ExlService Holdings, Inc. 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion in connection with our unaudited consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Some of the statements in the following discussion are forward looking statements. 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 September 30, 2020. 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 within the meaning of the United States Private Securities Litigation Reform Act of 1995. You should not place undue reliance on these statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. These statements often include words such as “may,” “will,” “should,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or similar expressions. These statements are based on assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this Quarterly Report on Form 10-Q, you should understand that these statements are not guarantees of performance or results. They involve known and unknown risks, uncertainties and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements. Many of the following risks, uncertainties and other factors identified below are, and will be, amplified by COVID-19. These factors include but are not limited to: • the impact of the COVID-19 pandemic and related response measures on our business, results of operations and financial condition, including the impact of governmental lockdowns and other restrictions on our operations and processes and those of our clients and suppliers; • our dependence on a limited number of clients in a limited number of industries; • worldwide political, economic or business conditions; • negative public reaction in the U.S. or elsewhere to offshore outsourcing; • fluctuations in our earnings; • our ability to attract and retain clients including in a timely manner; • our ability to successfully consummate or integrate strategic acquisitions; • our ability to accurately estimate and/or manage the costs and/or timing of winding down businesses; • restrictions on immigration; • our ability to hire and retain enough sufficiently trained employees to support our operations; • our ability to grow our business or effectively manage growth and international operations; • any changes in the senior management team; • increasing competition in our industry; • telecommunications or technology disruptions or breaches, natural or other disasters, or medical epidemics or pandemics; • our ability to withstand the loss of a significant customer; • our ability to realize the entire book value of goodwill and other intangible assets from acquisitions; 41 Table of Contents • regulatory, legislative and judicial developments, including changes to or the withdrawal of governmental fiscal incentives; • changes in tax laws or decisions regarding repatriation of funds held abroad; • ability to service debt or obtain additional financing on favorable terms; • legal liability arising out of customer contracts; • technological innovation; • political or economic instability in the geographies in which we operate; • operational and information security failures arising as a result of remote work solutions adopted due to COVID-19; • cyber security incidents, data breaches, or other unauthorized disclosure of sensitive or confidential client and customer data; and • adverse outcome of our disputes with the Indian tax authorities In particular, you should consider the numerous risks outlined in Part II, Item 1A—“Risk Factors” in this Quarterly Report on Form 10-Q, Part II, Item 1A—“Risk Factors” in our Quarterly Reports on Form 10-Q for the quarter ended June 30, 2020 and March 31, 2020 and Part I, Item 1A—“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. These and other risks could cause actual results to differ materially from those implied by forward-looking statements in this Quarterly Report on Form 10-Q. The forward-looking statements made by us in this Quarterly Report on Form 10-Q, or elsewhere, speak only as of the date on which they were made. New risks and uncertainties come up from time to time, and it is impossible for us to predict those events or how they may affect us. We have no obligation to update any forward-looking statements in this Quarterly Report on Form 10-Q after the date of this Quarterly Report on Form 10-Q, except as required by federal securities laws. Executive Overview We are a leading operations management and analytics company that helps our clients build and grow sustainable businesses. By orchestrating our domain expertise, data, analytics and digital technology, we look deeper to design and manage agile, customer-centric operating models to improve global operations, drive profitability, enhance customer satisfaction, increase data-driven insights, and manage risk and compliance. We serve customers in multiple industries, including insurance, healthcare, banking and financial services, utilities, travel, transportation and logistics, media and retail, among others. We operate in the business process management (“BPM”) industry and we provide operations management and analytics services. Effective January 1, 2020, we made certain operational and structural changes to more closely integrate our businesses and to simplify our organizational structure. We now manage and report financial information through our four strategic business units, Insurance, Healthcare, Analytics and Emerging Business, which reflects how management will review financial information and make operating decisions. These business units develop client specific solutions, build capabilities, maintain a unified go-to-market approach and are integrally responsible for service delivery, customer satisfaction, growth and profitability. In line with our strategy of vertical integration and focus on domain expertise, we have integrated our Finance & Accounting and Consulting operating segments within each of the Insurance and Healthcare operating segments based on the corresponding industry-specific clients. Finance & Accounting and Consulting services provided to clients outside of the Insurance and Healthcare industries is now the part of our newly formed business unit and reportable segment, Emerging Business. In addition, we integrated our former Travel, Transportation and Logistics, Banking and Financial Services, and Utilities operating segments under Emerging Business to further leverage and optimize the operating scale in providing operations management services. 