchange (loss)/gain $ ( 71 ) $ 56 $ ( 49 ) $ 113

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

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

March 31, 2020

December 31, 2019

June 30, 2020 December 31, 2019

Cost $ 14,891 $ 15,784

Accumulated amortization ( 4,477 ) ( 4,989 )

1 unchanged sentence

The amortization expense on internally developed software recognized in the unaudited consolidated statements of income was as follows:

Three months ended March 31

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Amortization expense $ 1,846 $ 559 $ 2,677 $ 1,206

During the three months ended March 31, 2019 , the Company performed an impairment test of its long-lived assets related to its Health Integrated business.

During the three and six months ended June 30, 2019, the Company performed an impairment test of its long-lived assets related to its Health Integrated business.

Based on the results, the long-lived assets carrying value exceeded its fair value.

The primary factor contributing to a reduction in the fair value is the wind-down of the Health Integrated business, due to reduction to the Company's estimated future cash flows.

As a result of this analysis, the Company recognized impairment charges of $ 1,227 during the three months ended March 31, 2019 , to write down the carrying value of internally developed software to its fair value.

As a result of this analysis, the Company recognized impairment charges of $ 951 and $ 2,178 during the three and six months ended June 30, 2019, respectively, to write down the carrying value of property and equipment to its fair value.

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

As of March 31, 2020 , the Company believes no impairment exists because the long-lived asset's future undiscounted net cash flows expected to be generated exceeds its carrying value;

As of June 30, 2020, the Company believes no impairment exists because the long-lived asset's future undiscounted net cash flows expected to be generated exceeds its carrying value;

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

1 unchanged sentence

It is reasonably possible that the judgments and estimates described above could change in future periods.

The duration and severity of COVID-19 and continued market volatility is highly uncertain and, as such, the impact on undiscounted cash flows is subject to significant judgment and may cause variability in the Company’s assessment of the existence of any impairment.

Goodwill and Intangible Assets

2 unchanged sentences

In addition, the Company completed an assessment of any potential goodwill impairment for all its reporting units immediately prior to the reallocation and determined that no impairment existed.

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

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

Emerging Business

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

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

Balance at January 1, 2019 $ 38,203 $ 19,276 $ — $ 12,697 $ 47,193 $ 5,326 $ 227,289 $ 349,984

2 unchanged sentences

Goodwill reallocation (1)

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

Currency translation adjustments ( 303 ) ( 38 ) ( 1,076 ) — — — ( 2 ) ( 1,419 )

Balance at March 31, 2020

(1) Represents the reallocation of goodwill as a result of the Company reorganizing its operating segments as described in Note 3 to the unaudited consolidated financial statements.

Balance at June 30, 2020 $ 50,165 $ 21,931 $ 48,727 $ — $ — $ — $ 227,287 $ 348,110

(1) Represents the reallocation of goodwill as a result of the Company reorganizing its operating segments as described in Note 3 - Segment and Geographical Information to the unaudited consolidated financial statements.

As of March 31, 2020, due to the deteriorating macroeconomic conditions arising from the COVID-19 pandemic, the Company performed a goodwill impairment test for its reporting units.

The Company considered the effects of the COVID-19 pandemic on its significant inputs used in determining the fair value of the Company’s reporting units.

Key assumptions used in determining the fair value of the Company’s reporting units were a long-term debt-free net cash flow growth rate in the terminal year of 3.0 % and discount rates ranging from 9.0 % to 10.0 % .

Based on the results, the fair value of each of the Company’s reporting units exceeded their carrying value and the Company’s goodwill was not impaired.

However, for the Healthcare Analytics reporting unit within the Analytics reportable segment, the fair value was not substantially in excess of its carrying value.

The Healthcare Analytics reporting unit was formed as a result of the Company’s transition to a new organization structure effective January 1, 2020 and the integration of the SCIOinspire Holdings Inc.

acquisition in July 2018 with other analytics services offered to clients in the Healthcare industry.

As of March 31, 2020 , the goodwill associated with the Healthcare Analytics reporting unit was $ 181,217 , representing approximately 52.0 % of the Company’s total goodwill, and the percentage by which the fair value of the Healthcare Analytics reporting unit exceeded the carrying value as of the date of the most recent annual impairment test was approximately 15.0 % .

While the goodwill of this reporting unit is not currently impaired, there could be an impairment in the future as a result of changes in certain assumptions, including those related to the pandemic.

For example, the fair value could be adversely affected and may result in an impairment of goodwill if this reporting unit is not able to expand its existing customer relationships, win new clients, improve profitability, the estimated cash flows are discounted at a higher risk-adjusted rate, or the market multiples decreases.

The Company also believes that it is possible that its actual revenue growth rates could be higher than the long-term revenue growth rates used in the impairment test due to a number of factors, including (i) increased demand for the Company’s reimbursement and care optimization services to help clients identify overpayments and enhance their claims payment accuracy, (ii) the Company's ability to improve business outcomes for its healthcare customers through data-driven insights thereby generating more demand for its analytics services, and (iii) the Company’s ability to offer integrated solutions by leveraging technology platforms, digital, customizable and configurable analytics for its clients.

The Company believes that its discount rate utilized is appropriate to use for its future cash flow assumptions considering current market conditions.

However, keeping all other variables constant, a further 50 basis point increase in discount rate will decrease the percentage by which the fair value exceeds the carrying value of the Healthcare Analytics reporting unit to approximately 10.0 % .

The Company continues to monitor the cash flows of the Healthcare Analytics reporting unit for changes in the business environment that could impact recoverability.

During the second quarter of 2020, the Company evaluated the continuing effects of COVID-19 and its impact on the global economy on each of the Company’s reporting units to assess whether there was a triggering event during the quarter requiring the Company to perform a goodwill impairment test.

The Company considered certain improvements in current and forecasted economic and market conditions and qualitative factors, such as, the Company’s performance and business forecasts, stock price movements and expansion plans.

The Company reviewed key assumptions, including revisions of projected future revenues for reporting units against the results of the interim impairment quantitative test performed during the first quarter of 2020.

The Company did not identify any triggers or indications of potential impairment for its reporting units as of June 30, 2020.

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

The recoverability of goodwill is dependent upon the continued growth of cash flows from our business activities.

