What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-06 compared with 2020-05-07 · 274 added, 139 removed, 198 unchanged (68% of the section changed)

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Dollar amounts within Item 2 are presented as actual, rounded, dollar amounts.

We have described in this Quarterly Report on Form 10-Q, the impact of the global Coronavirus Disease 2019 pandemic (“COVID-19”) on our financial results for the quarter ended March 31, 2020.

However, we are not able to predict at this time what impact, the spread of COVID-19 will have on our 2020 financial results.

We have described in this Quarterly Report on Form 10-Q, the impact of the global Coronavirus Disease 2019 pandemic (“COVID-19”) on our financial results for the quarter ended June 30, 2020.

However, it remains difficult to predict at this time what impact, the spread of COVID-19 will have on our 2020 financial results.

See "Cautionary Note Regarding Forward-Looking Statements" below and in Item 1A-“Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q for further information regarding risks and uncertainties relating to COVID-19.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995.

You should not place undue reliance on these statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control.

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Our new reportable segments are as follows:

• Healthcare,

• Analytics, and

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We have operations centers in India, the U.S., the Philippines, Bulgaria, Colombia, South Africa, Romania and the Czech Republic.

The recent outbreak of COVID-19, which has been declared by the World Health Organization to be a “public health emergency of international concern,” has spread across the globe and is materially impacting worldwide economic activity and levels of business confidence.

Through the first fiscal quarter ended March 31, 2020, COVID-19 did not have a significant impact on our business, however COVID-19 is likely to materially impact us and our customers, employees, contractors, suppliers, and other partners, who have been prevented from conducting business activities as usual, including due to shutdowns that have been requested or mandated by governmental authorities.

The restrictions have disrupted our ability to provide our services and solutions and resulted in, among other things loss of revenue, increased costs and the possibility of enhanced credit risk on our accounts receivable.

The continued spread of COVID-19 and the measures taken by the governments of countries affected has disrupted the continuity of providing services to our customers and adversely impacted our business, financial condition or results of operations.

Impact of COVID-19 on Our Business

The global COVID-19 pandemic continues to materially impact worldwide economic activity and levels of business confidence and has had widespread, rapidly-evolving and unpredictable impacts on global societies, economies, financial markets and business practices.

During the first fiscal quarter ended March 31, 2020, COVID-19 did not have a significant impact on our business, however during the second fiscal quarter ended June 30, 2020, COVID-19 materially impacted us and our customers, employees, contractors, suppliers, and other partners, who were prevented from conducting business activities as usual, including due to the health and safety measures in response to COVID-19, such as shutdowns, which have been requested or mandated by governmental authorities.

The shutdown measures disrupted our ability to provide our services and solutions and resulted in, among other things, loss of revenue, increased costs and the possibility of enhanced credit risk on our accounts receivable.

The continued spread of COVID-19 and the measures taken by the governments of countries affected has disrupted the continuity of our provision of services to our customers and adversely impacted our business, financial condition or results of operations.

In the second quarter of 2020, we took actions in response to the pandemic that focused on maintaining business continuity and helping our employees and our customers, as well as on preparing for the future and the long-term success of our business.

These actions included disseminating guidance and information to our employees, periodic CEO messaging, various programs aimed at employee wellness and facilitating work from home, including a global wellness program, enhanced awareness towards information security, cyber security and data privacy policies and practices for employees while working from home among others.

There continues to be significant volatility and economic and geopolitical uncertainty in many markets around the world.

Several states in the United States, including New York, where we are headquartered, have declared states of emergency, and several countries around the world, including the United States, have significantly restricted travel.

Several states in the United States, including New York, where we are headquartered, declared states of emergency, some of which are now being slowly lifted in a piecemeal manner through multi-step reopening policies, while others are being reinstated in response to new outbreaks.

Several countries around the world, including the United States, have significantly restricted travel.

We are actively managing our business to respond to the impact.

Given the unprecedented uncertainty of this situation, including the unknown duration and severity of the pandemic and the unknown overall impact on our services, we are unable to forecast the full impact on our business;

Given the unprecedented uncertainty of this situation, including the unknown duration, scope and severity of the pandemic and the current and future health and safety measures implemented in response to the pandemic, and the unknown overall impact on our services, it makes it difficult to forecast the full impact on our business or the duration of such impact;

however, we expect that the impacts from COVID-19 and the related economic disruption will have an adverse impact on our consolidated results of operations, consolidated financial position and consolidated cash flow in fiscal 2020.

Due to the above circumstances and as described generally in this Quarterly Report on Form 10-Q, our results of operations for the three month period ended March 31, 2020 are not necessarily indicative of the results to be expected for the full fiscal year.

As of March 31, 2020, due to the deteriorating macroeconomic conditions arising from the COVID-19 pandemic, we performed a goodwill impairment test for any potential impairment and concluded that there was no impairment.

However we do not expect COVID-19 and its related economic impact to materially adversely affect our liquidity position in the foreseeable future.

Due to the above circumstances and as described generally in this Quarterly Report on Form 10-Q, our results of operations for the three and six months ended period ended June 30, 2020 are not necessarily indicative of the results to be expected for the full fiscal year and such impact may not be directly comparable to any historical period.

We continue to monitor the implications of COVID-19 on our business, as well as our customers’ and suppliers’ businesses.

In response to certain anticipated impacts from COVID-19, we have also implemented a series of temporary cost reduction measures to further preserve financial flexibility.

These actions include the postponement of certain discretionary spending and capital expenditures, deferring scheduled increases in base salaries and temporarily reducing the base salaries of our executive officers and certain other groups of employees.

We have also taken certain precautionary measures to maintain financial flexibility during this time, including drawing $100.0 million from our line of credit under our existing Credit Agreement on March 12, 2020, the proceeds of which were available for working capital, general corporate or other purposes as needed, however it was repaid in full on April 20, 2020.

We also temporarily suspended our stock repurchase program during the first and second quarter of 2020, which was resumed as of July 1, 2020.

As of June 30, 2020, due to the macroeconomic conditions arising from COVID-19, we performed a goodwill impairment test for any potential impairment and concluded that there was no impairment.

However, there can be no assurances that goodwill will not be impaired in future periods.

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

Given the continued uncertainty surrounding COVID-19, we have taken certain precautionary measures to maintain financial flexibility during this time, including drawing $100 million from our line of credit under our existing Credit Agreement on March 12, 2020, the proceeds of which were available for working capital, general corporate or other purposes as needed, and which was repaid in full on April 20, 2020, temporary suspension of our stock repurchase program, and other cost reduction measures related to employee and vendor expenses and capital expenditure plans.