42 Table of Contents Our new reportable segments are as follows: • Insurance, • Healthcare, • Analytics, and • Emerging Business In conjunction with the new reporting structure, we recast our segment and goodwill disclosures for all prior periods presented to conform to the way we internally manage and monitor segment performance. Our global delivery network, which includes highly trained industry and process specialists across the United States, Latin America, South Africa, Europe and Asia (primarily India and the Philippines), is a key asset. We have operations centers in India, the U.S., the Philippines, Bulgaria, Colombia, South Africa, Romania and the Czech Republic. Continued 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, in subsequent quarters, 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, which is reflected in our financial operating results. 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 and third quarters of 2020, we took actions in response to the pandemic that focused on the implementation of our business continuity plans, 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, facilitating work from home, implementing best practices for employees while working from home, periodic CEO messaging, various programs aimed at employee wellness, including a global wellness program, enhanced awareness towards information security, and updated cyber security and data privacy policies, among others. We have implemented broad travel restrictions and largely moved to virtual-only events for the safety of our employees and our customers. We also implemented pandemic-specific protocols for our essential employees whose jobs require them to be on-site or with our customers by implementing additional safety measures at all of our facilities, including increased frequency in cleaning and disinfecting, and enhanced hygiene and social distancing practices. We continue to work closely with our customers and business partners to support them as they expand their own remote work solutions and contingency plans, and help them to access our products and services remotely. There continues to be volatility and economic and geopolitical uncertainty in many markets around the world. Despite the efforts described above, there is a risk that if jurisdictions in which we operate reinstate prior restrictions, stagnate in their reopening processes, or implement new restrictions in response to new outbreaks or continued spread, our operations and business could be materially impacted. The full extent of the impact of COVID-19 on our business, results of operations, financial position and cash flow in fiscal year 2020 and beyond is currently uncertain and will depend on many factors that are not within our control, including, but not limited to: the duration and scope of the pandemic; the effectiveness of actions taken to contain or mitigate the pandemic and prevent or limit any reoccurrence; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; general economic uncertainty in key global markets and financial market volatility; global economic conditions and levels of economic growth; and the pace of recovery when the COVID-19 pandemic subsides. We also continue to evaluate market conditions and are taking precautionary measures to strengthen our financial position, including reevaluating the pace of our investment plans, hiring practices, use of our real estate and facilities, employee compensation, stock repurchase and discretionary spending, including marketing and travel expenses. In addition, some of our expenses are less variable in nature and do not closely correlate to changes in revenues, which may lead to a decrease in our profitability. 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 43 Table of Contents operations for the three and nine months ended period ended September 30, 2020 are not necessarily indicative of our future performance, and our financial results, including but not limited to net revenues, income from operations, net income, cash flow and earnings per share, in future periods may differ materially from historical trends. 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, deferring non-critical hiring, temporarily reducing the base salaries of our executive officers and certain other groups of employees and temporarily suspending the 401(k) match program for U.S. employees. Some of these actions have been reversed as of September 30, 2020. 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. During the quarter ended March 31, 2020, to enhance our liquidity position in response to COVID-19, management elected to temporarily suspend share repurchases under the 2019 Repurchase Program. We resumed share repurchases effective July 1, 2020, considering improved market conditions, our capital and liquidity needs and other factors, and are now targeting to repurchase up to $80.0 million for calendar year 2020, subject to market conditions. As of September 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. Estimating the fair value of goodwill requires the use of estimates and significant judgments that are based on a number of factors including actual operating results. 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. We determined there was no triggering event and no impairment test was performed during the three months ended September 30, 2020. For additional information and risks related to COVID-19, see Item 1A- "Risk Factors" below. Revenues For the three months ended September 30, 2020, we had revenues of $241.0 million compared to revenues of $251.4 million for the three months ended September 30, 2019, a decrease of $10.4 million, or 4.1%. For the nine months ended September 30, 2020, we had revenues of $709.5 million compared to revenues of $734.5 million for the nine months ended September 30, 2019, a decrease of $25.0 million, or 3.4%. We serve clients mainly in the United States and the United Kingdom, with these two regions generating 84.6% and 9.5%, respectively, of our total revenues for the three months ended September 30, 2020, and 83.0% and 11.1%, respectively, of our total revenues for the three months ended September 30, 2019. For the nine months ended September 30, 2020, these two regions generated 84.7% and 9.2%, respectively, of our total revenues and 82.1% and 11.9%, respectively, of our total revenues for the nine months ended September 30, 2019. For the three months ended September 30, 2020 and 2019, our total revenues from our top ten clients accounted for 38.7% and 35.7% of our total revenues, respectively. For the nine months ended September 30, 2020 and 2019, our total revenues from our top ten clients accounted for 37.3% and 36.2% of our total revenues, respectively. Our revenue concentration with our top clients remains largely consistent year-over-year and we continue to develop relationships with new clients to diversify our client base. We believe that the loss of any of our top ten clients could have a material adverse effect on our financial performance. 