2 unchanged sentences

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

The duration and severity of COVID-19 and continued market volatility is highly uncertain and, as such, the impact on cash flows, long-term debt-free net cash flow growth rate in the terminal year and discount rates are subject to significant judgments and may cause variability in the Company’s assessment of existence of any impairment.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

1 unchanged sentence

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

As of March 31, 2020

Carrying Amount

As of June 30, 2020

Carrying Amount Accumulated

Amortization Net Carrying

Finite-lived intangible assets:

2 unchanged sentences

Trade names and trademarks 5,100 ( 3,261 ) 1,839

$ 101,608 $ ( 36,212 ) $ 65,396

Indefinite-lived intangible assets:

2 unchanged sentences

As of December 31, 2019

Gross Carrying Amount

Accumulated Amortization

Gross Carrying Amount Accumulated Amortization Net Carrying

Finite-lived intangible assets:

2 unchanged sentences

Trade names and trademarks 5,100 ( 2,579 ) 2,521

$ 129,678 $ ( 56,596 ) $ 73,082

Indefinite-lived intangible assets:

2 unchanged sentences

The amortization expense for the period is as follows:

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Amortization expense $ 3,430 $ 5,554 $ 7,584 $ 11,082

5 unchanged sentences

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

Estimated future amortization expense related to intangible assets as of March 31, 2020 is as follows:

2020 (April 1 - December 31)

Estimated future amortization expense related to intangible assets as of June 30, 2020 is as follows:

2020 (July 1 - December 31) $ 6,822

2025 and thereafter 18,789

Total $ 65,396

Other Current Assets

Other current assets consist of the following:

March 31, 2020

December 31, 2019

June 30, 2020 December 31, 2019

Derivative instruments $ 4,128 $ 4,076

3 unchanged sentences

Deferred contract fulfillment costs 2,208 1,673

Interest accrued on fixed deposits 344 439

Others 3,384 2,803

Other current assets $ 27,472 $ 24,594

Other assets consist of the following:

March 31, 2020

December 31, 2019

June 30, 2020 December 31, 2019

Lease deposits $ 9,738 $ 9,983

4 unchanged sentences

Deferred contract fulfillment costs 4,572 5,582

Others 2,973 3,518

Other assets $ 31,599 $ 36,016

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

1 unchanged sentence

Accrued expenses and other current liabilities consist of the following:

March 31, 2020

December 31, 2019

June 30, 2020 December 31, 2019

Accrued expenses $ 41,724 $ 50,097

Payable to statutory authorities 9,360 9,247

Accrued capital expenditure

Derivative instruments 4,749 1,783

2 unchanged sentences

Other current liabilities 3,157 1,732

Finance lease liabilities 253 253

Accrued expenses and other current liabilities $ 74,772 $ 74,017

Other Non-Current Liabilities

Other non-current liabilities consist of the following:

March 31, 2020

December 31, 2019

June 30, 2020 December 31, 2019

Derivative instruments $ 3,496 $ 1,250

2 unchanged sentences

Deferred transition revenue 1,586 1,911

Accrued capital expenditure

Others 2,904 987

Finance lease liabilities 357 430

Other non-current liabilities $ 19,566 $ 12,142

3 unchanged sentences

Changes in the fair values of these foreign currency exchange contracts are recognized in AOCI on the Company's unaudited consolidated balance sheets until the settlement of those contracts.

The balances as of March 31, 2020 and December 31, 2019 are as follows:

March 31, 2020

December 31, 2019

The balances as of June 30, 2020 and December 31, 2019 are as follows:

June 30, 2020 December 31, 2019

Cumulative foreign currency translation loss $ ( 97,766 ) $ ( 86,963 )

1 unchanged sentence

Retirement benefits ( 1,582 ) ( 1,780 )

Income tax benefit/(expense) relating to above (1)

Income tax expense relating to above (1)

( 2,603 ) ( 753 )

Accumulated other comprehensive loss $ ( 104,274 ) $ ( 84,892 )

(1) These are income tax benefits/(expenses) recognized on cash flow hedges and retirement benefits.

Refer to Note 21 to the unaudited consolidated financial statements.

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

Refer to Note 21 - Income Taxes to the unaudited consolidated financial statements.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

1 unchanged sentence

Assets and Liabilities Measured at Fair Value

The following table sets forth the Company’s assets and liabilities that were accounted for at fair value as of March 31, 2020 and December 31, 2019 .

As of March 31, 2020

The following table sets forth the Company’s assets and liabilities that were accounted for at fair value as of June 30, 2020 and December 31, 2019.

As of June 30, 2020 Level 1 Level 2 Level 3 Total

Mutual funds* $ 117,490 $ — $ — $ 117,490

Derivative financial instruments — 5,862 — 5,862

Total $ 117,490 $ 5,862 $ — $ 123,352

Derivative financial instruments $ — $ 8,245 $ — $ 8,245

As of December 31, 2019

Total $ — $ 8,245 $ — $ 8,245

As of December 31, 2019 Level 1 Level 2 Level 3 Total

Mutual funds* $ 166,330 $ — $ — $ 166,330

Derivative financial instruments — 7,509 — 7,509

Total $ 166,330 $ 7,509 $ — $ 173,839

Derivative financial instruments $ — $ 3,033 $ — $ 3,033

* Represents those short-term investments which are carried at the fair value option under ASC 825 "Financial Instruments” as of March 31, 2020 and December 31, 2019 .

Total $ — $ 3,033 $ — $ 3,033

* Represents those short-term investments, which are carried at the fair value option under ASC 825 "Financial Instruments” as of June 30, 2020 and December 31, 2019.

Derivative Financial Instruments:

1 unchanged sentence

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

Refer to Note 16 to the unaudited consolidated financial statements for further details.

Refer to Note 16 - Derivatives and Hedge Accounting to the unaudited consolidated financial statements for further details.

Financial instruments not carried at fair value :

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

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

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

Convertible Senior Notes:

The total estimated fair value of the convertible senior notes as of March 31, 2020 and December 31, 2019 was $ 120,033 and $ 149,934 , respectively.

The fair value was determined based on the market yields for similar Notes as of the March 31, 2020 and December 31, 2019 , respectively.

The Company considers the fair value of the Notes to be a Level 2 measurement due to the limited inputs available for its fair valuation.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

Convertible Senior Notes:

The total estimated fair value of the convertible senior notes as of June 30, 2020 and December 31, 2019 was $ 141,023 and $ 149,934 , respectively.

The fair value was determined based on the market yields for similar Notes as of the June 30, 2020 and December 31, 2019, respectively.

The Company considers the fair value of the Notes to be a Level 2 measurement due to the limited inputs available for its fair valuation.

Nonrecurring fair value measurements of assets:

Nonrecurring fair value measurements include impairment tests conducted by the Company during the six months ended June 30, 2020 of its goodwill related to its Healthcare Analytics and Healthcare BPM reporting units.

The fair value determination for goodwill was based on Company’s internal assessment, which are Level 3 inputs.

During the six months ended June 30, 2020, the Company did no t recognize any impairment charges on goodwill as the fair values exceeded their carrying value.