As public health protocols begin to accommodate returning to work at our facilities, we are implementing additional safety measures at all of our facilities, including increased frequency in cleaning and disinfecting as well as hygiene and social distancing practices.

However there is a risk that if jurisdictions in which we operate re-instate prior restrictions, our operations and business will be materially impacted.

For additional information and risks related to COVID-19, see Item 1A- "Risk Factors" below.

For the three months ended March 31, 2020 , we had revenues of $246.0 million compared to revenues of $239.6 million for the three months ended March 31, 2019 , an increase of $6.4 million, or 2.7% .

We serve clients mainly in the U.S.

and the U.K., with these two regions generating 84.5% and 9.5% , respectively, of our total revenues for the three months ended March 31, 2020 , and 81.9% and 12.1% , respectively, of our revenues for the three months ended March 31, 2019 .

For the three months ended March 31, 2020 and 2019, our total revenues from our top ten clients accounted for 37.3% and 36.6% of our total revenues, respectively.

For the three months ended June 30, 2020, we had revenues of $222.5 million compared to revenues of $243.5 million for the three months ended June 30, 2019, a decrease of $21.0 million, or 8.6%.

For the six months ended June 30, 2020, we had revenues of $468.5 million compared to revenues of $483.1 million for the six months ended June 30, 2019, a decrease of $14.6 million, or 3.0%.

We serve clients mainly in the United States and the United Kingdom, with these two regions generating 85.0% and 8.5%, respectively, of our total revenues for the three months ended June 30, 2020, and 81.3% and 12.4%, respectively, of our total revenues for the three months ended June 30, 2019.

For the six months ended June 30, 2020, these two regions generated 84.7% and 9.0%, respectively, of our total revenues and 81.6% and 12.3%, respectively, of our total revenues for the six months ended June 30, 2019.

For the three months ended June 30, 2020 and 2019, our total revenues from our top ten clients accounted for 38.7% and 36.5% of our total revenues, respectively.

For the six months ended June 30, 2020 and 2019, our total revenues from our top ten clients accounted for 37.1% and 36.5% of our total revenues, respectively.

Our revenue concentration with our top clients remains largely consistent year-over-year and we continue to develop relationships with new clients to diversify our client base.

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Operations Management Services:

We provide our clients with a range of operations management services from our Insurance, Healthcare and Emerging Business operating segments, which typically involve the transfer to EXL business

operations of a client such as claims processing, clinical operations, or financial transaction processing, after which we administer and manage those operations for our client on an ongoing basis.

We provide our clients with a range of operations management services from our Insurance, Healthcare and Emerging Business operating segments, which typically involve the transfer to EXL business operations of a client such as claims processing, clinical operations, or financial transaction processing, after which we administer and manage those operations for our client on an ongoing basis.

As part of this transfer, we hire and train employees to work at our operations centers on the relevant business operations, implement a process migration to these operations centers and then provide services either to the client or directly to the client’s customers.

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We anticipate that revenues from our analytics services will grow as we expand our service offerings and client base, both organically and through acquisitions.

We expect that the growth of our operations management and analytics services will continue to be impacted throughout 2020 by the COVID-19 pandemic and subsequent global recovery.

Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Impact of COVID-19 on Our Business” and to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.

Critical Accounting Policies and Estimates

For a description of our critical accounting policies and estimates, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” and Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019

For a description of our critical accounting policies and estimates, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” and Note 2 - Summary of Significant Accounting Policies to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019

In addition, due to outbreak of COVID-19, we have reassessed those of our accounting policies whose application places the most significant demands on management’s judgment, for instance, revenue recognition, allowance for expected credit losses, business combinations, goodwill, intangibles and long-lived assets, stock-based compensation, derivative instruments and hedging activity, borrowings, assumptions related to ROU assets, lease cost, income taxes and assets and obligations related to employee benefit plans.

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Results of Operations

The following table summarizes our results of operations for the three months ended March 31, 2020 and 2019:

Three months ended March 31,

The following table summarizes our results of operations for the three months ended June 30, 2020 and 2019:

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

2020 2019 2020 2019

(dollars in millions)

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Cost of revenues (1)

158.4 162.4 321.1 319.7

Gross profit (1)

64.1 81.1 147.4 163.4

Operating expenses:

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Net income attributable to ExlService Holdings, Inc.

stockholders $ 8.4 $ 12.5 $ 30.8 $ 27.3

(1) Exclusive of depreciation and amortization expense.

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

The following table summarizes our revenues by reportable segments for the three months ended March 31, 2020 and 2019:

Three months ended March 31,

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

The following table summarizes our revenues by reportable segments for the three months ended June 30, 2020 and 2019:

Three months ended June 30, Percentage

2020 2019 Change

(dollars in millions)

Insurance $ 81.3 $ 85.6 $ (4.3) (5.0) %

Healthcare 25.0 21.7 3.3 14.9 %

Emerging Business 34.5 48.3 (13.8) (28.5) %

Analytics 81.7 87.9 (6.2) (7.0) %

Total revenues, net $ 222.5 $ 243.5 $ (21.0) (8.6) %

Revenues for the three months ended March 31, 2020 were $246.0 million , up $6.4 million , or 2.7% , compared to the three months ended March 31, 2019 .

Revenue growth in Insurance of $2.4 million was primarily driven by expansion of business from our existing clients of $3.3 million.

This was partially offset by $0.9 million mainly attributable to the depreciation of the Australian dollar, Indian rupee, U.K.

Revenues for the three months ended June 30, 2020 were $222.5 million, down $21.0 million, or 8.6%, compared to the three months ended June 30, 2019.

Revenue decline in Insurance of $4.3 million was primarily driven by lower volumes due to the impact of COVID-19, partially offset by expansion of business from certain existing clients aggregating to $3.6 million and $0.7 million mainly attributable to the depreciation of the Australian dollar, Indian rupee, U.K.

pound sterling and South African ZAR against the U.S.

dollar during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 .

Insurance revenues were 34.0% and 33.9% of our total revenues in the three months ended March 31, 2020 and March 31, 2019 , respectively.

Revenue growth in Healthcare of $4.8 million was primarily driven by expansion of business from our existing clients and new wins aggregating to $8.7 million, partially offset by our December 2019 wind-down of Health Integrated business revenues of $3.9 million during the three months ended March 31, 2019, compared to none in the three months ended March 31, 2020.