44 Table of Contents Our Business We provide operations management and analytics services. We market our services to our existing and prospective clients through our sales and client management teams, which are aligned by key industry verticals and cross-industry domains such as finance and accounting. Our sales and client management teams operate from the U.S., Europe and Australia. 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. 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. Each client contract has different terms based on the scope, deliverables and complexity of the engagement. We also provide consulting services related to operations management that include industry-specific digital transformational services as well as cross-industry finance and accounting services as part of the Emerging Business operating segment. We continue to observe a shift in industry pricing models toward transaction-based pricing, outcome-based pricing and other alternative pricing models. We believe this trend will continue and we use such alternative pricing models with some of our current clients and are seeking to move certain other clients from a billing rate model to a transaction-based or other alternative pricing model. These alternative pricing models place the focus on operating efficiency in order to maintain our gross margins. In addition, we have also observed that prospective larger clients are entering into multi-vendor relationships with regard to their outsourcing needs. We believe that the trend toward multi-vendor relationships will continue. A multi-vendor relationship allows a client to seek more favorable pricing and other contract terms from each vendor, which can result in significantly reduced gross margins from the provision of services to such client for each vendor. To the extent our large clients expand their use of multi-vendor relationships and are able to extract more favorable contract terms from other vendors, our gross margins and revenues may be reduced with regard to such clients if we are required to modify the terms of our relationships with such clients to meet competition. Our existing agreements with original terms of three or more years provide us with a relatively predictable revenue base for a substantial portion of our operations management business, however, we have a long selling cycle for our services and the budget and approval processes of prospective clients make it difficult to predict the timing of entering into definitive agreements with new clients. Similarly, new license sales and implementation projects for our technology service platforms and other software-based services have a long selling cycle, however ongoing annual maintenance and support contracts for existing arrangements provide us with a relatively predictable revenue base. Analytics: Our analytics services focus on driving improved business outcomes for our customers by generating data-driven insights across all parts of our customers’ business. We also provide care optimization and reimbursement optimization services, for our clients through our healthcare analytics solutions and services. We also offer integrated solutions to help our clients in cost containment by leveraging technology platforms, customizable and configurable analytics and expertise in healthcare reimbursements to help clients enhance their claim payment accuracy. Our teams deliver predictive and prescriptive analytics in the areas of customer acquisition and lifecycle management, risk underwriting and pricing, operational effectiveness, credit and operational risk monitoring and governance, regulatory reporting, payment integrity and care management and data management. We actively cross-sell and, where appropriate, integrate our Analytics services with other operations management services as part of a comprehensive offering for our clients. 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. 45 Table of Contents 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 - 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. Such reassessments did not have a significant impact on our results of operations and cash flows for the periods presented. Due to rounding, the numbers presented in the tables included in this “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” may not add up precisely to the totals provided. Results of Operations The following table summarizes our results of operations for the three and nine months ended September 30, 2020 and 2019: Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 (dollars in millions) (dollars in millions) Revenues, net $ 241.0 $ 251.4 $ 709.5 $ 734.5 Cost of revenues (1) 152.1 167.5 473.1 487.2 Gross profit (1) 88.9 83.9 236.4 247.3 Operating expenses: General and administrative expenses 26.8 29.6 84.5 93.4 Selling and marketing expenses 15.3 18.3 42.8 54.0 Depreciation and amortization expense 12.4 13.1 37.3 39.5 Impairment and restructuring charges — 0.5 — 7.3 Total operating expenses 54.5 61.5 164.6 194.2 Income from operations 34.4 22.4 71.8 53.1 Foreign exchange gain, net 0.7 1.0 3.5 3.5 Interest expense (2.6) (3.2) (8.6) (10.6) Other income, net 2.5 4.6 9.2 13.1 Income before income tax expense and earnings from equity affiliates 35.0 24.8 75.9 59.1 Income tax expense 8.5 5.7 18.4 12.6 Income before earnings from equity affiliates 26.5 19.1 57.5 46.5 Loss from equity-method investment 0.1 0.1 0.2 0.2 Net income attributable to ExlService Holdings, Inc. stockholders $ 26.4 $ 19.0 $ 57.3 $ 46.3 (1) Exclusive of depreciation and amortization expense. 