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

During the year ended December 31, 2019, the Company conducted impairment tests of its long-lived assets and ROU assets related to its Health Integrated business.

The fair value determination for ROU assets was based on third party quotes, which are Level 2 inputs, and for other long-lived assets, it was based on Company’s internal assessment, which are Level 3 inputs.

During the year ended December 31, 2019, the Company recognized impairment charges on long-lived assets and ROU assets to write down the carrying value to their fair values.

Derivatives and Hedge Accounting

1 unchanged sentence

The Company’s derivative financial instruments are largely forward foreign exchange contracts that are designated as effective hedges and that qualify as cash flow hedges under ASC 815.

The Company had outstanding cash flow hedges totaling $ 449,495 (including $ 2,550 of range forward contracts) as of March 31, 2020 and $ 410,390 (including $ 4,300 of range forward contracts) as of December 31, 2019.

The Company had outstanding cash flow hedges totaling $ 421,630 (including $ 750 of range forward contracts) as of June 30, 2020 and $ 410,390 (including $ 4,300 of range forward contracts) as of December 31, 2019.

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

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

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

The impact of COVID-19 on the economic environment is uncertain and may cause variability in determination of fair value of these cash flow hedges, which could impact the effects of change in fair value that get recorded as a component of accumulated other comprehensive income/(loss) and also resultant exchange gain/(loss) upon settlement of derivative financial instruments.

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

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

The Company estimates that approximately $ 4,480 of net derivative losses, excluding tax effects, included in AOCI, representing changes in the value of cash flow hedges, could be reclassified into earnings within the next twelve months based on exchange rates prevailing as of March 31, 2020 .

At March 31, 2020 , the maximum outstanding term of the cash flow hedges was 45 months .

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

The Company estimates that approximately $ 561 of net derivative losses, excluding tax effects, included in AOCI, representing changes in the fair value of cash flow hedges, could be reclassified into earnings within the next twelve months based on exchange rates prevailing as of June 30, 2020.

At June 30, 2020, the maximum outstanding term of the cash flow hedges was 45 months.

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

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

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

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

pound sterling and the Philippine peso.

The Company also has exposure to Colombian pesos, Czech Koruna, the Euro, South African ZAR and other local currencies in which it operates.

Outstanding foreign currency forward contracts amounted to $ 137,700 , GBP 9,590 and EUR 1,446 as of March 31, 2020 and $ 124,045 , GBP 10,843 and EUR 1,289 as of December 31, 2019 .

Changes in the fair value of these derivatives are recognized in the unaudited

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

consolidated statements of income and are included in the foreign exchange gain/(loss) line item.

The impact of COVID-19 on the economic environment is uncertain and may cause variability in determination of fair value of these derivatives, which could impact the effects of change in fair value that get recorded in the foreign exchange gain/(loss) line item.

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

pound sterling and the Philippine peso.

The Company also has exposure to Colombian pesos, Czech Koruna, the Euro, South African ZAR and other local currencies in which it operates.

Outstanding foreign currency forward contracts amounted to $ 106,988 , GBP 9,487 and EUR 1,453 as of June 30, 2020 and $ 124,045 , GBP 10,843 and EUR 1,289 as of December 31, 2019.

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

Derivatives designated as hedging instruments:

Foreign currency exchange contracts

March 31, 2020

December 31,2019

Foreign currency exchange contracts June 30, 2020 December 31, 2019

Other current assets $ 4,070 $ 3,945

Other assets $ 1,734 $ 3,433

Accrued expenses and other current liabilities $ 4,631 $ 1,524

1 unchanged sentence

Derivatives not designated as hedging instruments:

Foreign currency exchange contracts

March 31, 2020

December 31,2019

Foreign currency exchange contracts June 30, 2020 December 31, 2019

Other current assets $ 58 $ 131

Accrued expenses and other current liabilities $ 118 $ 259

The following tables set forth the effect of foreign currency exchange contracts on the unaudited consolidated statements of income and accumulated other comprehensive loss for the three months ended March 31, 2020 and 2019 :

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

Forward Exchange Contracts:

Unrealized (loss)/gain recognized in AOCI

2020 2019 2020 2019

Unrealized gain/(loss) recognized in AOCI

Derivatives in cash flow hedging relationships $ 7,721 $ 3,268 $ ( 7,125 ) $ 9,205

(Loss)/Gain recognized in consolidated statements of income

Gain/(loss) recognized in consolidated statements of income

Derivatives not designated as hedging instruments $ 3,204 $ 2,923 $ ( 1,011 ) $ 4,319

1 unchanged sentence

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

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

Three months ended March 31,

As per unaudited consolidated statements of income

Gain/(loss) on foreign currency exchange contracts

As per unaudited consolidated statements of income

Gain on foreign currency exchange contracts

Three months ended June 30,

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

Cash flow hedging relationships

Location in unaudited consolidated statements of income where gain was reclassed from AOCI

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

Cost of revenues $ 158,401 $ ( 851 ) $ 162,446 $ 719

2 unchanged sentences

Depreciation & amortization expense $ 12,405 ( 80 ) $ 12,752 47

$ ( 1,127 ) $ 884

Derivatives not designated as hedging instruments

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

Foreign exchange gain, net $ 1,359 $ 3,204 $ 1,202 $ 2,923

$ 1,359 $ 3,204 $ 1,202 $ 2,923

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2020

(In thousands, except share and per share amounts)

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

Six months ended June 30,

As per unaudited consolidated statements of income Loss on foreign currency exchange contracts As per unaudited consolidated statements of income Gain on foreign currency exchange contracts

Cash flow hedging relationships

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

Cost of revenues $ 321,057 $ ( 39 ) $ 319,686 $ 1,250

General and administrative expenses $ 57,691 ( 114 ) $ 63,759 186

Selling & marketing expenses $ 27,507 ( 5 ) $ 35,694 19

Depreciation & amortization expense $ 24,855 ( 40 ) $ 26,419 100

$ ( 198 ) $ 1,555

Derivatives not designated as hedging instruments

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

Foreign exchange gain/(loss), net $ 2,736 $ ( 1,011 ) $ 2,462 $ 4,319

Revolver Credit Agreement

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

as Administrative Agent (the “Credit Agreement”).

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

The Credit Agreement also includes a letter of credit sub-facility.

The Credit Facility has a maturity date of November 21, 2022 and is voluntarily pre-payable from time to time without premium or penalty.

Borrowings under the Credit Facility may be used for working capital and general corporate purposes, including permitted acquisitions.

On July 2, 2018, the Company exercised its option under the Credit Agreement to increase the commitments by $ 100,000 thereby utilizing the entire revolver under the Credit Facility of $ 300,000 .