Healthcare revenues were 11.0% and 9.3% of our total revenues in the three months ended March 31, 2020 and March 31, 2019 , respectively.

Revenue decline in Emerging Business of $6.3 million was primarily driven by termination of certain existing client contracts of $5.8 million, and $0.5 million attributable to the depreciation of the Indian rupee against the U.S.

dollar during the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

Emerging Business revenues were 17.4% and 20.5% of our total revenues in the three months ended March 31, 2020 and March 31, 2019, respectively.

Revenue growth in Analytics of $5.5 million was primarily driven by an increase in revenues from our recurring and project-based engagements from our existing and new clients of $5.8 million.

This was partially offset by $0.3 million attributable to the depreciation of the U.K.

dollar during the three months ended June 30, 2020, compared to the three months ended June 30, 2019.

Insurance revenues were 36.5% and 35.1% of our total revenues in the three months ended June 30, 2020 and June 30, 2019, respectively.

Revenue growth in Healthcare of $3.3 million was primarily driven by expansion of business from our existing clients of $6.2 million, partially offset by our December 2019 wind-down of Health Integrated business revenues of $2.9 million during the three months ended June 30, 2019.

Healthcare revenues were 11.2% and 8.9% of our total revenues in the three months ended June 30, 2020 and June 30, 2019, respectively.

Revenue decline in Emerging Business of $13.8 million was primarily driven by lower volumes due to the impact of COVID-19 and ramp down in certain client contracts aggregating to $13.0 million and $0.8 million attributable to the depreciation of the Indian rupee against the U.S.

dollar during the three months ended June 30, 2020, compared to the three months ended June 30, 2019.

Emerging Business revenues were 15.5% and 19.8% of our total revenues in the three months ended June 30, 2020 and June 30, 2019, respectively.

Revenue decline in Analytics of $6.2 million was primarily driven by lower revenues from our recurring and project-based engagements due to the impact of COVID-19 aggregating to $6.0 million, and $0.2 million attributable to the depreciation of the U.K.

pound sterling and Indian rupee against the U.S.

dollar during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 .

Analytics revenues were 37.6% and 36.3% of our total revenues in the three months ended March 31, 2020 and March 31, 2019 , respectively.

dollar during the three months ended June 30, 2020, compared to the three months ended June 30, 2019.

Analytics revenues were 36.7% and 36.1% of our total revenues in the three months ended June 30, 2020 and June 30, 2019, respectively.

Cost of Revenues and Gross Margin :

The following table sets forth cost of revenues and gross margin of our reportable segments.

Cost of Revenues

Three months ended March 31,

Cost of Revenues Gross Margin

Three months ended June 30, Change Percentage

change Three months ended June 30, Change

2020 2019 2020 2019

(dollars in millions)

Insurance $ 59.1 $ 59.4 $ (0.3) (0.5) % 27.3 % 30.6 % (3.3) %

Healthcare 19.6 17.7 1.9 10.7 % 21.4 % 18.3 % 3.1 %

Emerging Business 22.5 27.9 (5.4) (19.5) % 35.1 % 42.4 % (7.3) %

For the three months ended March 31, 2020 , cost of revenues was $162.7 million compared to $157.3 million for the three months ended March 31, 2019 , an increase of $5.4 million , or 3.4% .

Our gross margin for the three months ended March 31, 2020 was 33.9% compared to 34.4% for the three months ended March 31, 2019 , a decrease of 50 basis points (“bps”), primarily due to the impact of COVID-19 related expenses of 80 bps.

The increase in cost of revenues in Insurance of $3.8 million was primarily due to an increase in employee-related costs of $3.0 million on account of higher headcount and wage inflation, higher infrastructure and travel costs of $1.1 million and higher technology and other operating costs of $0.3 million.

Analytics 57.2 57.4 (0.2) (0.3) % 29.9 % 34.6 % (4.7) %

Total $ 158.4 $ 162.4 $ (4.0) (2.5) % 28.8 % 33.3 % (4.5) %

For the three months ended June 30, 2020, cost of revenues was $158.4 million compared to $162.4 million for the three months ended June 30, 2019, a decrease of $4.0 million, or 2.5%.

Our gross margin for the three months ended June 30, 2020 was 28.8% compared to 33.3% for the three months ended June 30, 2019, a decrease of 450 basis points (“bps”).

The decrease in cost of revenues in Insurance of $0.3 million was primarily due to decrease in employee-related costs of $1.3 million and currency movements, net of hedging of $0.8 million.

This was offset by higher infrastructure, technology and other operating costs of $1.8 million.

Gross margin in Insurance decreased by 330 bps during the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily due to lower revenues and impact of COVID-19 related expenses during the three months ended June 30, 2020.

The increase in cost of revenues in Healthcare of $1.9 million was primarily due to an increase in employee-related costs of $1.6 million and other operating costs of $0.5 million.

This was partially offset by currency movements, net of hedging of $0.2 million.

Gross margin in Insurance decreased by 240 bps during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 , primarily due to higher operating expenses.

The increase in cost of revenues in Healthcare of $1.8 million was primarily due to an increase in employee-related costs of $2.1 million.

This was partially offset by lower other operating cost of $0.2 million and currency movements, net of hedging of $0.1 million.

Gross margin in Healthcare increased by 750 bps during the three months ended March 31, 2020 , compared to the three months ended March 31, 2019 , primarily due to lower margin in the Heath Integrated business during the three months ended March 31, 2019 and higher revenues during the three months ended March 31, 2020.

The decrease in cost of revenues in Emerging Business of $1.8 million was primarily due to a decrease in employee-related costs of $1.3 million, lower infrastructure and technology cost of $0.5 million and currency movements, net of hedging of $0.2 million.

This was partially offset by higher other operating cost of $0.2 million.

Gross margin in Emerging Business decreased by 390 bps during the three months ended March 31, 2020, compared to the three months ended March 31, 2019, primarily due to lower revenues and higher operating expenses.

The increase in cost of revenues in Analytics of $1.6 million was primarily due to an increase in employee-related costs of $4.0 million on account of higher headcount and wage inflation and higher infrastructure and travel costs $0.7 million.

This was partially offset by lower other operating cost $2.6 million and currency movements, net of hedging of $0.5 million.

Gross margin in Analytics increased by 200 bps during the three months ended March 31, 2020, compared to the three months ended March 31, 2019, primarily due to higher volumes in existing clients.