46 Table of Contents Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019 Revenues. The following table summarizes our revenues by reportable segments for the three months ended September 30, 2020 and 2019: Three months ended September 30, Percentage change 2020 2019 Change (dollars in millions) Insurance $ 87.8 $ 91.1 $ (3.3) (3.6) % Healthcare 25.1 25.6 (0.5) (2.0) % Emerging Business 37.6 45.9 (8.3) (18.2) % Analytics 90.5 88.8 1.7 2.0 % Total revenues, net $ 241.0 $ 251.4 $ (10.4) (4.1) % Revenues for the three months ended September 30, 2020 were $241.0 million, down $10.4 million, or 4.1%, compared to the three months ended September 30, 2019. The impact of the COVID-19 pandemic on our net revenues in the third quarter of 2020 was primarily related to clients adapting to the shift in our delivery capabilities from a physical to a virtual, work-from-home operating environment as well as economic uncertainty leading to lower volumes from some existing clients and causing delays in the execution and implementation of new client contracts, which impacted growth. Revenue decline in Insurance of $3.3 million was primarily driven by ramp down of certain client contracts and lower volumes due to the impact of COVID-19 aggregating to $14.1 million, partially offset by expansion of business from certain existing clients aggregating to $10.6 million and $0.2 million mainly attributable to the appreciation of Australian dollar and U.K pound sterling against the U.S. dollar and depreciation of the Indian rupee and South African ZAR against the U.S. dollar during the three months ended September 30, 2020, compared to the three months ended September 30, 2019. Insurance revenues were 36.4% and 36.2% of our total revenues in the three months ended September 30, 2020 and September 30, 2019, respectively. Revenue decline in Healthcare of $0.5 million was primarily driven by our December 2019 wind-down of Health Integrated business revenues of $2.9 million, partially offset by expansion of business from certain existing clients aggregating to $2.4 million during the three months ended September 30, 2020. Healthcare revenues were 10.4% and 10.2% of our total revenues in the three months ended September 30, 2020 and September 30, 2019, respectively. Revenue decline in Emerging Business of $8.3 million was primarily driven by lower volumes due to the impact of COVID-19 and ramp down of certain client contracts aggregating to $7.9 million and $0.4 million attributable to the depreciation of the Indian rupee against the U.S. dollar during the three months ended September 30, 2020, compared to the three months ended September 30, 2019. Emerging Business revenues were 15.6% and 18.3% of our total revenues in the three months ended September 30, 2020 and September 30, 2019, respectively. Revenue growth in Analytics of $1.7 million was attributable to higher volumes from our existing clients of $1.4 million, and $0.3 million attributable to the appreciation of the U.K. pound sterling against the U.S. dollar during the three months ended September 30, 2020, compared to the three months ended September 30, 2019. Analytics revenues were 37.5% and 35.3% of our total revenues in the three months ended September 30, 2020 and September 30, 2019, respectively. 47 Table of Contents Cost of Revenues and Gross Margin : The following table sets forth cost of revenues and gross margin of our reportable segments. Cost of Revenues Gross Margin Three months ended September 30, Change Percentage change Three months ended September 30, Change 2020 2019 2020 2019 (dollars in millions) Insurance $ 56.8 $ 62.2 $ (5.4) (8.7) % 35.3 % 31.7 % 3.6 % Healthcare 18.0 20.4 (2.4) (11.8) % 28.4 % 20.4 % 8.0 % Emerging Business 20.8 27.1 (6.3) (23.2) % 44.7 % 41.0 % 3.7 % Analytics 56.5 57.8 (1.3) (2.4) % 37.6 % 34.8 % 2.8 % Total $ 152.1 $ 167.5 $ (15.4) (9.2) % 36.9 % 33.4 % 3.5 % For the three months ended September 30, 2020, cost of revenues was $152.1 million compared to $167.5 million for the three months ended September 30, 2019, a decrease of $15.4 million, or 9.2%. Our gross margin for the three months ended September 30, 2020 was 36.9% compared to 33.4% for the three months ended September 30, 2019, an increase of 350 basis points (“bps”). The decrease in cost of revenues in Insurance of $5.4 million was primarily due to decrease in employee-related costs of $3.9 million, lower travel costs of $2.2 million and currency movements, net of hedging of $0.3 million. This was offset by higher technology and other operating costs of $0.9 million. Gross margin in Insurance increased by 360 bps during the three months ended September 30, 2020 compared to the three months ended September 30, 2019, primarily due to expansion in margin in certain existing clients and lower operating expenses as a result of COVID-19 cost reduction measures during the three months ended September 30, 2020. The decrease in cost of revenues in Healthcare of $2.4 million was primarily due to decrease in employee-related costs of $2.2 million, lower travel costs of $0.3 million and currency movements, net of hedging of $0.1 million, partially offset by higher other operating costs of $0.2 million. Gross margin in Healthcare increased by 800 bps during the three months ended September 30, 2020, compared to the three months ended September 30, 2019, primarily due to lower margin in the Heath Integrated business during the three months ended September 30, 2019 and higher revenues during the three months ended September 30, 2020. The decrease in cost of revenues in Emerging Business of $6.3 million was primarily due to a decrease in employee-related costs of $4.9 million, lower infrastructure and travel costs of $1.5 million and currency movements, net of hedging of $0.2 million, partially offset by higher other operating costs of $0.3 million. Gross margin in Emerging Business increased by 370 bps during the three months ended September 30, 2020, compared to the three months ended September 30, 2019, primarily due to lower operating expenses as a result of COVID-19 cost reduction measures during the three months ended September 30, 2020. The decrease in cost of revenues in Analytics of $1.3 million was primarily due to lower travel costs of $1.8 million, lower other operating costs of $1.1 million, lower infrastructure costs of $0.5 million and currency movements, net of hedging of $0.4 million. This was partially offset by an increase in employee-related costs of $1.5 million and technology costs of $0.9 million. Gross margin in Analytics increased by 280 bps during the three months ended September 30, 2020, compared to the three months ended September 30, 2019, primarily due to higher revenues and lower operating expenses as a result of COVID-19 cost reduction measures. 