The incremental commitments were made pursuant to (and constitute part of) the existing commitments and are subject to the terms and conditions applicable to the existing commitments as set forth in the Credit Agreement.

Depending on the type of borrowing, borrowings under the Credit Agreement bear interest at a rate equal to the specified prime rate (alternate base rate) or adjusted LIBOR rate, plus, in each case, an applicable margin.

The applicable margin is tied to the Company’s total net leverage ratio and ranges from 0 % to 0.75 % per annum with respect to loans pegged to the specified prime rate, and 1.00 % to 1.75 % per annum on loans pegged to the adjusted LIBOR rate.

The revolving credit commitments under the Credit Agreement are subject to a commitment fee, which is also tied to the Company’s total net leverage ratio, and ranges from

$ 2,736 $ ( 1,011 ) $ 2,462 $ 4,319

The following tables summarizes the Company’s debt position as of June 30, 2020 and December 31, 2019.

As of June 30, 2020

Revolver Credit Facility Structured Payables Notes Total

Current portion of long-term borrowings $ 20,000 $ 657 $ — $ 20,657

Long-term borrowings 79,000 — 150,000 229,000

Unamortized debt discount — — ( 12,562 ) ( 12,562 )

Unamortized debt issuance costs* — — ( 911 ) ( 911 )

Long-term borrowings

79,000 — 136,527 215,527

Total borrowings $ 99,000 $ 657 $ 136,527 $ 236,184

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

0.15 % to 0.30 % per annum on the average daily amount by which the aggregate revolving commitments exceed the sum of outstanding revolving loans and letter of credit obligations.

The Credit Facility carried an effective interest rate of 3.0 % per annum and 3.9 % per annum during the three months ended March 31, 2020 , and 2019, respectively.

Obligations under the Credit Agreement are guaranteed by the Company’s material domestic subsidiaries and are secured by all or substantially all of the assets of the Company and its material domestic subsidiaries.

The Credit Agreement contains customary affirmative and negative covenants, including, but not limited to, restrictions on the ability to incur indebtedness, create liens, make certain investments, make certain dividends and related distributions, enter into, or undertake, certain liquidations, mergers, consolidations or acquisitions and dispose of assets or subsidiaries.

In addition, the Credit Agreement contains a covenant to not permit the interest coverage ratio (the ratio of EBITDA to cash interest expense) or the total net leverage ratio (total funded indebtedness, less unrestricted domestic cash and cash equivalents not to exceed $ 50,000 to EBITDA) for the four consecutive quarter period ending on the last day of each fiscal quarter, to be less than 3.5 to 1.0 or more than 3.0 to 1.0 , respectively.

As of March 31, 2020 , the Company was in compliance with all financial and non-financial covenants listed under the Credit Agreement.

The Company entered into a second amendment (the “Amendment”) to its Credit Agreement, as amended, among the Company, as borrower, with certain lenders, and Citibank, N.A.

as Administrative Agent to, among other things, permit the issuance by the Company of the convertible notes, and settlement upon maturity or conversion thereof, in accordance with the Investment Agreement, the indenture dated as of October 4, 2018 and the other documents entered into in connection therewith.

As of March 31, 2020 , the Company had outstanding indebtedness under the Credit Facility of $ 199,000 , of which $ 100,000 is expected to be repaid within the next twelve months and is included under “current portion of long-term borrowings” and of which $ 99,000 is included under “long-term borrowings, less current portion” in the unaudited consolidated balance sheets.

As of December 31, 2019, the Company had an outstanding indebtedness under the Credit Facility of $ 99,000 , of which $ 40,000 was included under “current portion of long-term borrowings” and the balance of $ 59,000 was included under “long-term borrowings, less current portion” in the consolidated balance sheets.

The Company incurred certain debt issuance costs, which are deferred and amortized as an adjustment to interest expense over the term of the credit facility.

The unamortized debt issuance costs as of March 31, 2020 and December 31, 2019 was $ 684 and $ 748 , respectively, and is included under "other current assets" and “other assets” in the consolidated balance sheets.

As of December 31, 2019

Revolver Credit Facility Structured Payables Notes Total

Current portion of long-term borrowings $ 40,000 $ 867 $ — $ 40,867

Long-term borrowings 59,000 — 150,000 209,000

Unamortized debt discount — — ( 13,851 ) ( 13,851 )

Unamortized debt issuance costs* — — ( 1,018 ) ( 1,018 )

Long-term borrowings

59,000 — 135,131 194,131

Total borrowings $ 99,000 $ 867 $ 135,131 $ 234,998

*Unamortized debt issuance costs for the Company’s revolver Credit Facility of $ 619 and $ 748 as of June 30, 2020 and December 31, 2019, respectively, is presented under “Other current assets” and “Other assets” in the consolidated balance sheets.

Revolver Credit Agreement

The Company’s $ 300,000 revolving credit facility pursuant to its credit agreement (the “Credit Agreement”) with certain lenders and Citibank N.A.

as Administrative Agent (the “Credit Facility”) carried an effective interest rate as shown below.

Three months ended

June 30, Six months ended

2020 2019 2020 2019

Effective interest rate 2.2 % 4.2 % 2.6 % 4.0 %

As of June 30, 2020 and December 31, 2019, the Company was in compliance with all financial and non-financial covenants listed under the Credit Agreement.

Convertible Senior Notes

2 unchanged sentences

The Notes bear interest at a rate of 3.50 % per annum, payable semi-annually in arrears in cash on April 1 and October 1 of each year.

During the three months ended March 31, 2020 and 2019, the Company recognized interest expense of $ 1,313 each on the Notes.

The Notes are convertible at an initial conversion rate of 13.3333 shares of the common stock per one thousand dollar principal amount of the Notes (which represents an initial conversion price of approximately $ 75 per share).

With certain exceptions, upon a fundamental change, as defined in the Indenture, the holders of the Notes may require that the Company to repurchase all or part of the principal amount of the Notes at a purchase price equal to the principal amount plus accrued and unpaid interest.

The Company may redeem the principal amount of the Notes, at its option, in whole but not in part, at a purchase price equal to the principal amount plus accrued and unpaid interest on or after October 1, 2021, if the closing sale price of the common stock exceeds 150 % of the then-current conversion price for 20 or more trading days in the 30 consecutive trading day period preceding the Company’s exercise of this redemption right (including the trading day immediately prior to the date of the notice of redemption).

The Company may elect to settle conversions of the Notes by paying or delivering, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock.

The Company used the proceeds from the issuance of the Notes to repay $ 150,000 of its outstanding borrowings under the Credit Facility.