Gross margin in Healthcare increased by 310 bps during the three months ended June 30, 2020, compared to the three months ended June 30, 2019, primarily due to lower margin in the Heath Integrated business during the three months ended June 30, 2019 and higher revenues during the three months ended June 30, 2020.

The decrease in cost of revenues in Emerging Business of $5.4 million was primarily due to a decrease in employee-related costs of $3.5 million, lower travel costs of $0.9 million, lower other operating costs of $0.4 million and currency movements, net of hedging of $0.6 million.

Gross margin in Emerging Business decreased by 730 bps during the three months ended June 30, 2020, compared to the three months ended June 30, 2019, primarily due to lower revenues during the three months ended June 30, 2020.

The decrease in cost of revenues in Analytics of $0.2 million was primarily due to lower travel costs of $2.2 million and currency movements, net of hedging of $0.7 million.

This was partially offset by an increase in employee-related costs of $2.2 million and higher other operating costs of $0.5 million.

Gross margin in Analytics decreased by 470 bps during the three months ended June 30, 2020, compared to the three months ended June 30, 2019, primarily due to lower revenues and higher operating expenses.

Selling, General and Administrative (“SG&A”) Expenses.

Three months ended March 31,

Three months ended June 30, Change Percentage

(dollars in millions)

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As a percentage of revenues 18.8 % 20.1 %

The decrease in SG&A expenses of $7.1 million was primarily due to a decrease in employee-related costs of $2.9 million, a decrease in stock-based compensation expense of $2.3 million mostly due to revision in estimates related to revenue linked performance based restricted stock units due to COVID-19, lower travel costs of $0.8 million, lower other operating costs $0.8 million and currency movements, net of hedging of $0.3 million.

The decrease in SG&A expenses of $7.0 million was primarily due to COVID-19 cost reduction measures including the temporary reduction of the base salaries of our executive officers and certain other groups of employees.

This was driven by lower employee-related costs of $4.5 million, lower infrastructure and travel costs of $1.9 million and currency movements, net of hedging of $0.6 million.

Depreciation and Amortization.

Three months ended March 31,

Three months ended June 30, Change Percentage

(dollars in millions)

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As a percentage of revenues 5.6 % 5.2 %

The decrease in intangibles amortization expense of $1.5 million was primarily due to lower weighted average remaining useful lives of intangible assets during the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

The increase in depreciation expense of $0.2 million was due to depreciation related to our new operating centers to support our business growth.

The decrease in intangibles amortization expense of $2.2 million was primarily due to end of useful lives for certain intangible assets during the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

The increase in depreciation expense of $1.8 million was due to depreciation related to our investments in new operating centers to support our business growth.

Impairment and Restructuring Charges.

Three months ended March 31,

Percentage change

Three months ended June 30, Percentage change

2020 2019 Change

(dollars in millions)

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As a percentage of revenues — % 2.3 %

During the three months ended March 31, 2019, we recognized an impairment charge of $1.2 million on our long-lived assets related to our Health Integrated business.

See Note 8 to our unaudited consolidated financial statements for details.

During the three months ended June 30, 2019, we recorded an impairment charge of $1.9 million and restructuring charges of $3.7 million in connection with the wind-down of our Health Integrated business.

Income from Operations.

Income from operations increased by $10.6 million, or 63.0%, from $16.9 million for the three months ended March 31, 2019 to $27.5 million for the three months ended March 31, 2020 .

As a percentage of revenues, income from operations increased from 7.0% for the three months ended March 31, 2019 to 11.2% for the three months ended March 31, 2020 .

Income from operations decreased by $4.0 million, or 28.8%, from $13.9 million for the three months ended June 30, 2019 to $9.9 million for the three months ended June 30, 2020.

As a percentage of revenues, income from operations decreased from 5.7% for the three months ended June 30, 2019 to 4.4% for the three months ended June 30, 2020.

Foreign Exchange Gain/(Loss).

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dollar against the Indian rupee, the U.K.

pound sterling and the Philippine peso during the three months ended March 31, 2020 .

pound sterling and the Philippine peso during the three months ended June 30, 2020.

The average exchange rate of the U.S.

dollar against the Indian rupee increased from 70.32 during the three months ended March 31, 2019 to 73.08 during the three months ended March 31, 2020 .

dollar against the Indian rupee increased from 69.42 during the three months ended June 30, 2019 to 75.41 during the three months ended June 30, 2020.

The average exchange rate of the U.K.

pound sterling against the U.S.

dollar decreased from 1.32 during the three months ended March 31, 2019 to 1.28 during the three months ended March 31, 2020 .

dollar decreased from 1.28 during the three months ended June 30, 2019 to 1.24 during the three months ended June 30, 2020.

The average exchange rate of the U.S.

dollar against the Philippine peso decreased from 52.11 during the three months ended March 31, 2019 to 50.83 during the three months ended March 31, 2020 .

We recorded a net foreign exchange gain of $1.4 million for the three months ended March 31, 2020 compared to the net foreign exchange gain of $1.3 million for the three months ended March 31, 2019 .

dollar against the Philippine peso decreased from 51.84 during the three months ended June 30, 2019 to 50.28 during the three months ended June 30, 2020.

We recorded a net foreign exchange gain of $1.4 million for the three months ended June 30, 2020 compared to the net foreign exchange gain of $1.2 million for the three months ended June 30, 2019.

Interest expense.

Interest expense decreased from $3.6 million for the three months ended March 31, 2019 to $3.1 million for the three months ended March 31, 2020 primarily due lower effective interest rates under our Credit Facility during the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

Interest expense decreased from $3.9 million for the three months ended June 30, 2019 to $2.9 million for the three months ended June 30, 2020 primarily due to lower borrowings and lower effective interest rates under our Credit Facility (as defined below) during the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

Other Income, net.

Three months ended March 31,

Three months ended June 30, Percentage

2020 2019 Change

(dollars in millions)

Gain on sale and mark-to-market of mutual funds $ 3.1 $ 3.3 $ (0.2) (6.3) %

Interest and dividend income

Interest income 0.6 0.7 (0.1) (9.3) %

Other, net 0.5 0.1 0.4 456.3 %

Other income, net $ 4.2 $ 4.1 $ 0.1 3.0 %

Other income, net decreased by $1.9 million , from $4.4 million for the three months ended March 31, 2019 to $2.5 million for the three months ended March 31, 2020 , primarily due to lower return on mutual fund investments of $1.5 million and decrease in interest and dividend income of $0.4 million.

Other income, net increased by $0.1 million, from $4.1 million for the three months ended June 30, 2019 to $4.2 million for the three months ended June 30, 2020, primarily due to recognition of non-recurring benefits of $0.5 million related to wind-down of the Health Integrated business during the three months ended June 30, 2020.

This was partially offset by lower return on mutual fund investments and interest income of $0.3 million during the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

Income Tax Expense.

We recorded income tax expense of $5.8 million and $4.2 million for the three months ended March 31, 2020 and 2019.

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 recording of higher excess tax benefits related to stock awards of $1.8 million pursuant to ASU No.

2016-09 during the three months ended March 31, 2020 compared to $1.0 million during the three months ended March 31, 2019 .

Net income increased from $14.7 million for the three months ended March 31, 2019 to $22.4 million for the three months ended March 31, 2020 , primarily due to increase in income from operations of $10.6 million, lower interest expense of $0.5 million and higher foreign exchange gain, net of $0.1 million.

We recorded income tax expense of $4.1 million and $2.7 million for the three months ended June 30, 2020 and 2019, respectively.

The 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 $1.3 million due to electing a new tax regime for two of our 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 three months ended June 30, 2020.

Net income decreased from $12.5 million for the three months ended June 30, 2019 to $8.4 million for the three months ended June 30, 2020, primarily due to decrease in income from operations of $4.0 million, and higher income tax expense of $1.4 million.

This was partially offset by lower interest expense of $1.0 million, higher foreign exchange gain, net of $0.2 million, higher other income, net of $0.1 million.

As a percentage of revenues, net income decreased from 5.2% for the three months ended June 30, 2019 to 3.8% for the three months ended June 30, 2020.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

The following table summarizes our revenues by reportable segments for the six months ended June 30, 2020 and 2019:

Six months ended June 30, Percentage

2020 2019 Change

(dollars in millions)

Insurance $ 165.0 $ 166.9 $ (1.9) (1.1) %

Healthcare 52.0 44.0 8.0 18.3 %

Emerging Business 77.4 97.4 (20.0) (20.6) %

Analytics 174.1 174.8 (0.7) (0.4) %

Total revenues, net $ 468.5 $ 483.1 $ (14.6) (3.0) %

Revenues for the six months ended June 30, 2020 were $468.5 million, down $14.6 million, or 3.0%, compared to the six months ended June 30, 2019.

Revenue decline in Insurance of $1.9 million was primarily driven by lower volumes due to the impact of COVID-19, partially offset by expansion of business from certain existing clients aggregating to $0.3 million and $1.6 million mainly attributable to the depreciation of the Australian dollar, Indian rupee, U.K.

pound sterling and South African ZAR against the U.S.

dollar during the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Insurance revenues were 35.2% and 34.5% of our total revenues in the six months ended June 30, 2020 and June 30, 2019, respectively.

Revenue growth in Healthcare of $8.0 million was primarily driven by expansion of business from our existing clients and new wins aggregating to $14.9 million, partially offset by our December 2019 wind-down of Health Integrated business revenues of $6.9 million during the six months ended June 30, 2019.

Healthcare revenues were 11.1% and 9.1% of our total revenues in the six months ended June 30, 2020 and June 30, 2019, respectively.

Revenue decline in Emerging Business of $20.0 million was primarily driven by lower volumes due to the impact of COVID-19 and ramp down in certain client contracts aggregating to $18.7 million, and $1.3 million attributable to the depreciation of the Indian rupee against the U.S.

dollar during the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Emerging Business revenues were 16.5% and 20.2% of our total revenues in the six months ended June 30, 2020 and June 30, 2019, respectively.

Revenue decline in Analytics of $0.7 million was primarily driven by lower revenues from our recurring and project based engagements due to the impact of COVID-19 aggregating to $0.2 million and $0.5 million attributable to the depreciation of the U.K.

pound sterling and Indian rupee against the U.S.

dollar during the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Analytics revenues were 37.2% and 36.2% of our total revenues in the six months ended June 30, 2020 and June 30, 2019, respectively.

Cost of Revenues and Gross Margin :

The following table sets forth cost of revenues and gross margin of our reportable segments.

Cost of Revenues Gross Margin

Six months ended June 30, Percentage change Six months ended June 30, Change

2020 2019 Change 2020 2019

(dollars in millions)

Insurance $ 118.1 $ 114.7 $ 3.4 3.0 % 28.4 % 31.3 % (2.9) %

Healthcare 39.2 35.6 3.6 10.4 % 24.6 % 19.2 % 5.4 %

Emerging Business 48.0 55.1 (7.1) (13.1) % 38.1 % 43.4 % (5.3) %

Analytics 115.8 114.3 1.5 1.3 % 33.5 % 34.6 % (1.1) %

Total $ 321.1 $ 319.7 $ 1.4 0.4 % 31.5 % 33.8 % (2.3) %

For the six months ended June 30, 2020, cost of revenues was $321.1 million compared to $319.7 million for the six months ended June 30, 2019, an increase of $1.4 million, or 0.4%.

Our gross margin for the six months ended June 30, 2020 was 31.5% compared to 33.8% for six months ended June 30, 2019, a decrease of 230 bps.

The increase in cost of revenues in Insurance of $3.4 million was primarily due to an increase in employee-related costs of $1.7 million, higher infrastructure and technology costs of $2.4 million, and other operating costs of $0.8 million.

This was partially offset by currency movements, net of hedging of $1.5 million.

Gross margin in Insurance decreased by 290 bps during the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to higher operating expenses.

The increase in cost of revenues in Healthcare of $3.6 million was primarily due to an increase in employee-related costs of $3.3 million and other operating costs of $0.9 million.

This was partially offset by lower technology costs of $0.3 million and currency movements, net of hedging of $0.3 million.

Gross margin in Healthcare increased by 540 bps during the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to lower margin in the Heath Integrated business during the six months ended June 30, 2019 and higher revenues during the six months ended June 30, 2020.

The decrease in cost of revenues in Emerging Business of $7.1 million was primarily due to a decrease in employee-related costs of $4.8 million, lower infrastructure and technology cost of $1.2 million, currency movements, net of hedging of $0.9 million and lower travel costs of $0.8 million, partially offset by higher other operating costs of $0.6 million.

Gross margin in Emerging Business decreased by 530 bps during the six months ended June 30, 2020, compared to the six months ended June 30, 2019, primarily due to lower revenues.

The increase in cost of revenues in Analytics of $1.5 million was primarily due to an increase in employee-related costs of $4.0 million.

This was partially offset by lower other operating costs of $1.4 million and currency movements, net of hedging of $1.1 million.

Gross margin in Analytics decreased by 110 bps during the six months ended June 30, 2020, compared to the six months ended June 30, 2019, primarily due to higher operating expenses.

Selling, General and Administrative (“SG&A”) Expenses.

Six months ended June 30, Percentage change

2020 2019 Change

(dollars in millions)

General and administrative expenses $ 57.7 $ 63.8 $ (6.1) (9.5) %

Selling and marketing expenses 27.5 35.7 (8.2) (22.9) %

Selling, general and administrative expenses $ 85.2 $ 99.5 $ (14.3) (14.3) %

As a percentage of revenues 18.2 % 20.6 %

The decrease in SG&A expenses of $14.3 million was primarily due to COVID-19 cost reduction measures including the temporary reduction of the base salaries of our executive officers and certain other groups of employees.

This was driven by lower employee-related costs of $7.7 million, a decrease in stock-based compensation expense of $2.0 million mostly due to revision in estimates related to revenue linked performance based restricted stock units due to COVID-19, lower infrastructure and travel costs of $2.6 million, lower other operating costs of $1.0 million and currency movements, net of hedging of $1.0 million.

Depreciation and Amortization.

Six months ended June 30, Percentage change

2020 2019 Change

(dollars in millions)

Depreciation expense $ 17.3 $ 15.3 $ 2.0 12.6 %

Intangible amortization expense 7.6 11.1 (3.5) (31.6) %

Depreciation and amortization expense $ 24.9 $ 26.4 $ (1.5) (5.9) %

As a percentage of revenues 5.3 % 5.5 %

The decrease in intangibles amortization expense of $3.5 million was primarily due to end of useful lives for certain intangible assets during the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

The increase in depreciation expense of $2.0 million was due to depreciation related to our investments in new operating centers to support our business growth.

Impairment and Restructuring Charges.

Six months ended June 30, Percentage change

2020 2019 Change

(dollars in millions)

Impairment and restructuring charges $ — $ 6.8 $ (6.8) (100.0) %

As a percentage of revenues — % 1.4 %

During the six months ended June 30, 2019, we recorded impairment charges of $3.2 million and restructuring charges of $3.6 million in connection with the wind-down of our Health Integrated business.

Income from Operations.

Income from operations increased by $6.6 million, or 21.6%, from $30.7 million for the six months ended June 30, 2019 to $37.4 million for the six months ended June 30, 2020.

As a percentage of revenues, income from operations increased from 6.4% for the six months ended June 30, 2019 to 8.0% for the six months ended June 30, 2020.

Foreign Exchange Gain/(Loss).

Net foreign exchange gains and losses are primarily attributable to movement of the U.S.

dollar against the Indian rupee, the U.K.

pound sterling and the Philippine peso during the six months ended June 30, 2020.

The average exchange rate of the U.S.

dollar against the Indian rupee increased from 69.87 during the six months ended June 30, 2019 to 74.25 during the six months ended June 30, 2020.

The average exchange rate of the U.K.

pound sterling against the U.S.

dollar decreased from 1.30 during the six months ended June 30, 2019 to 1.26 during the six months ended June 30, 2020.

The average exchange rate of the U.S.

dollar against the Philippine peso decreased from 51.97 during the six months ended June 30, 2019 to 50.55 during the six months ended June 30, 2020.

We recorded a net foreign exchange gain of $2.7 million for the six months ended June 30, 2020 compared to the net foreign exchange gain of $2.5 million for the six months ended June 30, 2019.

Interest expense.

Interest expense decreased from $7.4 million for the six months ended June 30, 2019 to $6.0 million for the six months ended June 30, 2020 primarily due to lower borrowings and lower effective interest rates under our Credit Facility during the six months ended June 30, 2020, compared to the six months ended June 30, 2019.

Other Income, net.

Six months ended June 30, Percentage change

2020 2019 Change

Gain on sale and mark-to-market of mutual funds $ 5.2 $ 6.8 $ (1.6) (24.5) %

Interest income 1.2 1.5 (0.3) (22.0) %

Other, net 0.4 0.2 0.2 125.5 %

Other income, net $ 6.8 $ 8.5 $ (1.7) (20.8) %

Other income, net decreased by $1.7 million, from $8.5 million for the six months ended June 30, 2019 to $6.8 million for the six months ended June 30, 2020, primarily due to lower return on mutual fund investments of $1.6 million during the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Income Tax Expense.

We recorded income tax expense of $9.9 million and $6.9 million for the six months ended June 30, 2020 and 2019, respectively.

The 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 of a one-time tax expense of $1.3 million due to electing a new tax regime for two of our 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 $1.5 million recorded during the six months ended June 30, 2019 and (ii) recording of excess tax benefits related to stock awards of $1.8 million pursuant to ASU No.

2016-09 during the six months ended June 30, 2020 compared to $1.1 million during the six months ended June 30, 2019.

See Note 21 - Income Taxes to our unaudited consolidated financial statements.

Net income increased from $27.3 million for the six months ended June 30, 2019 to $30.8 million for the six months ended June 30, 2020, primarily due to increase in income from operations of $6.6 million, lower interest expense of $1.4 million and higher foreign exchange gain, net of $0.2 million.

This was partially offset by lower other income, net of $1.7 million and higher income tax expense of $3.0 million.

As a percentage of revenues, net income increased from 6.1% for the three months ended March 31, 2019 to 9.1% for the three months ended March 31, 2020 .

As a percentage of revenues, net income increased from 5.6% for the six months ended June 30, 2019 to 6.6% for the six months ended June 30, 2020.

Liquidity and Capital Resources

Three months ended March 31,

Six months ended June 30,

(dollars in millions)

Opening cash, cash equivalents and restricted cash $ 127.0 $ 104.1

Net cash (used for)/provided by operating activities

Net cash provided by/(used for) investing activities

Net cash provided by financing activities

Net cash provided by operating activities 58.9 47.7

Net cash provided by investing activities 1.1 0.9

Net cash used for financing activities (13.4) (61.1)

Effect of exchange rate changes (2.8) (0.2)

Closing cash, cash equivalents and restricted cash $ 170.8 $ 91.4

As of March 31, 2020 and 2019, we had $367.4 million and $302.7 million , respectively, in cash, cash equivalents and short-term investments, of which $227.0 million , and $273.9 million , respectively, is located in foreign jurisdictions that upon distribution may be subject to withholding and other taxes and we do not currently intend to distribute such amounts.

As of June 30, 2020 and 2019, we had $335.6 million and $253.0 million, respectively, in cash, cash equivalents and short-term investments, of which $275.5 million, and $214.8 million, respectively, is located in foreign jurisdictions that upon distribution may be subject to withholding and other taxes and we do not currently intend to distribute such amounts.

If, in the future, we change our intention regarding distributions, additional taxes may be required and would be recorded in the period the intention changes.

Operating Activities:

Cash flows used for operating activities were $13.6 million for the three months ended March 31, 2020 as compared to cash flows provided by operating activities of $8.3 million during the three months ended March 31, 2019 .

Cash flows provided by operating activities were $58.9 million for the six months ended June 30, 2020 as compared to cash flows provided by operating activities of $47.7 million during the six months ended June 30, 2019.

Generally, factors that affect our earnings, for instance, pricing, volume of services, costs and productivity, affect our cash flows used or provided from operations in a similar manner.

However, while management of working capital, including

timing of collections and payments affects operating results only indirectly, the impact on the working capital requirements and cash flows provided by operating activities can be significant.

Cash flows used for operating activities for the three months ended March 31, 2020 was $13.6 million .

However, while management of working capital, including timing of collections and payments affects operating results only indirectly, the impact on the working capital requirements and cash flows provided by operating activities can be significant.

Cash flows provided by operating activities for the six months ended June 30, 2020 were $58.9 million.

This comprised of net income plus the net effect of non-cash items, such as depreciation and amortization expense, stock-based compensation expense, amortization of operating lease right-of-use assets, unrealized gains on short-term investment, deferred income taxes, and others aggregating to $75.6 million.

The primary working capital use of net cash of $59.7 million during the three months ended March 31, 2020 was driven by decrease in accrued employee costs and operating lease liabilities, increase in accounts receivables and current and non-current assets.

The primary working capital use of cash of $41.6 million during the six months ended June 30, 2020 was driven by decrease in accrued employee costs, operating lease liabilities, accrued expenses and other liabilities and increase in other current assets.

The primary working capital sources of cash of $24.9 million was driven by decrease in accounts receivables, advance income tax, net, other assets, increase in deferred revenues and accounts payable.

Investing Activities:

Cash flows provided by investing activities were $36.0 million for the three months ended March 31, 2020 as compared to cash flows used for investing activities of $37.2 million for the three months ended March 31, 2019 .

The increase in cash flows is mainly due to net higher redemption of investments of $49.0 million during the three months ended March 31, 2020 as compared to net purchase of investments of $26.3 million during the three months ended March 31, 2019.

This was partially offset by higher capital expenditures of $1.4 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 and additional investment in equity affiliate of $0.7 million during the three months ended March 31, 2020.

Cash flows provided by investing activities were $1.1 million for the six months ended June 30, 2020 as compared to cash flows provided by investing activities of $0.9 million for the six months ended June 30, 2019.

The increase is mainly due to higher net redemption of investments of $23.8 million during the six months ended June 30, 2020 as compared to net redemptions of investments of $23.5 million during the six months ended June 30, 2019.

Financing Activities:

Cash flows provided by financing activities were $86.7 million during the three months ended March 31, 2020 as compared to cash flows provided by financing activities of $19.8 million during the three months ended March 31, 2019 .

The increase in cash flows provided from financing activities was primarily due to higher net borrowings of $99.8 million (net of repayment) under our Credit Facility (as described below in “Financing Arrangements”) during the three months ended March 31, 2020 as compared to net borrowings (net of repayment) of $35.4 million during the three months ended March 31, 2019 and lower purchases of treasury stock by $1.4 million under our share repurchase program during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

We expect to use cash from operating activities to maintain and expand our business by making investments primarily related to new facilities and capital expenditures associated with leasehold improvements to build our facilities, and purchase telecommunications equipment and computer hardware and software in connection with managing client operations.

We incurred $12.3 million of capital expenditures in the three months ended March 31, 2020 .

We expect to incur capital expenditures of between $32.0 million and $38.0 million in 2020, primarily to meet our growth requirements, including additions to our facilities as well as investments in technology applications, product development, digital technology, advanced automation, robotics and infrastructure.

In connection with any tax assessment orders that have been issued or may be issued against us or our subsidiaries, we may be required to deposit additional amounts with respect to such assessment orders (see Note 24 to our unaudited consolidated financial statements herein for further details).

Cash flows used for financing activities were $13.4 million during the six months ended June 30, 2020 as compared to cash flows used for financing activities of $61.1 million during the six months ended June 30, 2019.

The decrease in cash flows used for financing activities was primarily due to higher repayment of $33.6 million (net of proceeds) under our Credit Facility (as described below in “Financing Arrangements (Debt Facility)”) during the six months ended June 30, 2019 as compared to net repayments of $0.2 million during the six months ended June 30, 2020 and lower purchases of treasury stock by $13.5 million under our share repurchase program during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

We expect to use cash from operating activities to maintain and expand our business by making investments primarily related to new facilities and capital expenditures associated with leasehold improvements to build our facilities, digital capabilities and purchase telecommunications equipment and computer hardware and software in connection with managing client operations.

We incurred $22.1 million of capital expenditures in the six months ended June 30, 2020.

We expect to incur capital expenditures of between $32.0 million and $38.0 million in 2020, primarily to meet our growth requirements, including

additions to our facilities as well as investments in technology applications, product development, digital technology, advanced automation, robotics and infrastructure.

In connection with any tax assessment orders that have been issued or may be issued against us or our subsidiaries, we may be required to deposit additional amounts with respect to such assessment orders (see Note 24 - Commitments and Contingencies to our unaudited consolidated financial statements herein for further details).

We anticipate that we will continue to rely upon cash from operating activities to finance our smaller acquisitions, capital expenditures and working capital needs.

If we have significant growth through acquisitions, we may need to obtain additional financing.

During the quarter ended March 31, 2020, to enhance our liquidity position in response to COVID-19, management has taken certain precautionary measures, including:

During the six months ended June 30, 2020, to enhance our liquidity position in response to COVID-19, management has taken certain precautionary measures, including:

drawing $100.0 million from our line of credit under our existing Credit Agreement on March 12, 2020, the proceeds of which were available for working capital, general corporate or other purposes as needed, and which was repaid in full on April 20, 2020;

and electing to temporarily suspend share repurchases under our 2019 Repurchase Program, and other cost reduction measures related to employee and vendor expenses and capital expenditure plans.