48 Table of Contents Selling, General and Administrative (“SG&A”) Expenses. Three months ended September 30, Change Percentage change 2020 2019 (dollars in millions) General and administrative expenses $ 26.8 $ 29.6 $ (2.8) (9.4) % Selling and marketing expenses 15.3 18.3 (3.0) (16.5) % Selling, general and administrative expenses $ 42.1 $ 47.9 $ (5.8) (12.1) % As a percentage of revenues 17.5 % 19.1 % The decrease in SG&A expenses of $5.8 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. The decrease was driven by lower employee-related costs of $4.7 million, lower travel costs of $1.7 million, partially offset by higher other operating costs of $0.6 million. Depreciation and Amortization. Three months ended September 30, Change Percentage change 2020 2019 (dollars in millions) Depreciation expense $ 9.0 $ 7.5 $ 1.5 19.4 % Intangible amortization expense 3.4 5.6 (2.2) (38.0) % Depreciation and amortization expense $ 12.4 $ 13.1 $ (0.7) (4.8) % As a percentage of revenues 5.2 % 5.2 % 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 September 30, 2020 compared to the three months ended September 30, 2019. The increase in depreciation expense of $1.5 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 September 30, Percentage change 2020 2019 Change (dollars in millions) Impairment and restructuring charges $ — $ 0.5 $ (0.5) (100.0) % As a percentage of revenues — % 0.2 % During the three months ended September 30, 2019, we recorded restructuring charges of $0.5 million in connection with the wind-down of our Health Integrated business. Income from Operations. Income from operations increased by $12.0 million, or 53.4%, from $22.4 million for the three months ended September 30, 2019 to $34.4 million for the three months ended September 30, 2020. As a percentage of revenues, income from operations increased from 8.9% for the three months ended September 30, 2019 to 14.3% for the three months ended September 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, the Philippine peso and the Australian dollar during the three months 49 Table of Contents ended September 30, 2020. The average exchange rate of the U.S. dollar against the Indian rupee increased from 70.35 during the three months ended September 30, 2019 to 74.06 during the three months ended September 30, 2020. The average exchange rate of the U.K. pound sterling against the U.S. dollar increased from 1.22 during the three months ended September 30, 2019 to 1.31 during the three months ended September 30, 2020. The average exchange rate of the U.S. dollar against the Philippine peso decreased from 51.59 during the three months ended September 30, 2019 to 48.71 during the three months ended September 30, 2020. The average exchange rate of the U.S. dollar against the Australian dollar decreased from 1.47 during the three months ended September 30, 2019 to 1.39 during the three months ended September 30, 2020. We recorded a net foreign exchange gain of $0.7 million for the three months ended September 30, 2020 compared to the net foreign exchange gain of $1.0 million for the three months ended September 30, 2019. Interest expense. Interest expense decreased from $3.2 million for the three months ended September 30, 2019 to $2.6 million for the three months ended September 30, 2020, primarily due to repayments leading to lower outstanding borrowings and lower effective interest rates under our Credit Facility during the three months ended September 30, 2020 compared to the three months ended September 30, 2019. Other Income, net. Three months ended September 30, Percentage change 2020 2019 Change (dollars in millions) Gain on sale and mark-to-market of mutual funds $ 2.0 $ 3.2 $ (1.2) (38.9) % Interest income 0.8 0.5 0.3 58.9 % Other, net (0.3) 0.9 (1.2) (130.1) % Other income, net $ 2.5 $ 4.6 $ (2.1) (45.5) % Other income, net decreased by $2.1 million, from $4.6 million for the three months ended September 30, 2019 to $2.5 million for the three months ended September 30, 2020, primarily due to lower return on mutual fund investments of $1.2 million during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 and recognition of one-time other income of $0.8 million related to our Health Integrated business during the three months ended September 30, 2019. Income Tax Expense. The effective tax rate increased from 23.0% during the three months ended September 30, 2019 to 24.3% during the three months ended September 30, 2020. We recorded income tax expense of $8.5 million and $5.7 million for the three months ended September 30, 2020 and 2019, respectively. The increase in income tax expense was primarily as a result of (i) higher profit during the three months ended September 30, 2020 and (ii) recording a discrete benefit of $0.5 million during the three months ended September 30, 2019 relating to job related incentives in India for prior years. Net Income. Net income increased from $19.0 million for the three months ended September 30, 2019 to $26.4 million for the three months ended September 30, 2020, primarily due to increase in income from operations of $12.0 million, lower interest expense of $0.6 million. This was partially offset by higher income tax expense of $2.8 million, lower other income, net of $2.1 million, lower foreign exchange gain, net of $0.3 million. As a percentage of revenues, net income increased from 7.6% for the three months ended September 30, 2019 to 11.0% for the three months ended September 30, 2020. 50 Table of Contents Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 Revenues. The following table summarizes our revenues by reportable segments for the nine months ended September 30, 2020 and 2019: Nine months ended September 30, Percentage change 2020 2019 Change (dollars in millions) Insurance $ 252.9 $ 258.0 $ (5.1) (2.0) % Healthcare 77.1 69.6 7.5 10.8 % Emerging Business 114.9 143.3 (28.4) (19.8) % Analytics 264.6 263.6 1.0 0.4 % Total revenues, net $ 709.5 $ 734.5 $ (25.0) (3.4) % Revenues for the nine months ended September 30, 2020 were $709.5 million, down $25.0 million, or 3.4%, compared to the nine months ended September 30, 2019. The impact of the COVID-19 pandemic on our net revenues for the nine months ended September 30, 2020 was primarily related to clients adapting to the shift in our delivery capabilities from a physical to a virtual, work-from-home operating environment, as well as economic uncertainty leading to lower volumes from some existing clients and causing delays in the execution and implementation of new client contracts, which impacted growth. Revenue decline in Insurance of $5.1 million was primarily driven by lower volumes due to the impact of COVID-19 and ramp down of certain client contracts, partially offset by expansion of business from certain existing clients aggregating to $3.8 million and $1.4 million mainly attributable to the depreciation of the Indian rupee, Australian dollar and South African ZAR against the U.S. dollar during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. Insurance revenues were 35.6% and 35.1% of our total revenues in the nine months ended September 30, 2020 and September 30, 2019, respectively. Revenue growth in Healthcare of $7.5 million was primarily driven by expansion of business from our existing clients and new wins aggregating to $17.2 million, partially offset by our December 2019 wind-down of Health Integrated business revenues of $9.7 million during the nine months ended September 30, 2019. Healthcare revenues were 10.9% and 9.5% of our total revenues in the nine months ended September 30, 2020 and September 30, 2019, respectively. Revenue decline in Emerging Business of $28.4 million was primarily driven by lower volumes due to the impact of COVID-19 and ramp down of certain client contracts aggregating to $26.7 million, and $1.7 million attributable to the depreciation of the Indian rupee against the U.S. dollar during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. Emerging Business revenues were 16.2% and 19.5% of our total revenues in the nine months ended September 30, 2020 and September 30, 2019, respectively. Revenue growth in Analytics of $1.0 million was attributable to our recurring and project-based engagements from our existing clients of $1.2 million, partially offset by $0.2 million attributable to the depreciation of the U.K. pound sterling against the U.S. dollar during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. Analytics revenues were 37.3% and 35.9% of our total revenues in the nine months ended September 30, 2020 and September 30, 2019, respectively. 51 Table of Contents 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 Nine months ended September 30, Percentage change Nine months ended September 30, Change 2020 2019 Change 2020 2019 (dollars in millions) Insurance $ 174.9 $ 176.9 $ (2.0) (1.1) % 30.8 % 31.4 % (0.6) % Healthcare 57.2 56.0 1.2 2.3 % 25.8 % 19.6 % 6.2 % Emerging Business 68.7 82.1 (13.4) (16.4) % 40.2 % 42.6 % (2.4) % Analytics 172.3 172.2 0.1 0.1 % 34.9 % 34.7 % 0.2 % Total $ 473.1 $ 487.2 $ (14.1) (2.9) % 33.3 % 33.7 % (0.4) % For the nine months ended September 30, 2020, cost of revenues was $473.1 million compared to $487.2 million for the nine months ended September 30, 2019, a decrease of $14.1 million, or 2.9%. Our gross margin for the nine months ended September 30, 2020 was 33.3% compared to 33.7% for nine months ended September 30, 2019, a decrease of 40 bps. The decrease in cost of revenues in Insurance of $2.0 million was primarily due to a decrease in employee-related costs of $2.2 million, lower travel costs of $1.8 million and currency movements, net of hedging of $1.8 million. This was partially offset by higher infrastructure and technology costs of $2.6 million and other operating costs of $1.2 million. Gross margin in Insurance decreased by 60 bps during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily due to lower revenues in existing clients. The increase in cost of revenues in Healthcare of $1.2 million was primarily due to an increase in employee-related costs of $1.5 million and other operating costs of $0.5 million. This was partially offset by lower technology costs of $0.4 million and currency movements, net of hedging of $0.4 million. Gross margin in Healthcare increased by 620 bps during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily due to lower margin in the Health Integrated business during the nine months ended September 30, 2019 and higher revenues during the nine months ended September 30, 2020. The decrease in cost of revenues in Emerging Business of $13.4 million was primarily due to a decrease in employee-related costs of $9.7 million, lower infrastructure and technology cost of $2.1 million, lower travel costs of $1.4 million, and currency movements, net of hedging of $1.1 million, partially offset by higher other operating costs of $0.9 million. Gross margin in Emerging Business decreased by 240 bps during the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, primarily due to lower revenues. The increase in cost of revenues in Analytics of $0.1 million was primarily due to an increase in employee-related costs of $10.7 million and higher technology costs of $1.1 million. This was partially offset by lower other operating costs of $6.4 million, lower travel costs of $3.7 million and currency movements, net of hedging of $1.6 million. Gross margin in Analytics increased by 20 bps during the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019. 52 Table of Contents Selling, General and Administrative (“SG&A”) Expenses. Nine months ended September 30, Percentage change 2020 2019 Change (dollars in millions) General and administrative expenses $ 84.5 $ 93.4 $ (8.9) (9.5) % Selling and marketing expenses 42.8 54.0 (11.2) (20.7) % Selling, general and administrative expenses $ 127.3 $ 147.4 $ (20.1) (13.6) % As a percentage of revenues 17.9 % 20.1 % The decrease in SG&A expenses of $20.1 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. The decrease was driven by lower employee-related costs of $14.4 million, lower infrastructure and travel costs of $4.0 million, lower other operating costs of $0.6 million and currency movements, net of hedging of $1.1 million. Depreciation and Amortization. Nine months ended September 30, Percentage change 2020 2019 Change (dollars in millions) Depreciation expense $ 26.3 $ 22.9 $ 3.4 14.9 % Intangible amortization expense 11.0 16.6 (5.6) (33.7) % Depreciation and amortization expense $ 37.3 $ 39.5 $ (2.2) (5.5) % As a percentage of revenues 5.3 % 5.4 % The decrease in intangibles amortization expense of $5.6 million was primarily due to end of useful lives for certain intangible assets during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increase in depreciation expense of $3.4 million was due to depreciation related to our investments in new operating centers to support our business growth. Impairment and Restructuring Charges. Nine months ended September 30, Percentage change 2020 2019 Change (dollars in millions) Impairment and restructuring charges $ — $ 7.3 $ (7.3) (100.0) % As a percentage of revenues — % 1.0 % During the nine months ended September 30, 2019, we recorded impairment charges of $3.2 million and restructuring charges of $4.1 million in connection with the wind-down of our Health Integrated business. Income from Operations. Income from operations increased by $18.7 million, or 35.0%, from $53.1 million for the nine months ended September 30, 2019 to $71.8 million for the nine months ended September 30, 2020. As a percentage of revenues, income from operations increased from 7.2% for the nine months ended September 30, 2019 to 10.1% for the nine months ended September 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, the Philippine peso, Australian dollar and the South African ZAR during the nine months ended September 30, 2020. The average exchange rate of the U.S. dollar against the Indian rupee increased from 70.03 during the nine months ended September 30, 2019 to 74.18 during the nine months ended September 30, 2020. The average exchange rate of the U.K. pound sterling against the U.S. dollar remained stable at 1.27 during the nine months ended September 30, 2020 from the nine months ended September 30, 2019. The average exchange rate of the U.S. dollar against the Philippine peso decreased from 51.84 during the nine months ended September 30, 2019 to 49.94 during the nine months ended September 30, 2020. The average exchange rate of the U.S. dollar against the Australian dollar increased 53 Table of Contents from 1.43 during the nine months ended September 30, 2019 to 1.48 during the nine months ended September 30, 2020. The average exchange rate of the U.S. dollar against the South African ZAR increased from 14.38 during the nine months ended September 30, 2019 to 16.88 during the nine months ended September 30, 2020. We recorded a net foreign exchange gain of $3.5 million each for the nine months ended September 30, 2020 and 2019. Interest expense. Interest expense decreased from $10.6 million for the nine months ended September 30, 2019 to $8.6 million for the nine months ended September 30, 2020 primarily due to repayments of borrowings leading to lower outstanding borrowings and lower effective interest rates under our Credit Facility during the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019. Other Income, net. Nine months ended September 30, Percentage change 2020 2019 Change Gain on sale and mark-to-market of mutual funds $ 7.1 $ 10.1 $ (3.0) (29.1) % Interest income 1.9 2.0 (0.1) (2.1) % Other, net 0.2 1.0 (0.8) (84.0) % Other income, net $ 9.2 $ 13.1 $ (3.9) (29.4) % Other income, net decreased by $3.9 million, from $13.1 million for the nine months ended September 30, 2019 to $9.2 million for the nine months ended September 30, 2020, primarily due to lower return on mutual fund investments of $3.0 million during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 and recognition of one-time other income of $0.8 million related to our Health Integrated business during the nine months ended September 30, 2019. Income Tax Expense. The effective tax rate increased from 21.3% during the nine months ended September 30, 2019 to 24.3% during the nine months ended September 30, 2020. We recorded income tax expense of $18.4 million and $12.6 million for the nine months ended September 30, 2020 and 2019, respectively. The increase in income tax expense was 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 nine months ended September 30, 2020, compared to a benefit of $2.5 million recorded during the nine months ended September 30, 2019, (ii) higher profit during the nine months ended September 30, 2020, partially offset by (iii) recording of excess tax benefits related to stock awards of $1.9 million pursuant to ASU No. 2016-09 during the nine months ended September 30, 2020 compared to $1.1 million during the nine months ended September 30, 2019. See Note 21 - Income Taxes to our unaudited consolidated financial statements. Net Income. Net income increased from $46.3 million for the nine months ended September 30, 2019 to $57.3 million for the nine months ended September 30, 2020, primarily due to increase in income from operations of $18.7 million, lower interest expense of $2.0 million. This was partially offset by lower other income, net of $3.9 million and higher income tax expense of $5.8 million. As a percentage of revenues, net income increased from 6.3% for the nine months ended September 30, 2019 to 8.1% for the nine months ended September 30, 2020. 