The net proceeds from the issuance of the Notes were approximately $ 149,000 , after deducting debt issuance costs of $ 1,000 and offering expenses of approximately $ 442 paid by the Company.

These transaction and debt issuance costs were allocated between the liability and equity components based on their relative values.

The transaction costs and debt issuance costs allocated to the liability and equity components were $ 1,279 and $ 163 , respectively.

The debt issuance costs allocated to the liability component are deferred and amortized as an adjustment to interest expense over the term of the Notes.

The unamortized debt

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

issuance costs are presented as a direct reduction from the Notes in the consolidated balance sheets.

The unamortized debt issuance costs as of March 31, 2020 and December 31, 2019 were $ 964 and $ 1,018 , respectively.

The Company accounted for the liability and equity components of the Notes separately to reflect its non-convertible debt borrowing rate.

The estimated fair value of the liability component at issuance of $ 133,077 was determined using a discounted cash flow technique, which considered debt issuances with similar features of the Company’s debt, excluding the conversion feature.

The resulting effective interest rate for the Notes was 5.75 % per annum.

The excess of the gross proceeds received over the estimated fair value of the liability component totaling $ 16,923 was allocated to the conversion feature (equity component, recorded as additional paid-in capital) with a corresponding offset recognized as a discount to reduce the net carrying value of the Notes.

The discount is being amortized to interest expense over a six-year period ending October 1, 2024 (the expected life of the liability component) using the effective interest method.

During the three months ended March 31, 2020 and March 31, 2019, the Company amortized $ 635 and $ 600 , of the discount to interest expense, on the Notes.

The unamortized debt discount on the Notes as of March 31, 2020 and December 31, 2019 was $ 13,216 and $ 13,851 , respectively.

Borrowings also includes structured payables which are in the nature of debt, amounting to $ 666 and $ 867 as of March 31, 2020 and December 31, 2019 , respectively, included under "current portion of long-term borrowings".

Future principal payments/maturities for all of the Company's borrowings as of March 31, 2020 were as follows:

Revolver Credit

Structured Payables

2020 (April - December)

During the three and six months ended June 30, 2020 and 2019, the Company recognized interest expense and amortization of debt discount, on the Notes as below:

Three months ended

June 30, Six months ended

2020 2019 2020 2019

Interest expense on Notes $ 1,313 $ 1,269 $ 2,625 $ 2,581

Amortization of debt discount on Notes $ 654 $ 618 $ 1,289 $ 1,218

Future principal payments/maturities for all of the Company's borrowings as of June 30, 2020 were as follows:

Notes Revolver Credit Facility Structured Payables Total

2020 (July - December) $ — $ 20,000 $ 657 $ 20,657

2021 — 20,000 — 20,000

2022 — 59,000 — 59,000

2024 150,000 — — 150,000

Total $ 150,000 $ 99,000 $ 657 $ 249,657

Letters of Credit

In the ordinary course of business, the Company provides standby letters of credit to third parties primarily for facility leases.

As of March 31, 2020 and December 31, 2019 , the Company had outstanding letters of credit of $ 461 each that were not recognized in the consolidated balance sheets.

As of June 30, 2020 and December 31, 2019, the Company had outstanding letters of credit of $ 461 each, that were not recognized in the consolidated balance sheets.

Capital Structure

The Company has one class of common stock outstanding.

During the three months ended March 31, 2020 and 2019 , the Company purchased 26,601 and 22,666 shares of common stock, respectively, from employees in connection with withholding tax payments related to the vesting of restricted stock for a total consideration of $ 2,012 and $ 1,408 , respectively.

The weighted average purchase price per share of $ 75.63 and $ 62.11 , respectively, was the closing price of the Company's share of common stock on the Nasdaq Global Select Market on the trading day prior to the vesting date of the shares of restricted stock.

On February 28, 2017, the Company’s Board of Directors authorized an additional common stock repurchase program (the “2017 Repurchase Program”), under which shares may be purchased by the Company from time to time from the open market and through private transactions during each of the fiscal years 2017 through 2019 up to an aggregate additional amount of $ 100,000 .

The approval increased the 2017 authorization from $ 20,000 to $ 40,000 and authorizes stock repurchases of up to $ 40,000 in each of 2018 and 2019.

On December 16, 2019, the Company’s Board of Directors authorized a $ 200,000 common stock repurchase program beginning January 1, 2020 through December 31, 2022 (the “2019 Repurchase Program”).

The shares may be purchased by the

During the three and six months ended June 30, 2020 and 2019, the Company purchased shares of common stock from employees in connection with withholding tax payments related to the vesting of restricted stock, as below:

Shares repurchased Total consideration Weighted average purchase price per share (1)

Three months ended June 30, 2020 — $ — $ —

Three months ended June 30, 2019 — $ — $ —

Six months ended June 30, 2020 26,601 $ 2,012 $ 75.63

Six months ended June 30, 2019 22,666 $ 1,408 $ 62.11

(1) The weighted average purchase price per share was the closing price of the Company's share of common stock on the Nasdaq Global Select Market on the trading day prior to the vesting date of the shares of restricted stock.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

Company from time to time from the open market and through private transactions, or otherwise, as determined by the Company’s management as market conditions warrant.

During the three months ended March 31, 2020 , the Company purchased 175,765 shares of its common stock, for an aggregate purchase price of $ 11,983 , including commissions, representing an average purchase price per share of $ 68.18 , under the 2019 Repurchase Program.

During the quarter ended March 31, 2020, to enhance the Company’s liquidity position in response to COVID-19, the Company elected to temporarily suspend share repurchases under the 2019 Repurchase Program.

The 2019 Repurchase Program remains authorized by the Board of Directors and the Company has the discretion to resume share repurchases in the future at any time, depending upon market conditions, the Company’s capital needs and other factors.

During the three months ended March 31, 2019 , the Company purchased 239,865 shares of its common stock, for an aggregate purchase price of $ 14,000 , including commissions, representing an average purchase price per share of $ 58.37 under the 2017 Repurchase Program.

of $ 100,000 .

The approval increased the 2017 authorization from $ 20,000 to $ 40,000 and authorizes stock repurchases of up to $ 40,000 in each of 2018 and 2019.

The shares may be purchased by the Company from time to time from the open market and through private transactions, or otherwise, as determined by the Company’s management as market conditions warrant.

During the three and six months ended June 30, 2020 and 2019, the Company purchased shares of its common stock, including commissions, under the 2019 Repurchase Program and the 2017 Repurchase Program, respectively, as below:

Shares repurchased Total consideration Weighted average purchase price per share

Three months ended June 30, 2020 — $ — $ —

Three months ended June 30, 2019 198,160 $ 12,130 $ 61.21

Six months ended June 30, 2020 175,765 $ 11,983 $ 68.18

Six months ended June 30, 2019 438,025 $ 26,130 $ 59.65

Repurchased shares have been recorded as treasury shares and will be held until the Company’s Board of Directors designates that these shares be retired or used for other purposes.