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

The 2019 Repurchase Program remains authorized by the Board of Directors and the management using its discretion has resumed share repurchases effective July 1, 2020, considering improved market conditions, our capital needs and other factors.

The Coronavirus Aid, Relief, and Economic Security Act, (the “CARES Act”) allows employers to defer the payment of the employer share of Federal Insurance Contributions Act (“FICA”) taxes for the period from April 1, 2020 and ending December 31, 2020.

During the six months ended June 30, 2020, we deferred FICA payments of $2.4 million under the CARES Act and will continue to defer FICA payments through December 31, 2020.

The deferred amount will be payable as follows:

(1) 50% of the deferred amount will be paid on December 31, 2021 and (2) the remaining 50% of the deferred amount will be paid on December 31, 2022.

Financing Arrangements (Debt Facility)

Credit Agreement

On November 21, 2017, we and each of our 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 $200.0 million revolving credit facility (the “Credit Facility”) with an option to increase the commitments by up to $100.0 million, subject to certain approvals and conditions as set forth in the Credit Agreement.

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

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

Borrowings under the Credit Agreement may be used for working

capital and general corporate purposes, including permitted acquisitions.

On July 2, 2018, we exercised our option under the Credit Agreement to increase the commitments by $100.0 million thereby utilizing the entire revolver under the Credit Facility of $300.0 million.

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

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

On October 1, 2018, we entered into a second amendment (the “Amendment”) to our 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 Senior Notes described below, 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.

See Note 17 to our unaudited consolidated financial statements herein for further details on our debt facilities.

As of March 31, 2020 , we had outstanding indebtedness under the Credit Facility of $199.0 million , of which $100.0 million is expected to be repaid within the next twelve months and is included under “current portion of long-term borrowings” and of which $99.0 million is included under “long-term borrowings”, less current portion” in the unaudited consolidated balance sheets.

As of December 31, 2019, we had outstanding indebtedness under the Credit Facility of $99.0 million , of which $40.0 million was included under "current portion of long-term borrowings" and the balance of $59.0 million was included under "long-term borrowings, net of current portion” in the consolidated balance sheets.

Convertible Senior Notes

On October 1, 2018, we entered into an investment agreement (the “Investment Agreement”) with Orogen Echo LLC, an affiliate of The Orogen Group LLC, relating to the issuance to Orogen Echo LLC of $150.0 million in an aggregate principal amount of 3.50% Convertible Senior Notes due October 1, 2024 (the "Notes").

The Notes were issued on October 4, 2018.

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

During the three months ended March 31, 2020 and March 31, 2019, we recognized interest expense of $1.3 million and $1.3 million, respectively, 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 us 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.

We may redeem the principal amount of the Notes, at our 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 our exercise of this redemption right (including the trading day immediately prior to the date of the notice of redemption).

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

We used the proceeds from the issuance of Notes to repay $150.0 million of our outstanding borrowings under the Credit Facility.

We 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 $133.1 million was determined using a discounted cash flow technique, which considered debt issuances with similar features of our 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 $16.9 million, 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.

Under the terms of the Notes, we are not prohibited from paying cash dividends unless payment would trigger an event of default or if one currently exists.

We do not anticipate paying any cash dividends in the foreseeable future.

The following tables summarizes our Debt balances as of June 30, 2020 and December 31, 2019.

As of June 30, 2020

(dollars in millions)

Revolver Credit Facility Structured Payables Notes Total

Current portion of long-term borrowings $ 20.0 $ 0.7 $ — $ 20.7

Long-term borrowings 79.0 — 150.0 229.0

Unamortized debt discount — — (12.6) (12.6)

Unamortized debt issuance costs* — — (0.9) (0.9)

Long-term borrowings

79.0 — 136.5 215.5

Total borrowings $ 99.0 $ 0.7 $ 136.5 $ 236.2

As of December 31, 2019

(dollars in millions)

Revolver Credit Facility Structured Payables Notes Total

Current portion of long-term borrowings $ 40.0 $ 0.9 $ — $ 40.9

Long-term borrowings 59.0 — 150.0 209.0

Unamortized debt discount — — (13.9) (13.9)

Unamortized debt issuance costs* — — (1.0) (1.0)

Long-term borrowings

59.0 $ — $ 135.1 $ 194.1

Total borrowings $ 99.0 $ 0.9 $ 135.1 $ 235.0

*Unamortized debt issuance costs for our revolver credit facility of $0.6 million and $0.7 million as of June 30, 2020 and December 31, 2019, respectively, is presented under “other current assets” and “other assets” in the consolidated balance sheets.

See Note 17- Borrowings to our unaudited consolidated financial statements herein for further details on our debt facilities.

Off-Balance Sheet Arrangements

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

As of March 31, 2020 and December 31, 2019, we had outstanding letters of credit of $0.5 million each, respectively, that were not recognized in our unaudited and audited consolidated balance sheets, respectively.

As of June 30, 2020 and December 31, 2019, we had outstanding letters of credit of $0.5 million each, respectively, that were not recognized in our unaudited and audited consolidated balance sheets, respectively.

These are not reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

1 unchanged sentence

Contractual Obligations

The following table sets forth our contractual obligations as of March 31, 2020 :

The following table sets forth our contractual obligations as of June 30, 2020:

Payment Due by Period

Less than 1-3 4-5 After

1 year years years 5 years Total

(dollars in millions)

1 unchanged sentence

Operating leases (a)

25.7 46.3 32.3 38.5 142.8

Purchase obligations 9.9 — — — 9.9

Other obligations (b)

2.4 4.2 3.4 5.7 15.7

Principal payments 20.7 79.0 150.0 — 249.7

Interest payments (c)

6.4 11.5 7.9 — 25.8

Total contractual cash obligations (d)

Represents lease liabilities payable for the expected lease term.

Represents estimated payments under the Gratuity Plan.

Interest on borrowings is calculated based on the interest rate on the outstanding borrowings as of March 31, 2020 .

Excludes $1.0 million related to uncertain tax positions, since the extent of the amount and timing of payment is currently not reliably estimable or determinable.

$ 65.4 $ 141.3 $ 193.7 $ 44.2 $ 444.6

(a) Represents lease liabilities payable for the expected lease term.

(b) Represents estimated payments under the Gratuity Plan.

(d) Excludes $1.0 million related to uncertain tax positions, since the extent of the amount and timing of payment is currently not reliably estimable or determinable.

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

9 unchanged sentences

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What changed 10-Q

Item 2. Management’s Discussion and Analysis