54 Table of Contents Liquidity and Capital Resources Nine months ended September 30, 2020 2019 (dollars in millions) Opening cash, cash equivalents and restricted cash $ 127.0 $ 104.1 Net cash provided by operating activities 126.3 106.0 Net cash provided by/(used for) investing activities 11.1 (21.3) Net cash used for financing activities (48.4) (77.7) Effect of exchange rate changes — (1.8) Closing cash, cash equivalents and restricted cash $ 216.0 $ 109.3 As of September 30, 2020 and 2019, we had $362.6 million and $280.8 million, respectively, in cash, cash equivalents and short-term investments, of which $300.7 million, and $228.7 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 provided by operating activities were $126.3 million for the nine months ended September 30, 2020 as compared to cash flows provided by operating activities of $106.0 million during the nine months ended September 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 provided by operating activities for the nine months ended September 30, 2020 were $126.3 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 $130.6 million. The primary working capital use of cash of $32.2 million during the nine months ended September 30, 2020 was driven by payments of operating lease liabilities, accrued employee costs, accrued expenses and other liabilities and accounts payable. The primary working capital sources of cash of $27.9 million was driven by collections of accounts receivables, decrease in advance income tax, net, current and non-current assets and increase in deferred revenues. Investing Activities: Cash flows provided by investing activities were $11.1 million for the nine months ended September 30, 2020 as compared to cash flows used for investing activities of $21.3 million for the nine months ended September 30, 2019. The increase is mainly due to higher net redemption of investments of $45.7 million during the nine months ended September 30, 2020 as compared to net redemptions of investments of $11.2 million during the nine months ended September 30, 2019. This was partially offset by higher capital expenditures for purchase of long-lived assets, including investments in infrastructure, technology assets, software and product developments of $2.1 million during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. Financing Activities: Cash flows used for financing activities were $48.4 million during the nine months ended September 30, 2020 as compared to cash flows used for financing activities of $77.7 million during the nine months ended September 30, 2019. The decrease in cash flows used for financing activities was primarily due to lower net repayment of $10.4 million (net of proceeds) under our Credit Facility (as described below in “Financing Arrangements (Debt Facility)”) during the nine months ended September 30, 2020 as compared to net repayments of $41.8 million during the nine months ended September 30, 2019, partially offset by higher purchases of treasury stock by $3.0 million under our share repurchase program during the nine months ended September 30, 2020 as compared to the nine months ended September 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. 55 Table of Contents We incurred $34.6 million of capital expenditures in the nine months ended September 30, 2020. We expect to incur total capital expenditures of between $36.0 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 nine months ended September 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 the management using its discretion has resumed share repurchases effective July 1, 2020, considering improved market conditions, our capital needs and other factors. However, there is no assurance that the impacts we have experienced to date, and any future impact we may experience, from the COVID-19 pandemic will not have an adverse effect on our cash flows. 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. As of September 30, 2020, we deferred FICA payments of $4.5 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) The following tables summarizes our Debt balances as of September 30, 2020 and December 31, 2019. As of September 30, 2020 (dollars in millions) Revolver Credit Facility Structured Payables Notes Total Current portion of long-term borrowings $ 10.0 $ 0.5 $ — $ 10.5 Long-term borrowings 79.0 — 150.0 229.0 Unamortized debt discount — — (11.9) (11.9) Unamortized debt issuance costs* — — (0.9) (0.9) Long-term borrowings 79.0 — 137.2 216.2 Total borrowings $ 89.0 $ 0.5 $ 137.2 $ 226.7 56 Table of Contents 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 September 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 September 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. We had no other off balance sheet arrangements or obligations. 57 Table of Contents Contractual Obligations The following table sets forth our contractual obligations as of September 30, 2020: Payment Due by Period Less than 1-3 4-5 After 1 year years years 5 years Total (dollars in millions) Finance leases $ 0.3 $ 0.3 $ 0.1 $ — $ 0.7 Operating leases (a) 26.5 47.5 30.1 36.9 141.0 Purchase obligations 2.7 — — — 2.7 Other obligations (b) 2.4 4.2 3.4 5.7 15.7 Borrowings: Principal payments 10.5 79.0 150.0 — 239.5 Interest payments (c) 6.3 11.5 7.9 — 25.7 Total contractual cash obligations (d) $ 48.7 $ 142.5 $ 191.5 $ 42.6 $ 425.3 (a) Represents operating lease liabilities payable over the lease term. (b) Represents estimated employee benefit payments under the Gratuity Plan. (c) Interest on borrowings is calculated based on the interest rate on the outstanding borrowings as of September 30, 2020. (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. These units are exempt from customs, central excise duties, and levies on imported and indigenous capital goods, stores, and spares. We have undertaken to pay custom duties, service taxes, levies, and liquidated damages payable, if any, in respect of imported and indigenous capital goods, stores, and spares consumed duty free, in the event that certain terms and conditions are not fulfilled. We believe, however, that these units have in the past satisfied and will continue to satisfy the required conditions. Our operations centers in the Philippines are registered with the Philippine Economic Zone Authority (“PEZA”). The registration provides us with certain fiscal incentives on the import of capital goods and local purchase of services and materials and requires that ExlService Philippines, Inc. to meet certain performance and investment criteria. We believe that these centers have in the past satisfied and will continue to satisfy the required criteria. Recent Accounting Pronouncements For a description of recent accounting pronouncements, see Note 2—“Recent Accounting Pronouncements” to the unaudited consolidated financial statements contained herein. 58 Table of Contents