The 2019 Repurchase Program may be suspended or discontinued at any time.

The 2019 Repurchase Program remains authorized by the Board of Directors and the Company resumed share repurchases effective July 1, 2020, considering improved market conditions, the Company’s capital and liquidity needs and other factors.

Employee Benefit Plans

7 unchanged sentences

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

Components of net periodic benefit cost:

Three months ended March 31,

Components of net periodic benefit cost were as follows:

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Service cost $ 664 $ 493 $ 1,342 $ 980

Interest cost 237 221 480 440

Expected return on plan assets ( 157 ) ( 144 ) ( 318 ) ( 286 )

Amortization of actuarial loss/(gain)

Amortization of actuarial (gain)/loss 97 ( 40 ) 198 ( 79 )

Net gratuity cost $ 841 $ 530 $ 1,702 $ 1,055

The Gratuity Plan in India is partially funded and the Philippines plan is unfunded.

The Company makes annual contributions to the employees' gratuity fund established with Life Insurance Corporation of India and HDFC Standard Life Insurance Company.

The Gratuity Plan in India is partially funded whereas the Philippines plan is unfunded.

The Company makes annual contributions to the employees' gratuity fund of the Gratuity Plan established with Life Insurance Corporation of India and HDFC Standard Life Insurance Company.

Fund managers manage these funds and calculate the annual contribution required to be made by the Company and manage the Gratuity Plans, including any required payouts.

These funds are managed on a cash accumulation basis and interest is declared retrospectively on March 31 of each year.

The Company earned a return of approximately 7.5 % per annum on these Gratuity Plans for the three months ended March 31, 2020 .

The Company expects to earn a return of approximately 7.0 % per annum on these Gratuity Plans for the year ended December 31, 2020.

The duration and severity of COVID-19 and continued market volatility is highly uncertain and, as such, the impact on assets and obligations related to employee benefit plans is subject to significant judgment and may cause variability in the Company’s net periodic benefit cost in future periods.

Change in Plan Assets

4 unchanged sentences

Effect of exchange rate changes ( 477 )

Plan assets at March 31, 2020

* Benefits payments were substantially made through the plan assets during the three months ended March 31, 2020 .

Plan assets at June 30, 2020 $ 8,161

* Benefits payments were substantially made through the plan assets during the six months ended June 30, 2020.

The Company maintains several 401(k) plans (the “401(k) Plans”) under Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”), covering all eligible employees, as defined in the Code as a defined contribution plan.

The Company may make discretionary contributions of up to a maximum of 4.0 % of employee compensation within certain limits.

The Company accrued for contributions to the 401(k) Plans of $ 226 and $ 1,213 for the three months ended March 31, 2020 and 2019, respectively.

During the three months ended March 31, 2020 and 2019 , the Company contributed $ 2,917 and $ 2,004 , respectively, for various defined contribution plans on behalf of its employees in India, the Philippines, Romania, the Czech Republic, South Africa, Colombia, and Singapore.

During the three months ended March 31, 2020 and six months ended June 30, 2020, to enhance the Company’s liquidity position in response to COVID-19, the Company elected to temporarily suspend making any discretionary contributions to the 401(k) Plans.

The Company's accrual for contributions to the 401(k) Plans were as follows:

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Contribution to the 401(k) Plan $ 29 $ 909 $ 255 $ 2,122

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2020

(In thousands, except share and per share amounts)

The Company's contribution for various defined benefit plans on behalf of employees in India, the Philippines, Bulgaria, Romania, the Czech Republic, South Africa, Colombia, Australia and Singapore were as follows:

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Contribution to the defined benefit plans $ 2,646 $ 2,762 $ 5,624 $ 4,816

The Company conducts its operations using facilities leased under operating lease agreements that expire at various dates.

3 unchanged sentences

The lease agreements do not contain any covenant to impose any restrictions except for market-standard practice for similar lease arrangements.

The impact of the COVID-19 pandemic on the economic environment is uncertain and has caused variability in the determination of the incremental borrowing rate, which has impacted the measurement of lease liabilities and ROU assets.

The Company accounts for lease-related concessions to mitigate the economic effects of COVID-19 on lessees in accordance with guidance in Topic 842, Leases , to determine on lease-by-lease basis, whether the concession provided by a lessor should be accounted for as a lease modification.

Such concessions had an insignificant impact on our unaudited consolidated financial statements during the three and six months ended June 30, 2020.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

Supplemental balance sheet information

March 31, 2020

December 31, 2019

June 30, 2020 December 31, 2019

Operating Lease

10 unchanged sentences

Total finance lease liabilities $ 610 $ 683

Finance lease liabilities are presented as a part of “accrued expenses and other current liabilities” and “other non-current liabilities,” as applicable, in the Company’s consolidated balance sheets.

During the three months ended June 30, 2019, the Company performed an impairment test of its long-lived assets of its Health Integrated business.

Based on the results, the operating lease ROU assets carrying value exceeded their fair value.

As a result of this analysis, the Company recognized impairment on ROU assets of $ 989 during the three and six months ended June 30, 2019, in the unaudited consolidated statements of income under "impairment and restructuring charges".

The components of lease cost, which are included in the Company's unaudited consolidated statements of income, are as follows:

Three months ended March 31, 2020

Three months ended March 31, 2019

Lease cost Three months ended June 30, Six months ended June 30,

Finance lease:

2020 2019 2020 2019

Amortization of right-of-use assets $ 63 $ 92 $ 125 $ 187

Interest on lease liabilities 20 20 50 45

83 112 175 232

Operating lease (a)

6,850 6,684 13,703 13,701

Sublease income — ( 105 ) — ( 105 )

Total lease cost $ 6,933 $ 6,691 $ 13,878 $ 13,828

2 unchanged sentences

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

Supplemental cash flow and other information related to leases are as follows:

Three months ended March 31,

Six months ended June 30,

Cash payments for amounts included in the measurement of lease liabilities :

5 unchanged sentences

Weighted-average remaining lease term

Finance lease

Operating lease

Finance lease 2.1 years 2.4 years

Operating lease 6.8 years 6.5 years

Weighted-average discount rate

2 unchanged sentences

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

Maturities of lease liabilities as of March 31, 2020 are as follows:

Operating Leases

Finance Leases

2020 (April 1 - December 31)

Maturities of lease liabilities as of June 30, 2020 are as follows:

Operating Leases Finance Leases

2020 (July 1 - December 31) $ 12,989 $ 183

2021 24,909 266

2022 23,121 153

2023 21,205 103

2024 16,841 32

2025 and thereafter 43,770 6

3 unchanged sentences

Maturities of minimum lease payments as of December 31, 2019 are as follows:

During the next twelve months ending December 31,

Operating Leases

Capital Leases

During the next twelve months ending December 31, Operating Leases Capital Leases

2020 $ 26,932 $ 325

2021 23,783 251

2022 21,526 157

2023 19,381 86

2024 14,865 22

2025 and thereafter 23,983 —

4 unchanged sentences

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

1 unchanged sentence

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 Company recorded income tax expense of $ 5,855 and $ 4,200 for the three months ended March 31, 2020 and 2019, respectively.

The effective tax rate decreased from 22.1 % during the three months ended March 31, 2019 to 20.7 % during the three months ended March 31, 2020 , primarily as a result of the recording of higher excess tax benefits related to stock awards of $ 1,799 pursuant to ASU No.

2016-09 during the three months ended March 31, 2020 compared to $ 1,015 during the three months ended March 31, 2019 .

Income taxes recognized in other comprehensive income are as follows:

Three months ended March 31,

Deferred taxes benefit/(expense):

The impact of COVID-19 on the economic environment is uncertain and may change the annual effective tax rate, which could impact tax expense.

The Company recorded income tax expense of $ 4,072 and $ 2,670 for the three months ended June 30, 2020 and 2019, respectively.

The Company's effective tax rate increased from 17.5 % during the three months ended June 30, 2019 to 32.4 % during the three months ended June 30, 2020, primarily as a result of recording a one-time tax expense of $ 1,320 due to electing a new tax regime for two of the Company’s Indian subsidiaries which provides for a lower tax rate on earnings in exchange for foregoing certain tax credits, including minimum alternative tax credits.

Accordingly, the Company recorded one-time tax expense of $ 573 on re-measurement of the Company’s Indian subsidiaries’ deferred taxes to a lower corporate tax rate and one-time tax expense of $ 747 resulting from foregoing the minimum alternative tax credits.

The Company recorded income tax expense of $ 9,927 and $ 6,870 for the six months ended June 30, 2020 and 2019, respectively.

The Company's effective tax rate increased from 20.1 % during the six months ended June 30, 2019 to 24.3 % during the six months ended June 30, 2020, primarily as a result of (i) recording a one-time tax expense of $ 1,320 due to electing a new tax regime for two of the Company’s Indian subsidiaries which provides for a lower tax rate on earnings in exchange for foregoing certain tax credits, including minimum alternative tax credits during the six months ended June 30, 2020, compared to a benefit of $ 1,471 recorded during the six months ended June 30, 2019 and (ii) recording of excess tax benefits related to stock awards of $ 1,822 pursuant to ASU No.

2016-09 during the six months ended June 30, 2020 compared to $ 1,072 during the six months ended June 30, 2019.

Income tax (deferred) recognized in other comprehensive income are as follows:

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Income tax benefit/(expense) on:

Unrealized gain/(loss) on cash flow hedges $ ( 2,702 ) $ ( 113 ) $ 2,106 $ ( 1,656 )

Retirement benefits 257 19 248 ( 90 )

Total Income tax benefit/(expense) recognized in other comprehensive income

Currency translation adjustments ( 4,204 ) ( 413 ) ( 4,204 ) ( 1,119 )

Total income tax expense recognized in other comprehensive income $ ( 6,649 ) $ ( 507 ) $ ( 1,850 ) $ ( 2,865 )

Stock-Based Compensation

The following costs related to the Company’s stock-based compensation plan are included in the unaudited consolidated statements of income:

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Cost of revenues $ 1,624 $ 1,638 $ 3,042 $ 2,964

1 unchanged sentence

Selling and marketing expenses 2,990 2,736 4,782 5,391

As of March 31, 2020 , the Company had 2,308,555 shares available for grant under the 2018 Omnibus Incentive Plan.

Total $ 7,726 $ 7,155 $ 12,504 $ 14,111

As of June 30, 2020, the Company had 2,305,155 shares available for grant under the 2018 Omnibus Incentive Plan.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

1 unchanged sentence

Stock option activity under the Company’s stock-based compensation plans is shown below:

Weighted-Average

Options Weighted-Average

Price Aggregate

Value Weighted-Average

Outstanding at December 31, 2019 98,161 $ 23.39 $ 4,522 1.86

Outstanding at March 31, 2020

Vested and exercisable at March 31, 2020

The unrecognized compensation cost for unvested options as of March 31, 2020 was $ nil .

Granted — — — —

Exercised ( 41,422 ) 23.18 1,993 —

Forfeited — — — —

Outstanding at June 30, 2020 56,739 $ 23.54 $ 2,261 1.54

Vested and exercisable at June 30, 2020 56,739 $ 23.54 $ 2,261 1.54

The unrecognized compensation cost for unvested options as of June 30, 2020 was $ nil .

Restricted Stock and Restricted Stock Units

Restricted stock and restricted stock unit activity under the Company’s stock-based compensation plans is shown below:

Restricted Stock

Restricted Stock Units

Weighted Average

Restricted Stock Restricted Stock Units

Number Weighted Average

Fair Value Number Weighted Average

Outstanding at December 31, 2019* 27,384 $ 48.72 913,094 $ 59.61

Outstanding at March 31, 2020*

* As of March 31, 2020 and December 31, 2019 restricted stock units vested for which the underlying common stock is yet to be issued is 167,270 each.

As of March 31, 2020 , unrecognized compensation cost of $ 61,705 is expected to be expensed over a weighted average period of 3.07 years .

Granted — — 392,287 77.01

Vested — — ( 310,657 ) 56.59

Forfeited — — ( 43,318 ) 63.87

Outstanding at June 30, 2020* 27,384 $ 48.72 951,406 $ 67.58

* As of June 30, 2020 and December 31, 2019 restricted stock units vested for which the underlying common stock is yet to be issued were 181,638 and 167,270 , respectively.

As of June 30, 2020, unrecognized compensation cost of $ 55,720 is expected to be expensed over a weighted average period of 2.85 years.

Performance Based Stock Awards

Performance based restricted stock unit activity under the Company’s stock plans is shown below:

Revenue Based PRSUs

Market Condition Based PRSUs

Weighted Average

Revenue Based PRSUs Market Condition Based PRSUs

Number Weighted Average

Fair Value Number Weighted Average

Outstanding at December 31, 2019 87,685 $ 62.54 87,670 $ 82.10

Outstanding at March 31, 2020

As of March 31, 2020 , unrecognized compensation cost of $ 10,092 is expected to be expensed over a weighted average period of 2.21 years .

Granted 61,368 78.29 61,352 102.10

Vested — — — —

Forfeited ( 2,063 ) 62.24 ( 2,062 ) 80.33

Outstanding at June 30, 2020 146,990 $ 69.12 146,960 $ 90.47

As of June 30, 2020, unrecognized compensation cost of $ 8,959 is expected to be expensed over a weighted average period of 2.01 years.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

June 30, 2020

(In thousands, except share and per share amounts)

The impact of COVID-19 on the economic environment is uncertain and has caused variability in the estimation of number of performance based restricted stock units that will eventually vest and the related compensation cost to be recognized in the unaudited consolidated statements of income.

Related Party Disclosures

2 unchanged sentences

Pandit, Chairman and CEO of The Orogen Group LLC (an affiliate of the Purchaser), was appointed to Company’s Board of Directors.

The Company had outstanding Notes with a principal amount of $ 150,000 each as of March 31, 2020 and December 31, 2019 and interest accrued of $ 2,625 and $ 1,313 as of March 31, 2020 and December 31, 2019 , respectively, related to the Investment Agreement.

During the three months ended March 31, 2020 and 2019, the Company recognized interest expense of $ 1,313 each on the Notes.

Refer to Note 17 to the unaudited consolidated financial statements for details.

The Company had outstanding Notes with a principal amount of $ 150,000 each as of June 30, 2020 and December 31, 2019 and interest accrued of $ 1,313 each as of June 30, 2020 and December 31, 2019, related to the Investment Agreement.

The Company recognized interest expense on the Notes related to the Investment Agreement s as below.

Refer to Note 17 – Borrowings to the unaudited consolidated financial statements for details.

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Interest expense on Notes $ 1,313 $ 1,269 $ 2,625 $ 2,581

Commitments and Contingencies

Capital Commitments

At March 31, 2020 , the Company has committed to spend approximately $ 12,300 under agreements to purchase property and equipment.

This amount is net of capital advances paid which are recognized in the unaudited consolidated balance sheets as property and equipment.

At June 30, 2020, the Company had committed to spend approximately $ 9,900 under agreements to purchase property and equipment.

This amount is net of capital advances paid as of June 30, 2020 which are recognized in the unaudited consolidated balance sheets as property and equipment.

Other Commitments

10 unchanged sentences

Accordingly, the Company determines the appropriate pricing for the international transactions among its associated enterprises on the basis of a detailed functional and economic analysis involving benchmarking against transactions among entities that are not under common control.

The tax authorities have jurisdiction to review this arrangement and in the event that they determine that the transfer price applied was not appropriate, the Company may incur increased tax liability, including accrued interest and penalties.

The tax authorities have jurisdiction to review this arrangement

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2020

(In thousands, except share and per share amounts)

and in the event that they determine that the transfer price applied was not appropriate, the Company may incur increased tax liability, including accrued interest and penalties.

The Company is currently involved in disputes with the Indian tax authorities over the application of some of its transfer pricing policies for some of its subsidiaries.

2 unchanged sentences

The Company is subject to taxation in the United States and various states and foreign jurisdictions.

For the U.S., the Philippines and India, tax year 2016 and subsequent tax years remain open for examination by the tax authorities as of March 31, 2020.

The aggregate amount demanded by income tax authorities (net of advance payments, if any) from the Company related to its transfer pricing issues for tax years 2003 to 2015 and its permanent establishment issues for tax years 2003 to 2007 as of March 31, 2020 and December 31, 2019 is $ 16,104 and $ 16,220 , respectively, of which the Company has made payments and/or provided bank guarantees to the extent $ 7,858 and $ 8,108 , respectively.

Amounts paid as deposits in respect of such assessments aggregating to $ 6,108 and $ 6,252 as of March 31, 2020 and December 31, 2019 , respectively, are included in “Other assets” and amounts deposited for bank guarantees aggregating to $ 1,750 and $ 1,856 as of March 31, 2020 and December 31, 2019 , respectively, are included in “Restricted cash” in the non-current assets section of the Company’s unaudited consolidated balance sheets.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2020

(In thousands, except share and per share amounts)

For the U.S., the Philippines and India, tax year 2016 and subsequent tax years remain open for examination by the tax authorities as of June 30, 2020.

The aggregate amount demanded by income tax authorities (net of advance payments, if any) from the Company related to its transfer pricing issues for tax years 2003 to 2015 and its permanent establishment issues for tax years 2003 to 2007 as of June 30, 2020 and December 31, 2019 is $ 16,152 and $ 16,220 , respectively, of which the Company has made payments and/or provided bank guarantees to the extent $ 7,856 and $ 8,108 , respectively.

Amounts paid as deposits in respect of such assessments aggregating to $ 6,102 and $ 6,252 as of June 30, 2020 and December 31, 2019, respectively, are included in “Other assets” and amounts deposited for bank guarantees aggregating to $ 1,754 and $ 1,856 as of June 30, 2020 and December 31, 2019, respectively, are included in “Restricted cash” in the non-current assets section of the Company’s unaudited consolidated balance sheets.

Based on the facts underlying the Company’s position and its experience with these types of assessments, the Company believes that its position will more likely than not be sustained upon final examination by the tax authorities based on its technical merits as of the reporting date and accordingly has not accrued any amount with respect to these matters in its unaudited consolidated financial statements.

2 unchanged sentences

Accordingly, even if these disputes are resolved, the Indian tax authorities may still serve additional orders or assessments.

During the quarter ended March 31, 2019, there was a judicial pronouncement in India with respect to defined contribution benefits payments interpreting certain statutory defined contribution obligations of employees and employers.

In February 2019, there was a judicial pronouncement in India with respect to defined contribution benefits payments interpreting certain statutory defined contribution obligations of employees and employers.

Currently some of the Company's subsidiaries in India are undergoing assessment with the statutory authorities.

10 unchanged sentences

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.

Subsequent Events

There are many uncertainties regarding COVID-19, and the Company is closely monitoring the effects of the pandemic on all aspects of its business, including how it will impact the Company, its customers, employees, contractors, suppliers, business partners and delivery models.

While COVID-19 did not have a significant impact on the Company’s financial results during the fiscal quarter ended March 31, 2020, the Company is unable to determine with any degree of accuracy the length and severity of the COVID-19 crisis and what impact it will have on its future financial position and operating results.

The COVID-19 crisis is ongoing and dynamic in nature and, to date, the Company has experienced temporary closures in key operations centers, including in the U.S., India, the Philippines, Europe and South Africa.

The Company will continue to assess the evolving impact of COVID-19 on its business.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements