What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2021-02-25 compared with 2020-02-27 · 881 added, 727 removed, 1276 unchanged (56% of the section changed)

53 unchanged sentences

The Exhibits filed as part of this Annual Report on Form 10-K are listed on the Exhibit Index immediately preceding such Exhibits, which Exhibit Index is incorporated in this Annual Report on Form 10-K by reference.

(b) Exhibits.

See Item 15(a)(3) above.

Financial Statement Schedules.

See Item 15(a)(2) above.

Form 10-K Summary

Not applicable.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned hereunto duly authorized.

February 27, 2020

EXLSERVICE HOLDINGS, INC.

February 25, 2021 EXLSERVICE HOLDINGS, INC.

/S/ MAURIZIO NICOLELLI

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Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature Title Date

/ S / R OHIT K APOOR

Chief Executive Officer, Vice-Chairman and Director (Principal Executive Officer)

February 27, 2020

/ S / G AREN K.

Chairman of the Board

February 27, 2020

Chief Executive Officer, Vice-Chairman and Director (Principal Executive Officer) February 25, 2021

/ S / M AURIZIO N ICOLELLI

Chief Financial Officer (Principal Financial and Accounting Officer)

February 27, 2020

Chief Financial Officer (Principal Financial and Accounting Officer) February 25, 2021

Maurizio Nicolelli

/ S / A NNE E.

February 27, 2020

/ S / C LYDE W.

February 27, 2020

/ S / G AREN K.

Chairman of the Board February 25, 2021

/ S / D AVID B.

February 27, 2020

Director February 25, 2021

/S/ D EBORAH K ERR

February 27, 2020

/S/ N ITIN S AHNEY

February 27, 2020

Director February 25, 2021

/ S / A NNE E.

Director February 25, 2021

/ S / S OM M ITTAL

February 27, 2020

/ S / J AYNIE M.

February 27, 2020

Director February 25, 2021

/ S / C LYDE W.

Director February 25, 2021

/ S / V IKRAM S.

February 27, 2020

Director February 25, 2021

/ S / K RISTY P IPES

Director February 25, 2021

/S/ N ITIN S AHNEY

Director February 25, 2021

/ S / J AYNIE M.

Director February 25, 2021

INDEX TO EXHIBITS

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1-33089) filed on October 4, 2018).

Description of Common Stock.

4.3 Description of Common Stock (incorporated by reference to Exhibit 4.3 to the Company’s Annual Report on Form 10-K (File No.

1-33089) filed on February 27, 2020).

10.1+ Amended and Restated Employment and Non-Competition Agreement, dated as of September 19, 2017 between ExlService Holdings, Inc.

1 unchanged sentence

1-33089) filed on October 26, 2017).

10.2+ Second Amended and Restated Employment and Non-Competition Agreement, dated August 3, 2020, between the Company and Rohit Kapoor (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (File No.

1-33089) filed on October 29, 2020)

10.3+ Employment Agreement, dated July 31, 2002, between ExlService Holdings, Inc.

1 unchanged sentence

333-121001) filed on December 6, 2004).

10.4+ Employment Agreement, effective as of February 3, 2020, between ExlService Holdings, Inc.

and Maurizio Nicolelli.

10.5+ Employment Agreement, dated as of September 15, 2014, between ExlService Holdings, Inc.

1 unchanged sentence

1-33089) filed on April 29, 2016).

10.6+ Employment Agreement, dated April 28, 2001, between ExlService Holdings, Inc.

and Vikas Bhalla.

10.7+ Employment Agreement, effective November 5, 2018, between ExlService Holdings, Inc.

and Samuel Meckey.

10.8+ ExlService Holdings, Inc.

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1-33089) filed on June 20, 2018).

Credit Agreement, dated as of October 24, 2014, among ExlService Holdings, Inc., JPMorgan Chase Bank, N.A., as administrative agent and co-lead arranger, Citibank, N.A., as co-lead arranger, and the other Loan Parties and Lenders thereto (incorporated by reference to Exhibit 10.39 to the Company’s Annual Report on Form 10-K (File No.

1-33089) filed on February 27, 2015).

First Amendment to Credit Agreement and Incremental Facility Agreement, dated as of February 23, 2015, by and among ExlService Holdings, Inc., each of its subsidiaries party thereto, the Lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent for the Lenders (incorporated by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K (File No.

1-33089) filed on February 27, 2015).

10.23 Credit Agreement, dated as of November 21, 2017, among ExlService Holdings, Inc., the other loan parties thereto, the lenders party thereto, and Citibank, N.A., as administrative agent, Citibank, N.A.

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23.1 Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.

Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.

31.1 Certification of the Chief Executive Officer of ExlService Holdings, pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Inline XBRL Instance Document**

Inline XBRL Taxonomy Extension Schema**

Inline XBRL Taxonomy Extension Calculation Linkbase**

Inline XBRL Taxonomy Extension Definition Linkbase**

Inline XBRL Taxonomy Extension Label Linkbase**

Inline XBRL Extension Presentation Linkbase**

101.INS Inline XBRL Instance Document**

101.SCH Inline XBRL Taxonomy Extension Schema**

101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase**

101.DEF Inline XBRL Taxonomy Extension Definition Linkbase**

101.LAB Inline XBRL Taxonomy Extension Label Linkbase**

101.PRE Inline XBRL Extension Presentation Linkbase**

104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firms

Reports of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2020 and 2019

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We have audited the accompanying consolidated balance sheets of ExlService Holdings, Inc.

(the "Company") as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, equity, and cash flows, for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

(the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.

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The determination of fair value using the market approach requires management to make significant assumptions related to market multiples of revenues and earnings derived from comparable publicly-traded companies with characteristics similar to the reporting unit.

The goodwill balance was approximately $350 million as of December 31, 2019, of which approximately $164 million has been allocated to the SCIOinspire Holdings, Inc.

(SCIO) reporting unit.

The SCIO reporting unit was formed as a result of the SCIO acquisition in July 2018 and its fair value was set at that time.

As a result, the fair value of this reporting unit was not substantially in excess of its carrying value.

Based on the results of the Company’s 2019 annual goodwill impairment quantitative test, the fair value of the SCIOinspire Holdings, Inc.

(SCIO) reporting unit was not substantially in excess of its carrying value.

Effective January 1, 2020, the SCIO reporting unit has been integrated within the Healthcare Analytics reporting unit.

The Company performed interim and annual goodwill impairment quantitative tests of its reporting units during the first and fourth quarters of 2020, respectively, and did not identify an impairment.

As of December 31, 2020, the total goodwill balance was approximately $349 million, of which approximately $181 million has been allocated to the Healthcare Analytics reporting unit.

Significant estimates and assumptions are used by management to determine fair value and, thus, sensitivity in fair value may result from changes in these estimates.

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How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the assumptions for long-term future growth rates and estimated future cash flows, and the selection of discount rates for the SCIO reporting unit included the following, among others:

We tested the effectiveness of controls over the Company’s goodwill impairment evaluation, including those over the determination of fair value of the SCIO reporting unit, such as controls related to management’s forecasts and selection of discount rates.

Our audit procedures related to the assumptions for long-term future growth rates and estimated future cash flows, and the selection of discount rates for the Healthcare Analytics reporting unit, used in both the Company’s interim and annual goodwill impairment tests performed during the first and fourth quarters of 2020, respectively, included the following, among others:

• We tested the effectiveness of controls over the Company’s goodwill impairment evaluation, including those over the determination of fair value of the Healthcare Analytics reporting unit, such as controls related to management’s forecasts and selection of discount rates.

• We evaluated management’s ability to accurately forecast by comparing actual results to management’s historical forecasts, reviewing internal communications between management and the Board of Directors, and reviewing forecasted information included in Company press releases, and analyst and industry reports of the Company and companies in its peer group.

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In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated February 27, 2020 , expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of a new accounting standard.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report February 25, 2021, expressed an unqualified opinion on those financial statements.

Basis for Opinion

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February 25, 2021

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of ExlService Holdings, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of income, comprehensive income, equity and cash flows of ExlService Holdings, Inc.

(the “Company”) for the year ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the consolidated results of its operations and its cash flows for the year ended December 31, 2017, in conformity with U.S.

generally accepted accounting principles.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor from 2002 to 2017.

New York, New York

February 27, 2018, except for Note 27, as to which the date is February 28, 2019

EXLSERVICE HOLDINGS, INC.

1 unchanged sentence

(In thousands, except share and per share amounts)

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Current assets:

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Intangible assets, net 59,594 73,982

Goodwill 349,088 349,529

Other assets 32,099 36,016

Investment in equity affiliate 2,957 2,484

Total assets $ 1,247,857 $ 1,183,088

Liabilities and stockholders’ equity

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Income taxes payable, net 3,488 1,432

Current portion of finance lease liabilities

Total current liabilities 221,078 229,349

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Deferred tax liabilities, net 847 966

Finance lease liabilities, less current portion

Other non-current liabilities 18,135 12,142

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5,408,618 shares as of December 31, 2020 and 4,295,413 shares as of December 31, 2019, held in treasury, at cost

( 268,238 ) ( 188,289 )

Stockholders' equity 719,172 670,001

Non-controlling interest

Total equity 719,172 670,001

Total liabilities and stockholders’ equity $ 1,247,857 $ 1,183,088

4 unchanged sentences

Year ended December 31,

2020 2019 2018

Revenues, net $ 958,434 $ 991,346 $ 883,112

Cost of revenues (1)

623,936 655,490 584,855

Gross profit (1)

334,498 335,856 298,257

Operating expenses:

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Net income attributable to ExlService Holdings, Inc.

stockholders $ 89,476 $ 67,659 $ 56,726

Earnings per share attributable to ExlService Holdings, Inc.

stockholders:

Basic $ 2.61 $ 1.97 $ 1.65

Diluted $ 2.59 $ 1.95 $ 1.62

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

stockholders:

Basic 34,273,388 34,350,150 34,451,008

Diluted 34,555,164 34,732,683 35,030,984

(1) Exclusive of depreciation and amortization expense.

4 unchanged sentences

Year ended December 31,

2020 2019 2018

Net income $ 89,476 $ 67,659 $ 56,726

Other comprehensive income/(loss):

Unrealized gain/(loss) on cash flow hedges 12,665 8,773 ( 13,724 )

Foreign currency translation (loss)/gain

Foreign currency translation loss ( 547 ) ( 2,857 ) ( 31,798 )

Retirement benefits ( 2,401 ) ( 2,539 ) 382

1 unchanged sentence

Gain on cash flow hedges (1)

( 801 ) ( 3,951 ) ( 3,149 )

Retirement benefits (2)

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

Total other comprehensive (loss)/income

394 ( 159 ) ( 153 )

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

598 ( 692 ) 10,685

Total other comprehensive income/(loss) $ 9,908 $ ( 1,425 ) $ ( 37,757 )

Total comprehensive income $ 99,384 $ 66,234 $ 18,969

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

Refer to Note 17 to the consolidated financial statements.

Refer to Note 17 - Derivatives and Hedge Accounting to the consolidated financial statements.

(2) These are reclassified to net income and are included in other income, net in the consolidated statements of income.

Refer to Note 20 to the consolidated financial statements.

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

Refer to Note 22 to the consolidated financial statements.

Refer to Note 20 - Employee Benefit Plans to the consolidated financial statements.

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

Refer to Note 22 - Income Taxes to the consolidated financial statements.

See accompanying notes to consolidated financial statements.

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(In thousands, except share and per share amounts)

Additional Paid-in Capital

Retained Earnings

Accumulated Other Comprehensive (Loss)/Income

Treasury Stock

Non - Controlling Interest

Balance as of December 31, 2016

Impact on adoption of ASU No.

Balance as of January 1, 2017

Stock issued against stock-based compensation plans

Stock-based compensation

Acquisition of treasury stock

Non-controlling interest

Other comprehensive income

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

Shares Amount Shares Amount

Balance as of December 31, 2017 36,790,751 $ 37 $ 322,246 $ 427,064 $ ( 45,710 ) ( 2,902,018 ) $ ( 103,816 ) $ 224 $ 600,045

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Acquisition of treasury stock — — — — — ( 726,050 ) ( 43,109 ) — ( 43,109 )

Allocation of equity component related to the convertible senior notes, net of tax and issuance costs

Allocation of equity component related to issuance costs on convertible notes — — 12,555 — — — — — 12,555

Non-controlling interest — — — — — — — 26 26

Other comprehensive loss — — — — ( 37,757 ) — — — ( 37,757 )

Net income — — — 56,726 — — — — 56,726

Balance as of December 31, 2018 37,850,544 $ 38 $ 364,179 $ 484,244 $ ( 83,467 ) ( 3,628,068 ) $ ( 146,925 ) $ 250 $ 618,319

5 unchanged sentences

Other comprehensive loss — — — — ( 1,425 ) — — — ( 1,425 )

Net income — — — 67,659 — — — — 67,659

Balance as of December 31, 2019 38,480,654 $ 39 $ 391,240 $ 551,903 $ ( 84,892 ) ( 4,295,413 ) $ ( 188,289 ) $ — $ 670,001

Stock issued against stock-based compensation plans 487,399 — 1,501 — — — — — 1,501

Stock-based compensation — — 28,235 — — — — — 28,235

Acquisition of treasury stock — — — — — ( 1,113,205 ) ( 79,949 ) — ( 79,949 )

Other comprehensive income — — — — 9,908 — — — 9,908

Net income — — — 89,476 — — — — 89,476

Balance as of December 31, 2020 38,968,053 $ 39 $ 420,976 $ 641,379 $ ( 74,984 ) ( 5,408,618 ) $ ( 268,238 ) $ — $ 719,172

See accompanying notes to consolidated financial statements.

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Year ended December 31,

2020 2019 2018

Cash flows from operating activities:

Net income $ 89,476 $ 67,659 $ 56,726

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

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Deferred income tax (benefit)/expense 2,697 ( 12,345 ) ( 625 )

Allowance for doubtful accounts receivable

Allowance for expected credit losses 297 614 ( 573 )

Loss from equity-method investment 227 269 247

1 unchanged sentence

Impairment charges — 3,627 20,056

Others, net ( 542 ) ( 1,204 ) 303

Change in operating assets and liabilities, net of effects of acquisitions:

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Advance income tax, net 696 7,194 ( 14,147 )

Other assets 6,505 ( 2,204 ) ( 6,800 )

Accounts payable 243 134 ( 360 )

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Purchases of property and equipment ( 42,224 ) ( 40,545 ) ( 40,789 )

Proceeds from sale of property and equipment 916 407 352

Investment in equity affiliate ( 700 ) — —

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Net increase/(decrease) in cash, cash equivalents and restricted cash 98,475 22,913 9,854

Cash, cash equivalents and restricted cash at the beginning of th e period

Cash, cash equivalents and restricted cash at the end of th e period

Cash, cash equivalents and restricted cash at the beginning of the period 127,044 104,131 94,277

Cash, cash equivalents and restricted cash at the end of the period $ 225,519 $ 127,044 $ 104,131

Supplemental disclosure of cash flow information:

Cash paid during the period for:

Interest $ 7,626 $ 10,649 $ 4,725

Income taxes, net of refunds $ 20,571 $ 19,087 $ 18,508

Supplemental disclosure of non-cash investing and financing activities:

Restricted common stock issued for business acquisition $ — $ — $ 4,080

Cash paid for interest

Cash paid for taxes, net of refund

Assets acquired under finance lease $ 45 $ 506 $ 277

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Summary of Significant Accounting Policies

Basis of Preparation and Principles of Consolidation

(a) Basis of Preparation and Principles of Consolidation

The consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles (“U.S.

The accompanying financial statements have been prepared on a consolidated basis and reflect the financial statements of ExlService Holdings and all of its subsidiaries and includes the Company's share in the results of its associates.

The accompanying financial statements have been prepared on a consolidated basis and reflect the financial statements of ExlService Holdings Inc.

and all of its subsidiaries and includes the Company's share in the results of its associates.

The standalone financial statements of subsidiaries are fully consolidated on a line-by-line basis.

Intra-group balances and transactions, and income and expenses arising from intra-group transactions, are eliminated while preparing those financial statements.

Intra-group balances and transactions, and gains and losses arising from intra-group transactions, are eliminated while preparing consolidated financial statements.

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

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

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

Use of Estimates

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

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

Effective January 1, 2020, the Company made certain operational and structural changes to more closely integrate the Company’s businesses and to simplify its organizational structure.

Under the new structure, the Company reports its financial performance based on new segments described in Note 3 - Segment and Geographical Information to the consolidated financial statements.

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

This change primarily impacted Note 3 - Segment and Geographical Information and Note 10 - Goodwill and Intangible Assets to the consolidated financial statements, with no impact on the consolidated balance sheets, statements of income, comprehensive income, equity and cash flows.

(b) Use of Estimates

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

1 unchanged sentence

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

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

The significant estimates and assumptions that affect the consolidated financial statements include, but are not limited to, allowance for expected credit losses, the nature and timing of the satisfaction of performance obligations, the standalone selling price of performance obligations, and variable consideration in a customer contract, expected recoverability from customers with contingent fee arrangements, estimated costs to complete fixed price

EXLSERVICE HOLDINGS, INC.

2 unchanged sentences

(In thousands, except share and per share amounts)

Foreign Currency Translation

contracts, recoverability of dues from statutory authorities, assets and obligations related to employee benefit plans, deferred tax valuation allowances, income-tax uncertainties and other contingencies, valuation of derivative financial instruments, assumptions used to calculate stock-based compensation expense, assumptions used to determine the incremental borrowing rate to calculate lease liabilities and right-of-use (“ROU”) assets, lease term to calculate amortization of ROU, depreciation and amortization periods, purchase price allocation and recoverability of long-lived assets, goodwill and intangibles.

As of December 31, 2020, the extent to which the global Coronavirus Disease 2019 pandemic (“COVID-19”) will ultimately impact the Company's business depends on numerous dynamic factors, which the Company still cannot reliably predict.

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

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

Any changes in estimates are adjusted prospectively in the Company’s consolidated financial statements.

The functional currency of each entity in the Company is its respective local country currency which is also the currency of the primary economic environment in which it operates except for the entities in Mauritius which use the U.S.

2 unchanged sentences

Monetary assets and liabilities denominated in foreign currencies are remeasured into functional currency at the rates of exchange prevailing at the balance sheet date.

Non-monetary assets and liabilities are remeasured to the functional currency of the subsidiary at exchange rates that prevailed on the date of inception of the transaction.

All foreign exchange gains and losses arising on re-measurement are recorded in the accompanying consolidated statements of income.

Non-monetary assets and liabilities are remeasured to the functional currency at exchange rates that prevailed on the date of inception of the transaction.

All foreign exchange gains and losses arising on re-measurement are recorded in the Company's consolidated statements of income.

The assets and liabilities of the subsidiaries for which the functional currency is other than the U.S.

3 unchanged sentences

dollars at the exchange rates prevailing on the last business day of each month, which approximates the average monthly exchange rate.

Share capital and other equity items are translated at exchange rates that prevailed on the date of inception of the transaction.

Resulting translation adjustments are included in “Accumulated other comprehensive loss” in the consolidated balance sheets.

Revenue Recognition

(d) Revenue Recognition

Revenue is recognized when services are provided to the Company's customers, in an amount that reflects the consideration which the Company expect to be entitled to in exchange for the services provided.

2 unchanged sentences

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.

Adoption of Financial Accounting Standards Board Accounting Standards Update (“ASU”) No.

2014-09 Topic 606, Revenue from Contracts with Customers (“Topic 606”)

On January 1, 2018, the date of initial application, the Company adopted Topic 606 using the modified retrospective method by recognizing the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of retained earnings, resulting in an increase of $ 454 , primarily due to new contract acquisition costs.

The initial application scopes in those contracts which were not completed as of January 1, 2018.

Results for reporting periods beginning January 1, 2018 are presented under Topic 606.

The prior period consolidated financial statements have not been retrospectively adjusted and continue to be reported under the accounting standards in effect for those periods.

The key area impacted upon adoption of Topic 606 relates to the accounting for sales commissions costs.

Specifically, under Topic 606 a portion of sales commission costs have been recorded as an asset and recognized as an operating expense on a straight-line basis over the expected period of benefit.

Prior to adoption, the Company was expensing sales commission costs as incurred.

Nature of Services

1 unchanged sentence

The Company operates in the business process management (“BPM”) industry providing operations management and analytics services helping businesses enhance revenue growth and improve profitability.

The Company provides BPM or “operations management” services, which typically involve transfer to the Company of business operations of a client, after which it administers and manages those operations for its client on an ongoing basis.

The Company also provides industry-specific digital transformational services related to operations management services, and analytics services that focus on driving improved business outcomes for clients by generating data-driven insights across all parts of their business.

The Company also provides care optimization and reimbursement optimization services, for its clients through its healthcare analytics solutions and services.

The Company offers integrated solutions to help its clients with cost containment by leveraging technology platforms, customizable and configurable analytics and expertise in healthcare reimbursements to help clients enhance their claims payment accuracy.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2019

(In thousands, except share and per share amounts)

Type of Contracts

2 unchanged sentences

Revenues are recognized net of any penalties or service credits that are due to a client.

b) Revenues from arrangements involving subcontracting, either in part or whole of the assigned work, are recognized after Company’s assessment of “Principal versus agent considerations”.

The Company evaluates whether it is in control of the services before the same are transferred to the customer to assess whether it is principal or agent in the arrangement.

b) Revenues from arrangements involving subcontracting, either in part or whole of the assigned work, are recognized after the Company’s assessment of “Principal versus agent considerations”.

The Company evaluates

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2020

(In thousands, except share and per share amounts)

whether it is in control of the services before the same are transferred to the customer to assess whether it is principal or agent in the arrangement.

Revenues are recognized on a gross basis if the Company is in the capacity of principal and on a net basis if it falls in the capacity of an agent.

19 unchanged sentences

Services added that are distinct and at standalone selling price are accounted on a prospective basis either as a separate contract, or as a termination of existing contract and creation of a new contract.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2019

(In thousands, except share and per share amounts)

Arrangements with Multiple Performance Obligations

2 unchanged sentences

Variable Consideration

Variability in the transaction price arises primarily due to service level agreements, pre-payment and volume discounts.

Variability in the transaction price arises primarily due to service level agreements and volume discounts.

The Company considers its experience with similar transactions and expectations regarding the contract in estimating the amount of variable consideration that should be recognized during a period.

The Company believes that the expected value method is most appropriate for determining the variable consideration since the Company has large number of contracts with similar nature of transactions/services.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2020

(In thousands, except share and per share amounts)

Allocation of Transaction Price to Performance Obligations

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Unbilled receivables represents revenues recognized for services rendered between the last billing date and the balance sheet date.

Unbilled receivables also include revenues recognized from reimbursement optimization services where the Company identify an overpayment claim.

Unbilled receivables also include revenues recognized from reimbursement optimization services where the Company identifies an overpayment claim.

In such contracts, Company’s consideration is contingent upon and collectable only when the actual collections are made by its customers.

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Deferred revenue also includes the amount for which services have been rendered but other conditions of revenue recognition are not met, for example where the Company does not have an enforceable contract.

Further, the Company also defer revenues attributable to certain process transition activities, with respect to its customers where such activities do not represent separate performance obligations.

Further, the Company also defers revenues attributable to certain process transition activities, with respect to its customers where such activities do not represent separate performance obligations.

Revenues related to such transition activities are classified under “Deferred revenue” and “Other non-current liabilities” in the Company’s consolidated balance sheets and are recognized ratably over the period during which the related services are performed.

Costs related to such transition activities are contract fulfillment costs, and thereby classified under “Other Current Assets” and “Other Assets” in the consolidated balance sheets, and are recognized over the estimated expected period of benefit, under Cost of Revenues in the consolidated statements of income.

Costs related to such transition activities are contract fulfillment costs, and thereby classified under “Other current assets” and “Other assets” in the consolidated balance sheets, and are recognized over the expected duration of the relationship with customers, under “Cost of revenues” in the consolidated statements of income.

Contract Acquisition Costs

Direct and incremental costs incurred for acquiring contracts, such as sales commissions are contract acquisition costs and thereby classified under “Other current assets” and “Other assets” in the consolidated balance sheets.

Such costs are amortized over the expected period of benefit and recorded under Selling and marketing expenses in the consolidated statements of income.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2019

(In thousands, except share and per share amounts)

Upfront Payment Made to Customer

Such costs are amortized over the expected duration of the relationship with customers and recorded under Selling and marketing expenses in the consolidated statements of income.

Upfront Payments Made to Customers

Upfront payments, in nature of deal signing discount or deal signing bonuses made to customers are contract assets and classified under “Other current assets and Other assets” in the consolidated balance sheets.

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The Company does not have any extended payment terms clauses in existing contracts.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2020

(In thousands, except share and per share amounts)

Remaining Performance Obligations

The Company does not disclose the value of remaining performance obligations by applying the practical expedient provided in Topic 606, for contracts that meet any of the following criteria:

The Company does not disclose the value of remaining performance obligations as a result of applying the practical expedient provided in Topic 606, for contracts that meet any of the following criteria:

Contracts with an original expected length of one year or less as determined under ASC 606,

Contracts for which Company recognize revenue based on the right to invoice for service performed.

Cash and Cash Equivalents and Restricted Cash

(e) Cash and Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments purchased with an original maturity of ninety days or less to be cash equivalents.

Pursuant to the Company’s investment policy, surplus funds are invested in highly-rated debt mutual funds, money market accounts and time deposits to reduce its exposure to market risk with regard to these funds.

Restricted cash represents amounts on deposit with banks against bank guarantees issued through banks in favor of relevant statutory authorities for equipment imports, deposits for obtaining indirect tax registrations and for demands against pending income tax assessments (refer to Note 8 to the consolidated financial statements for details).

Restricted cash represents amounts on deposit with banks against bank guarantees issued through banks in favor of relevant statutory authorities for equipment imports, deposits for obtaining indirect tax registrations and for demands against pending income tax assessments (refer to Note 8 - Cash, Cash Equivalents and Restricted Cash to the consolidated financial statements for details).

These deposits with banks have maturity dates after December 31, 2020.

Restricted cash presented under current assets represents funds held on behalf of clients in dedicated bank accounts.

The corresponding liability against the same is included under “Accrued Expenses and other current liabilities”.

For purposes of the statements of cash flows, the Company includes in its cash and cash-equivalent balances those amounts that have been classified as restricted cash and restricted cash equivalents.

(f) Investments

The Company’s investments consist of time deposits with financial institutions which are valued at cost and approximate fair value.

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The Company's mutual fund investments are in debt and money market funds which invest in instruments of various maturities in India.

These investments are accounted for in accordance with the fair value option under Financial Accounting Standard Board Accounting Standards Codification (“ASC”) Topic 825, Financial Instruments , (“Topic 825”) and any changes in fair value are included in interest and other income.

The fair value is represented by original cost on the acquisition date and the net asset value (“NAV”) as quoted, at each reporting period.

Gain or loss on the disposal of these investments is calculated using the weighted average cost of the investments sold or disposed and is included in interest and other income .

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2019

(In thousands, except share and per share amounts)

Accounts Receivable and Allowance for Doubtful Receivable

Accounts receivable are recorded net of allowances for doubtful accounts.

Allowances for doubtful accounts are established through the evaluation of the accounts receivable aging and prior collection experience, current market conditions, client’s financial condition and the amounts of receivables in dispute to ascertain the ultimate collectability of these receivables.

As of December 31, 2019 and 2018 , the Company had $ 1,163 and $ 956 , respectively, of allowance for doubtful accounts.

The fair value is represented by original cost on the acquisition date and the net asset value (“NAV”) as quoted, at each reporting period and any changes in fair value are included in other income, net.

Gain or loss on the disposal of these investments is calculated using the weighted average cost of the investments sold or disposed and is included in other income.

(g) Accounts Receivable and Allowance for Expected Credit Losses

Accounts receivable are recorded net of allowances for expected credit losses.

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

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

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

As of December 31, 2020 and 2019, the Company had $ 1,189 and $ 1,163 , respectively, of allowances for expected credit losses.

Accounts receivable include unbilled accounts receivable which represent revenues on contracts to be billed, in subsequent periods, as per the terms of the related contracts.

As of December 31, 2020 and 2019, the Company had $ 63,995 and $ 73,920 , respectively, of unbilled accounts receivable.

Property and equipment

(h) Property and equipment

Property and equipment are stated at cost less accumulated depreciation and impairment.

Equipment held under finance leases are capitalized at the commencement of the lease at the lower of present value of minimum lease payments at the inception of the leases or its fair value.

Expenditures for replacements and improvements are capitalized, if they enhance the production capacity and future benefits whereas the costs of maintenance and repairs are charged to earnings as incurred.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2020

(In thousands, except share and per share amounts)

Advances paid towards acquisition of property and equipment and the cost of property and equipment not yet placed in service before the end of the reporting period are classified as capital work in progress.

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Depreciation on equipment held under finance leases and leasehold improvements are computed using the straight-line method over the shorter of the asset's estimated useful lives or the lease term.

The property and equipment which are abandoned and disposed other than by sale, are assessed for revision of their useful life, thereby revising the future depreciation to reflect the use of property and equipment over the remaining shortened life.

The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.

Network equipment and computers 3 - 5

Software 3 - 5

Leasehold improvements 3 - 8

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Motor vehicles 2 - 5

Software Development Costs

(i) Software Development Costs

The Company capitalizes certain costs related to the development or enhancements to existing software products to be sold, leased or otherwise marketed and / or used for internal use.

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Annual amortization of internally developed software products meant for internal use is based on the straight-line method over the estimated useful lives of the internally developed software products.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2019

(In thousands, except share and per share amounts)

Business Combinations, Goodwill and Other Intangible Assets

(j) Business Combinations, Goodwill and Other Intangible Assets

ASC Topic 805, Business Combinations, requires that the acquisition method of accounting be used for all business combinations.

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Contingent consideration is recognized at its fair value on the acquisition date.

A liability resulting from contingent consideration is re-measured to fair value as of each reporting date until the contingency is resolved.

Changes in fair value are recognized in earnings.

A liability resulting from contingent consideration is re-measured to fair value as of each reporting date until the contingency is resolved, whereby such changes in fair value are recognized in earnings.

These fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market.

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Goodwill is not amortized but is tested for impairment at least on an annual basis, relying on a number of factors including operating results, business plans and estimated future cash flows of the reporting units to which it is assigned.

The Company undertakes studies to determine the fair values of assets and liabilities acquired and allocate purchase consideration to assets and liabilities, including property and equipment, goodwill and other identifiable intangibles.

The Company undertakes studies to determine the fair values of assets and liabilities acquired and

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2020

(In thousands, except share and per share amounts)

allocate purchase consideration to assets and liabilities, including property and equipment, goodwill and other identifiable intangibles.

The Company examines the carrying value of the goodwill annually in the fourth quarter, or more frequently, as circumstances warrant, to determine whether there are any impairment losses.

The Company tests for goodwill impairment at the reporting unit level, as that term is defined in U.S.

Refer to Note 10 for discussion of the Company's goodwill impairment testing.

The Company also assesses any potential goodwill impairment for all its reporting units immediately prior to any segment changes and reallocates goodwill to its new reporting units using a relative fair value approach.

Refer to Note 10 - Goodwill and Intangible Assets to the consolidated financial statements for discussion of the Company's goodwill impairment testing.

The Company adopted ASU No.

2017-04, Simplifying the Test for Goodwill Impairment, effective January 1, 2018 in conjunction with our goodwill impairment assessment.

The quantitative goodwill impairment test involves a comparison of the fair value of a reporting unit with its carrying amount.

The goodwill quantitative impairment test involves a comparison of the fair value of a reporting unit with its carrying amount.

The Company estimates the fair value of reporting unit using a combination of the income approach, using discounted cash flow analysis (“DCF model”), and also the market approach, using market multiples for reporting units whereby the fair value is not substantially in excess of carrying value.

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The variables within the discount rate, many of which are outside of the Company’s control, provide the Company’s best estimate of all assumptions applied within the DCF model.

The Company uses the “Market approach” to corroborate the results of the income approach.

The Company also uses the “Market approach” to corroborate the results of the income approach for some of the Company’s reporting units.

Under the market approach, the Company estimates fair value based on market multiples of revenues and earnings derived from comparable publicly-traded companies with characteristics similar to the reporting unit and comparable market transactions.

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If the fair value of the intangible assets is less than the carrying amount of the asset, the asset is considered impaired and an impairment expense is recognized equal to any shortfall in the current period.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2019

(In thousands, except share and per share amounts)

The Company’s definite lived intangible assets are amortized over their estimated useful lives as listed below using a straight-line method:

Customer relationships 3 - 15

Leasehold benefits

Developed technology 5 - 10

Non-compete agreements

Trade names and trademarks 3 - 10

Investment in Equity Affiliate

Investments in equity affiliate are initially recorded at cost and any excess cost over proportionate share of the fair value of the net assets of the investee at the acquisition date is recognized as goodwill.

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

(k) Investment in Equity Affiliate

Investments in equity affiliate are initially recorded at cost and any excess purchase consideration paid over proportionate share of the fair value of the net assets of the investee at the acquisition date is recognized as goodwill.

The proportionate share

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2020

(In thousands, except share and per share amounts)

of net income or loss of the investee after its acquisition is recognized in the consolidated statements of income.

The Company periodically reviews the carrying value of its investment to determine if there has been any other than temporary decline in carrying value.

The investment balance for an investee is increased or decreased for cash contribution and distributions to or from, respectively.

Impairment of Long-lived Assets

(l) Impairment of Long-lived Assets

Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

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The impairment amount to be recognized is measured as the amount by which the carrying value of the assets exceeds their fair value.

Derivative Financial Instruments

(m) Derivative Financial Instruments

In the normal course of business, the Company uses derivative instruments for the purpose of mitigating the exposure from risk of foreign currency fluctuation associated with forecasted transactions denominated in certain foreign currencies and to minimize earnings and cash flow volatility associated with changes in foreign currency exchange rates, and not for speculative trading purposes.

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

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

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

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

1 unchanged sentence

The Company uses derivatives instruments consisting of foreign currency exchange contracts to economically hedge intercompany balances and other monetary assets or liabilities denominated in currencies other than the functional currency, against the risk of foreign currency fluctuations associated with remeasurement of such assets and liabilities to functional currency.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2019

(In thousands, except share and per share amounts)

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

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

The Company also uses forward contracts designated as net investment hedges to hedge the foreign currency risks related to the Company's investment in foreign subsidiaries.

Gains and losses on these forward contracts are recognized in AOCI as part of the foreign currency translation adjustment.

(n) Borrowings

The Company accounts for convertible notes in accordance with the guidelines established by the ASC 470-20, Debt with Conversion and Other Options.

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The Company records a BCF related to the issuance of a convertible note when issued.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2020

(In thousands, except share and per share amounts)

If a convertible note is within the scope of the Cash Conversion Subsections and contains embedded features other than the embedded conversion option, the guidance in ASC 815-15, Derivatives and Hedging - Embedded Derivatives (ASC 815-15), is applied to determine if any of those features must be separately accounted for as a derivative instrument.

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The discount is amortized to interest expense over the expected term of the convertible notes using the effective interest method.

Employee Benefits

(o) Employee Benefits

Contributions to defined contribution plans are charged to the consolidated statements of income in the period in which services are rendered by the covered employees.

Current service costs for defined benefit plans are accrued in the period to which they relate.

Current service costs for defined benefit plans are recognized in the period to which they relate.

The liability in respect of defined benefit plans is calculated annually by the Company using the projected unit credit method.

Prior service cost, if any, resulting from an amendment to a plan is recognized and amortized over the remaining period of service of the covered employees.

The Company records annual amounts relating to its defined benefit plans based on calculations that incorporate various actuarial and other assumptions, including discount rates, mortality, assumed rates of return on plan assets, future compensation increases and attrition rates.

The Company reviews its assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is appropriate to do so.

The effect of modifications to those assumptions is recorded in other comprehensive income (loss) and amortized to net periodic benefit cost over the expected remaining period of service of the covered employees using the corridor method.

The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience and market conditions.

These assumptions may not be within the control of the Company and accordingly it is reasonably possible that these assumptions could change in future periods.

The Company includes the service cost component of the net periodic benefit cost in the same line item or items as other compensation costs arising from services rendered by the respective employees during the period.

The interest cost, expected return on plan assets and amortization of actuarial gains/loss, are classified in - “Other income, net”.

Refer to Note 20 and Note 27 to the consolidated financial statements for details.

The interest cost, expected return on plan assets and amortization of actuarial gains/loss, are included in - “Other income, net”.

Refer to Note 20 - Employee Benefit Plans to the consolidated financial statements for details.

The Company recognizes its liabilities for compensated absences depending on whether the obligation is attributable to employee services already rendered, rights to compensated absences vest or accumulate and payment is probable and estimable.

Stock-Based Compensation

The Company recognizes stock-based compensation expense in the consolidated financial statements for awards of equity instruments to employees and non-employee directors based on the grant-date fair value of those awards.

(p) Stock-Based Compensation

The Company recognizes stock-based compensation expense in the consolidated statements of income for awards of equity instruments to employees and non-employee directors based on the grant-date fair value of those awards.

The Company recognizes these compensation costs over the requisite service period of the award.

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Under the Company’s 2018 Omnibus Incentive Plan (the “2018 Plan”), which was adopted by the Company's stockholders on June 15, 2018, which replaces and supersedes the 2015 Amendment and Restatement of the Company’s 2006 Omnibus Award Plan (the “Prior Plan”) and is effective upon the date approved by the Company’s stockholders, the Company grants performance-based restricted stock units (“PRSUs”) to executive officers and other specified employees.

50 % of the PRSUs cliff vest based on an aggregated revenue target (“PU”) for a three -year period.

Generally the grants provide that 50 % of the PRSUs cliff vest based on an aggregated revenue target (“PU”) for a three-year period.

The remaining 50 % vest based on a market condition (“MUs”) that is contingent on meeting or exceeding the Company's total shareholder return relative to a group of peer companies specified under the program, measured over a three-year performance period.

The award recipient may earn up to two hundred percent ( 200 % ) of the PRSUs granted based on the actual achievement of both targets.

The award recipient may earn up to 200 % of the PRSUs granted based on the actual achievement of both targets.

However, the features of the equity incentive compensation program are subject to change by the Compensation Committee of our Board of Directors.

The fair value of each PU is determined based on the market price of one common share of the Company on the day prior to the date of grant, and the associated compensation expense is calculated on the basis that performance targets at 100 % are probable of being achieved.

The compensation expense for the PUs is recognized on a straight-line basis over the service

EXLSERVICE HOLDINGS, INC.

2 unchanged sentences

(In thousands, except share and per share amounts)

The compensation expense for the PUs is recognized on a straight-line basis over the service period, which is through the end of the third year.

Over this period, the number of shares that will be issued will be adjusted upward or downward based upon the probability of achievement of the performance targets.

period, which is through the end of the third year.

Over this period, the number of shares that will be issued is adjusted upward or downward based upon the probability of achievement of the performance targets.

The final number of shares issued and the related compensation cost recognized as an expense will be based on a comparison of the final performance metrics to the specified targets.

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All compensation expense related to the MUs will be recognized if the requisite performance period is fulfilled, regardless of the extent of the market condition achieved.

(q) Income Taxes

The Company accounts for income taxes using the asset and liability method of accounting for income taxes.

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The Company establishes provisions for uncertain tax provisions and related interest and penalties when the Company believes those tax positions are not more likely than not of being sustained, if challenged.

Financial Instruments and Concentration of Credit Risk

(r) Financial Instruments and Concentration of Credit Risk

Financial Instruments .

For certain financial instruments, including cash and cash equivalents, short-term investments (except investment in mutual funds, as disclosed in Note 16), restricted cash, accounts receivable, accounts payable, accrued expenses, other current liabilities and outstanding revolver credit, recorded amounts approximate fair value due to the relatively short maturity periods and/or timing of repayments of such instruments.

For certain financial instruments, including cash and cash equivalents, short-term investments (except investment in mutual funds, as disclosed in Note 16), restricted cash, accounts receivable, accrued interest on term deposits, accrued capital expenditures, accrued expenses and interest payable on borrowings for which fair values approximate their carrying amounts due to their short-term nature.

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

Concentration of Credit Risk .

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By their nature, all such financial instruments involve risks including the credit risks of non-performance by counterparties.

Pursuant to the Company’s investment policy, surplus funds are maintained as cash equivalents and are invested in highly-rated mutual funds, money market accounts and time deposits, placed with highly rated financial institutions to reduce its exposure to market risk with regard to these funds.

Pursuant to the Company’s investment policy, surplus funds are maintained as cash equivalents and short- term investments, and are invested in highly-rated mutual funds, money market accounts and time deposits, placed with highly rated financial institutions to reduce its exposure to market risk with regard to these funds.

The Company’s exposure to credit risk on account receivable is influenced mainly by the individual characteristic of each customer and the concentration of risk from the top few customer s.

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

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

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

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

Long-lived assets underlying finance leases are recorded in “Property and equipment” and the current and non-current portion of finance lease liabilities are presented within “Accrued expenses and other current liabilities” and “other non-current liabilities,” respectively, in the Company's consolidated balance sheets.

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

Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

For leases in

EXLSERVICE HOLDINGS, INC.

2 unchanged sentences

(In thousands, except share and per share amounts)

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

Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

For leases in which the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate based on the information available at commencement date for determining the present value of lease payments.

Lease term includes the effects of options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

which the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate based on the information available at commencement date for determining the present value of lease payments.

Lease terms includes the effects of options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

Lease expense for operating lease arrangements is recognized on a straight-line basis over the lease term.

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

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

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

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

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

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

Upon modification, the Company remeasures the lease liability to reflect changes to the remaining lease payments and discount rates and recognizes the amount of the remeasurement of the lease liability as an adjustment to the ROU assets.

However, if the carrying amount of the ROU assets is reduced to zero as a result of modification, any remaining amount of the remeasurement is recognized as an expense in consolidated statements of income.

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

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

3 unchanged sentences

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

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

Refer to Note 21 to the consolidated financial statements for details.

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

Refer to Note 21 - Leases to the consolidated financial statements for details.

The Company reviews ROU assets for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable.

Government Grants

(t) Government Grants

Government grants related to income are recognized as a reduction of expenses in the consolidated statements of income when there is a reasonable assurance that the entity will comply with the conditions attached to the grant and that the grants will be received.

Earnings per share

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 enjoy exemption from payment of customs, central excise duties, and levies on imported and indigenous capital goods, subject to certain performance conditions being fulfilled by these units.

Such exemption is considered as a government grant.

Grants from the government are recognized when there is reasonable assurance that these units will comply with those conditions.

The carrying amount of an item of property and equipment is reduced by government grants received (i.e.

the asset is accounted for on the basis of its net acquisition cost).

The grant is recognized in the consolidated statements of income over the life of the depreciable asset in the form of reduced depreciation expense.

(u) Earnings per share

Basic earnings per share is computed using the weighted average number of common shares outstanding, adjusted for outstanding shares that are subject to repurchase during the period.

Diluted earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period.

For the purposes of calculating diluted earnings per share, the treasury stock method is used for stock-based awards except where the results would be anti-dilutive .

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

Commitments and contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated.

Legal costs incurred in connection with such liabilities are expensed as incurred .

For the purposes of calculating diluted earnings per share, the treasury stock method is used for stock-based awards and outstanding convertible

EXLSERVICE HOLDINGS, INC.

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(In thousands, except share and per share amounts)

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU No.

2016-13, Financial Instruments - Credit Losses , which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

notes except where the results would be anti-dilutive.

The Company calculates the dilutive effect of convertible notes using the treasury stock method through the maturity date of the convertible notes, if it has the intent and ability to settle the principal amount of the outstanding convertible notes in cash.

Under the treasury stock method, the convertible notes shall have a dilutive impact related to the conversion premium, if any, on diluted earnings per share to the extent the issuance is dilutive based on the average market price of our common stock for a reporting period being greater the conversion price.

(v) Commitments and contingencies

Legal costs incurred in connection with such liabilities are expensed as incurred.

(w) Recent Accounting Pronouncements

In March 2020, FASB issued ASU No.

2020-04, Reference Rate Reform (Topic 848):

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

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

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

GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

The amendments are elective and are effective upon issuance for all entities through December 31, 2022.

The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

In August 2020, FASB issued ASU No.

2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.

This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity.

The ASU removes separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature and hence most of the instruments will be accounted for as a single model (either debt or equity).

The ASU also states that entities must apply the if-converted method to all convertible instruments for calculation of diluted EPS and the treasury stock method is no longer available.

An entity can use either a full or modified retrospective approach to adopt the ASU’s guidance.

The ASU is effective for fiscal years beginning after December 15, 2021 and may be early adopted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.

The Company is currently evaluating the potential impact of adoption of this ASU on its consolidated financial statements.

In October 2020, FASB issued ASU No.

2020-10, Codification Improvements.

This ASU provides guidance for technical corrections such as conforming amendments, clarifications to guidance, simplifications to wording or structure of guidance, and other minor improvements.

The amendments in this ASU improves the consistency of the Codification by ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to financial statements is codified in the Disclosure Section of the Codification.

The amendments are varied in nature and may affect the application of the guidance in cases in which the original guidance may have been unclear.

An entity has to apply the amendments retrospectively.

The ASU is effective for fiscal years beginning after December 15, 2020.

The Company is currently evaluating the potential impact of adoption of this ASU on its consolidated financial statements.

(x) Recently Adopted Accounting Pronouncements

In June 2016, FASB issued ASU No.

2016-13, Financial Instruments - Credit Losses (Topic 326), which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

The new guidance replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates.

1 unchanged sentence

The allowance for credit losses is a valuation account that is to be deducted from the amortized cost of the financial asset(s) so as to present the net carrying value at the amount expected to be collected on the financial asset.

The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

Early adoption as of the fiscal years beginning after December 15, 2018 was permitted.

The amendment should be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align credit loss methodology with the new standard.

Adoption of the ASU will result in immaterial impact to equity as of January 1, 2020 with a corresponding offset to accounts receivable.

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

The Company adopted Topic 326 as of January 1, 2020 using a modified retrospective approach through a cumulative-effect adjustment to its retained earnings.

The adoption of the ASU had no impact to equity as of January 1, 2020.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2020

(In thousands, except share and per share amounts)

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

Refer to Note 5 - Revenues, net to the consolidated financial statements for details.

In August 2018, FASB issued ASU No.

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Changes to the Disclosure Requirements for Fair Value Measurement.

The amendments in this ASU changes the disclosure requirements on fair value measurements in Topic 820 by prescribing new, elimination and modification of disclosure requirements, based on the concepts in the Concepts Statement, including the consideration of costs and benefits.

The amendments in this ASU modify the disclosure requirements on fair value measurements in Topic 820, by prescribing new disclosure requirements, and the elimination and modification of disclosure requirements based on the concepts in the Concepts Statement, including the consideration of costs and benefits.

The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

An entity was permitted to early adopt either the entire standard or only the provisions that eliminate or modify requirements.

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

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

In August 2018, FASB issued ASU No.

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The amendments in this ASU are effective for fiscal years beginning after December 15, 2020.

Early adoption is permitted.

The adoption of this ASU is not expected to have any material effect on the Company’s consolidated financial statements.

Early adoption was permitted.

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

In August 2018, FASB issued ASU No.

3 unchanged sentences

The ASU 2018-15 also provides guidance on amortization and impairment of any costs capitalized, along with new presentation and disclosure requirements.

The new guidance is effective for fiscal years beginning after December 15, 2019.

Early adoption was permitted and both prospective and retrospective transition methods are allowed.

The adoption of this ASU did not have any material effect on the Company’s consolidated financial statements.

The new guidance is effective for fiscal years beginning after December 15, 2019 and adoption was allowed prospectively.

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

In April 2019, FASB issued ASU No.

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With respect to hedge accounting, the amendments address partial-term fair value hedges, fair value hedge basis adjustments, and certain transition requirements, among other things.

With respect to recognizing and measuring financial instruments, the amendment in ASU address the scope of the guidance, the requirement for remeasurement under ASC 820 when using the measurement alternative, certain disclosure requirements and which equity securities have to be remeasured at historical exchange rates.

With respect to recognizing and measuring financial instruments, the amendment in the ASU address the scope of the guidance, the requirement for remeasurement under ASC 820 when using the measurement alternative, certain disclosure requirements and which equity securities have to be remeasured at historical exchange rates.

This ASU is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year.

Early adoption is permitted.

The adoption of this ASU is not expected to have any material effect on the Company’s consolidated financial statements.

Early adoption was permitted.

The adoption of this ASU did not have any material effect on the Company’s consolidated financial statements.

In May 2019, FASB issued ASU No.

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Targeted Transition Relief.

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

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

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

The amendments in this ASU provide entities with targeted transition relief that is intended to increase comparability of financial statement information for some entities that otherwise would have measured similar financial instruments using different measurement methodologies.

The Company adopted Topic 326 as of January 1, 2020, whereby no such fair value election was made, accordingly, the adoption of this ASU did not have any material effect on the Company’s consolidated financial statements.

EXLSERVICE HOLDINGS, INC.

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(In thousands, except share and per share amounts)

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

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

The amendments in this Update provide entities with targeted transition relief that is intended to increase comparability of financial statement information for some entities that otherwise would have measured similar financial instruments using different measurement methodologies.

This ASU is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year.

Early adoption is permitted.

The adoption of this ASU is not expected to have any material effect on the Company's consolidated financial statements.

Recently Adopted Accounting Pronouncements

In February 2016, FASB issued ASU No.

2016-02, Leases (Topic 842), which requires the identification of arrangements that should be accounted for as leases.

Lease arrangements exceeding a twelve months term should be recognized as assets with corresponding liabilities on the balance sheet of the lessee.

This ASU requires recognition of an ROU asset and lease obligation for those leases classified as operating leases under Topic 840, while the income statement will reflect lease expense for operating leases.

The balance sheet amounts recorded for existing operating leases at the date of adoption of this ASU must be calculated using the applicable incremental borrowing rate.

The Company adopted Topic 842 as of January 1, 2019 using the modified retrospective method provided by ASU 2018-11.

The adoption had a material impact on the Company's consolidated balance sheets, but did not have a material impact on the Company's consolidated income statements and consolidated statements of cash flows.

The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while the Company's accounting for finance leases remained substantially unchanged.

Refer to Note 21 to the consolidated financial statements for details.

In July 2018, FASB issued ASU No.

2018-11, Leases (Topic 842), which provide entities with an additional (and optional) transition method to adopt the new leases standard.

Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP (Topic 840, Leases).

The Company adopted Topic 842 as of January 1, 2019 using this ASU.

Refer to Note 21 to the consolidated financial statements for details.

Segment and Geographical Information

The Company operates in the BPM industry and is a provider of operations management and analytics services.

Effective January 1, 2020, the Company realigned its operating and reportable segments, but the presentation in this Annual Report, including the discussion in next paragraphs, refers to the structure in place prior to such realignment.

The Company has eight operating segments, which are strategic business units that align its products and services with how it manages its business, approaches its key markets and interacts with its clients.

Five of those operating segments provide BPM or “operations management” services, which is organized into industry-focused operating segments (Insurance, Healthcare, Travel, Transportation and Logistics, Banking and Financial Services, and Utilities) and one of the operating segment is a “capability” segment (Finance and Accounting) that provides services to clients in the Company's industry-focused segments as well as clients across other industries.

In each of these six operating segments, the Company provides operations management services, which typically involve transfer to the Company of the business operations of a client, after which it administers and manages those operations for its client on an ongoing basis.

The remaining two operating segments are Consulting, which provides industry-specific transformational services related to operations management services, and Analytics, which provides services that focus on driving improved business outcomes for clients by generating data-driven insights across all parts of their business.

Effective January 1, 2020, the Company made certain operational and structural changes to more closely integrate its businesses and to simplify its organizational structure.

The Company since then manages and reports financial information through its four strategic business units:

Insurance, Healthcare, Analytics and Emerging Business, which reflects how management reviews financial information and makes operating decisions.

These business units will develop client-specific solutions, build capabilities, maintain a unified go-to-market approach and be integrally responsible for service delivery, customer satisfaction, growth and profitability.

In line with the Company’s strategy of vertical integration and focus on domain expertise, the Company has integrated its 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 to clients outside of the Insurance and Healthcare industries are part of the Company’s “Emerging Business” segment.

In addition, the Company integrated its 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.

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

• Healthcare,

• Emerging Business, and

In conjunction with the new reporting structure, the Company has recast its segment disclosures for prior periods presented to conform to the way the Company internally manages and monitors segment performance.

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

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

Many of the Company’s assets are shared by multiple operating segments.

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

Revenues and cost of revenues for each of the years ended December 31, 2020, 2019 and 2018, respectively, for each of the reportable segments, are as follows:

EXLSERVICE HOLDINGS, INC.

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(In thousands, except share and per share amounts)

The Company presents information for the following reportable segments:

Travel, Transportation and Logistics (“TT&L”)

Finance and Accounting (“F&A”)

Analytics, and

All Other (consisting of the Company's remaining operating segments, which are the Banking and Financial Services, Utilities and Consulting operating segments).

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

Many of the Company’s assets are shared by multiple operating segments.

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

Revenues and cost of revenues for each of the years ended December 31, 2019 , 2018 and 2017 , for each of the reportable segments, are as follows:

Year ended December 31, 2020

Insurance Healthcare Emerging Business Analytics Total

Revenues, net $ 341,770 $ 101,315 $ 152,670 $ 362,679 $ 958,434

Cost of revenues (1)

231,884 73,143 89,459 229,450 623,936

Gross profit (1)

$ 109,886 $ 28,172 $ 63,211 $ 133,229 $ 334,498

Operating expenses 224,476

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Loss from equity-method investment 227

Net income $ 89,476

(1) Exclusive of depreciation and amortization expense.

Year ended December 31, 2019

Insurance Healthcare Emerging Business Analytics Total

Revenues, net $ 346,434 $ 97,465 $ 190,118 $ 357,329 $ 991,346

Cost of revenues (1)

238,580 77,048 108,617 231,245 655,490

Gross profit (1)

$ 107,854 $ 20,417 $ 81,501 $ 126,084 $ 335,856

Operating expenses 259,403

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Loss from equity-method investment 269

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2019

(In thousands, except share and per share amounts)

Net income $ 67,659

(1) Exclusive of depreciation and amortization expense.

Year ended December 31, 2018

Insurance Healthcare Emerging Business Analytics Total

Revenues, net $ 311,152 $ 89,845 $ 196,825 $ 285,290 $ 883,112

Cost of revenues (1)

211,818 70,446 117,987 184,604 584,855

Gross profit (1)

$ 99,334 $ 19,399 $ 78,838 $ 100,686 $ 298,257

Operating expenses 248,436

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Income tax expense 3,397

Loss from equity-method investment 247

Net income $ 56,726

(1) Exclusive of depreciation and amortization expense.

Revenues, net by service type, were as follows:

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2020

(In thousands, except share and per share amounts)

Year ended December 31,

2020 2019 2018

BPM and related services (1)

$ 595,755 $ 634,017 $ 597,822

Analytics services 362,679 357,329 285,290

Revenues, net $ 958,434 $ 991,346 $ 883,112

(1) BPM and related services include revenues of the Company's five industry-focused operating segments, one capability operating segment and the consulting operating segment, which provides services related to operations management services.

Refer to reportable segment disclosure above.

(1) BPM and related services include revenues of the Company's Insurance, Healthcare and Emerging Business reportable segments.

Refer to the reportable segment disclosure above.

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

Year ended December 31,

2020 2019 2018

Revenues, net

5 unchanged sentences

Revenues, net $ 958,434 $ 991,346 $ 883,112

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

December 31, 2019

December 31, 2018

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

December 31, 2020 December 31, 2019

Long-lived assets

India $ 97,261 $ 78,244

United States 46,659 52,375

Philippines 29,434 26,006

Rest of World 11,439 8,913

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Summarized quarterly results for the years ended December 31, 2020 and 2019 are as follows:

Three months ended 2019 (Unaudited)

Year ended (Audited)

December 31, 2019

Three months ended 2020 (Unaudited) Year ended (Audited)

March 31 June 30 September 30 December 31 December 31, 2020

Revenues, net $ 245,990 $ 222,473 $ 241,018 $ 248,953 $ 958,434

Gross profit (1)

$ 83,334 $ 64,072 $ 88,931 $ 98,161 $ 334,498

Income before equity method investment activity, net and income tax expense $ 28,321 $ 12,567 $ 34,979 $ 39,462 $ 115,329

Net income $ 22,411 $ 8,429 $ 26,418 $ 32,218 $ 89,476

Earnings per share:

$ 0.65 $ 0.24 $ 0.77 $ 0.95 $ 2.61

$ 0.65 $ 0.24 $ 0.76 $ 0.94 $ 2.59

Weighted-average number of shares used in computing earnings per share:

34,401,565 34,486,202 34,327,477 33,882,013 34,273,388

34,720,603 34,597,688 34,536,049 34,370,023 34,555,164

Stock compensation expense $ 4,778 $ 7,726 $ 8,346 $ 7,385 $ 28,235

Amortization of intangibles $ 4,154 $ 3,430 $ 3,413 $ 3,415 $ 14,412

Three months ended 2018 (Unaudited)

Year ended (Audited)

December 31, 2018

Three months ended 2019 (Unaudited) Year ended (Audited)

March 31 June 30 September 30 December 31 December 31, 2019

Revenues, net $ 239,573 $ 243,509 $ 251,392 $ 256,872 $ 991,346

Gross profit (1)

$ 82,333 $ 81,063 $ 83,850 $ 88,610 $ 335,856

Income before equity method investment activity, net and income tax expense $ 18,962 $ 15,296 $ 24,814 $ 24,028 $ 83,100

Net income $ 14,695 $ 12,564 $ 19,044 $ 21,356 $ 67,659

Earnings per share:

$ 0.43 $ 0.36 $ 0.55 $ 0.62 $ 1.97

$ 0.42 $ 0.36 $ 0.55 $ 0.62 $ 1.95

Weighted-average number of shares used in computing earnings per share:

34,374,815 34,451,671 34,322,449 34,253,308 34,350,150

34,833,435 34,702,547 34,699,497 34,696,896 34,732,683

Stock compensation expense $ 6,956 $ 7,155 $ 7,427 $ 4,532 $ 26,070

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(2) Total of quarterly basic and diluted earnings per share and weighted average number of shares used in computing earnings per share will not be equal to year end basic and diluted earnings per share and weighted average number of shares used in computing earnings per share, respectively.

Revenues, net

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

Contract balances

The following table provides information about accounts receivable, contract assets and contract liabilities from contracts with customers:

EXLSERVICE HOLDINGS, INC.

2 unchanged sentences

(In thousands, except share and per share amounts)

December 31, 2019

December 31, 2018

Revenues, net

Refer to Note 3 - Segment and Geographical Information to the consolidated financial statements for revenues disaggregated by reportable segments and geography.

Contract balances

The following table provides information about accounts receivable, contract assets and contract liabilities from contracts with customers:

December 31, 2020 December 31, 2019

Accounts receivable, net $ 147,635 $ 171,864

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

Contract assets represents upfront payments in nature of deal signing discount or deal signing bonuses made to customers.

These costs are amortized over the expected period of benefit and are recorded as an adjustment to transaction price and reduced from revenues.

Contract liabilities represents that portion of deferred revenue for which payments have been received in advance from customers.

This may also include revenues deferred for certain contracts where services have been rendered but other conditions for revenue recognition have not been met for e.g.

legally enforceable contract is not executed.

Contract assets represent upfront payments such as deal signing discounts or deal signing bonuses made to customers.

These costs are amortized over the expected period of the benefit and are recorded as an adjustment to transaction price and reduced from revenues.

The Company’s assessment did not indicate any impairment losses on its contract assets for the periods presented.

Contract liabilities represent that portion of deferred revenue for which payments have been received in advance from customers.

The Company also defers revenues attributable to certain process transition activities for which costs have been capitalized by the Company as contract fulfillment costs.

The contract liabilities are included within “Deferred revenues” and “other non-current liabilities” in the consolidated balance sheets.

Consideration received from customers, if any, relating to such transition activities are classified under contract liabilities and are included within “Deferred revenues” and “Other non-current liabilities” in the consolidated balance sheets.

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

Revenue recognized during the year ended December 31, 2019 that was included in the contract liabilities balance at the beginning of the period was $ 6,077 and revenue recognized during the year ended December 31, 2018 that was included in the contract liabilities balance at the beginning of the period was $ 9,147 .

Revenue recognized during the year ended December 31, 2020 and 2019, which was included in the contract liabilities balance at the beginning of the respective periods:

Year ended December 31,

Deferred revenue (consideration received in advance)

$ 10,949 $ 6,077

Consideration received for process transition activities

$ 1,424 $ 844

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2020

(In thousands, except share and per share amounts)

Contract acquisition and fulfillment costs

The following table provides details of the Company’s contract acquisition and fulfillment costs:

Contract acquisition cost

Contract fulfillment cost

Contract acquisition cost

Contract fulfillment cost

Balance as of January 1

Balance as of December 31

There was no impairment loss in relation to costs capitalized.

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

Consideration received from customers, if any, relating to such transition activities are classified under Contract Liabilities and are recognized over the period in which the related performance obligations are fulfilled.

Contract Acquisition Costs Contract Fulfillment Costs

Year ended December 31, Year ended December 31,

2020 2019 2020 2019

Opening Balance $ 1,307 $ 713 $ 7,255 $ 4,051

Additions 310 1,222 779 4,652

Amortization ( 590 ) ( 628 ) ( 2,403 ) ( 1,448 )

Closing Balance $ 1,027 $ 1,307 $ 5,631 $ 7,255

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

The capitalized costs are amortized over the expected period of benefit of the contract.

Allowance for expected credit losses

On January 1, 2020, the Company adopted ASC Topic 326, Financial Instruments-Credit Losses .

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

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

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

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

As of January 1, 2020 the Company’s provision for credit losses was $ 1,163 .

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

December 31, 2020 January 1, 2020

Accounts receivable, including unbilled receivables $ 148,824 $ 173,027

Allowance for lifetime expected credit loss ( 1,189 ) ( 1,163 )

Accounts receivable, net $ 147,635 $ 171,864

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

Year ended December 31,

Balance at the beginning of the year $ 1,163 $ 956

Additions during the period 300 354

Charged against allowance ( 269 ) ( 156 )

Translation adjustment ( 5 ) 9

Balance at the end of the year $ 1,189 $ 1,163

EXLSERVICE HOLDINGS, INC.

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Year ended December 31,

2020 2019 2018

Gain on sale and mark-to-market of mutual funds $ 9,521 $ 12,965 $ 9,970

Interest and dividend income 2,595 2,399 1,873

Others, net ( 51 ) 1,143 1,146

Other income, net $ 12,065 $ 16,507 $ 12,989

1 unchanged sentence

Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding, adjusted for outstanding shares that are subject to repurchase during each period.

Diluted earnings per share is computed using the weighted average number of common shares plus the potentially dilutive effect of common stock equivalents (outstanding stock options, restricted stock and restricted stock units) issued and outstanding at the reporting date, using the treasury stock method.

Common stock equivalents that are anti-dilutive are excluded from the computation of weighted average shares outstanding.

Common stock equivalents and the conversion premium of outstanding convertible notes that are anti-dilutive are excluded from the computation of weighted average shares outstanding.

The Company has a choice to settle the Notes in cash, shares or any combination of the two.

The Company presently intends and has the ability to settle the principal balance of the Notes in cash, and as such, the Company has applied the treasury stock method.

The dilution related to the conversion premium, if any, of the Notes is included in the calculation of diluted weighted-average shares outstanding to the extent the issuance is dilutive based on the average stock price during the reporting period being greater than the conversion price of $ 75 .

Refer to Note 18 - Borrowings to the consolidated financial statements for further details.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2020

(In thousands, except share and per share amounts)

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

Year ended December 31,

2020 2019 2018

Net income $ 89,476 $ 67,659 $ 56,726

Denominators:

1 unchanged sentence

Dilutive effect of share based awards 254,717 382,533 579,976

Dilutive effect of conversion premium on convertible notes 27,059 — —

Diluted weighted average common shares outstanding 34,555,164 34,732,683 35,030,984

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stockholders:

Basic $ 2.61 $ 1.97 $ 1.65

Diluted $ 2.59 $ 1.95 $ 1.62

Weighted average potentially dilutive shares considered anti-dilutive and not included in computing diluted earnings per share 289,061 106,375 121,344

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

December 31, 2019

December 31, 2018

December 31, 2017

December 31, 2020 December 31, 2019 December 31, 2018

Cash and cash equivalents $ 218,530 $ 119,165 $ 95,881

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Accordingly, restricted cash and restricted cash equivalents is included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the consolidated statements of cash flows.

Refer to Note 27 to the consolidated financial statements.

EXLSERVICE HOLDINGS, INC.

4 unchanged sentences

Property and equipment, net consists of the following:

Estimated useful lives (Years)

December 31, 2019

December 31, 2018

Estimated useful lives (Years) December 31, 2020 December 31, 2019

Owned assets:

Network equipment and computers 3 - 5

$ 107,109 $ 98,309

Software 3 - 5

99,708 79,746

Leasehold improvements 3 - 8

48,052 44,982

Office furniture and equipment 3 - 8

22,117 22,046

Motor vehicles 2 - 5

Land — 712 729

Capital work in progress — 4,647 10,309

284,033 257,836

Accumulated depreciation and amortization ( 191,629 ) ( 179,331 )

$ 92,404 $ 78,505

Right-of-use assets under finance leases:

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

During the year ended December 31, 2020, and 2019 there were no changes in estimated useful lives of property and equipment.

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

Year ended December 31,

2020 2019 2018

Depreciation and amortization expense $ 36,050 $ 30,423 $ 28,189

The depreciation and amortization set forth above includes the effect of foreign exchange gain upon settlement of cash flow hedges, amounting to $ 212 , $ 153 and $ 435 for the year ended December 31, 2019 , 2018 and 2017 , respectively (Refer to Note 17 to the consolidated financial statements for further details).

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

Year ended December 31,

2020 2019 2018

Effect of foreign exchange gain/(loss) $ 51 $ 212 $ 153

EXLSERVICE HOLDINGS, INC.

3 unchanged sentences

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

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Cost $ 18,371 $ 15,784

Accumulated amortization ( 5,998 ) ( 4,989 )

Internally developed software, net $ 12,373 $ 10,795

During the year ended December 31, 2019, there were no significant changes in estimated useful lives of property and equipment.

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

Year ended December 31,

2020 2019 2018

Amortization expense $ 4,894 $ 2,745 $ 1,417

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

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

Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which undiscounted cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount, and the asset’s residual value, if any.

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

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

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

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

Refer to Note 24 to the consolidated financial statements for further details.

Business Combinations, Goodwill and Intangible Assets

SCIOinspire Holdings Inc.

On July 1, 2018, the Company, through its wholly owned subsidiary ExlService.com, LLC (“Buyer”) and Buyer’s wholly owned subsidiary, ExlService Cayman Merger Sub, completed the acquisition of SCIO pursuant to an Agreement of Merger dated April 28, 2018 (the "Merger Agreement").

ExlService Cayman Merger Sub, merged with and into SCIO, with SCIO surviving the merger as a wholly-owned subsidiary of the Buyer.

SCIO is a health analytics solution and services company serving healthcare organizations including providers, health plans, pharmacy benefit managers, employers, health services and global life sciences companies.

The acquisition is expected to significantly strengthen the Company’s capability in the high growth cost optimization and care optimization markets.

The acquisition of SCIO is included in the Analytics reportable segment.

The aggregate purchase consideration was $ 245,044 , including cash and cash equivalents acquired and post-closing adjustments.

The aggregate base purchase consideration payable at closing of the merger was $ 236,500 based on completion of diligence, which was adjusted based on, among other things, SCIO’s cash, debt, working capital position and other adjustments as of the Closing as set forth in the Merger Agreement.

To finance the acquisition at Closing, the Company utilized its revolving Credit Facility in the amount of $ 233,000 , issued 69,459 shares of restricted common stock of the Company in the amount of $ 4,080 and paid the balance with available cash on hand.

Pursuant to the Company’s business combinations accounting policy, the total purchase consideration for SCIO was allocated to identifiable net tangible and intangible assets based upon their fair values.

The excess of the purchase consideration over fair value of identifiable net tangible and intangible assets was recorded as goodwill.

In order to allocate the consideration transferred for SCIO, the fair values of all identifiable assets and liabilities were established.

For accounting and financial reporting purposes, fair value is defined under ASC No.

820, Fair Value Measurement and Disclosure , as the price that would be received upon sale of an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2019

(In thousands, except share and per share amounts)

participants are assumed to be buyers and sellers in the principal (most advantageous) market for the asset or liability.

Additionally, fair value measurements for an asset assume the highest and best use of that asset by market participants.

Use of different estimates and judgments could yield different results.

The Company’s purchase price allocation to net tangible and intangible assets of SCIO is as follows:

Cash and cash equivalents

Restricted cash

Accounts receivable

Other current assets

Property and equipment

Intangible assets

Customer relationships

Developed technology

Trade names and trademarks

Current liabilities

Deferred tax liabilities, net

Other non-current liabilities

Net assets acquired

Total purchase consideration

The fair values of the trade names and trademarks intangible assets were determined by using an “income approach”, specifically the relief-from-royalty approach.

The basic principle of the relief-from-royalty method is that without ownership of the subject intangible asset, the user of that intangible asset would have to make a stream of payments to the owner of the asset in return for the rights to use that asset.

By acquiring the intangible asset, the user avoids these payments.

Therefore, a portion of SCIO’s earnings, equal to the after-tax royalty that would have been paid for the use of the asset, can be attributed to the firm’s ownership.

The trade names and trademarks are being amortized on a straight-line basis (which approximates the economic pattern of benefits) over the estimated economic life of 3 years .

The fair values of the developed technology intangible assets were also determined by the relief-from-royalty approach.

Similarly, this approach is based on the assumption that in lieu of ownership, a firm would be willing to pay a royalty in order to exploit the related benefits of the technology.

Therefore, a portion of SCIO’s earnings, equal to the after-tax royalty that would have been paid for the use of the technology, can be attributed to the firm’s ownership of the technology.

The technology assets are being amortized on a straight-line basis (which approximates the economic pattern of benefits) over the estimated economic life of 5 years .

The fair values of the customer relationships were determined by using an “income approach”, specifically the Multi-Period Excess Earnings Method ("MPEEM").

The MPEEM is a specific application of the discounted cash flow method.

The principle behind the MPEEM is that the value of an intangible asset is equal to the present value of the incremental after-tax cash flows attributable only to the subject intangible asset after deducting Contributory Asset Charges ("CAC").

The principle behind a CAC is that an intangible asset ‘rents’ or ‘leases’ from a hypothetical third party all the assets it requires to produce the cash flows resulting from its development, that each project rents only those assets it needs (including elements of goodwill) and not the ones that it does not need, and that each project pays the owner of the assets a fair return on (and of, when appropriate) the value of the rented assets.

The customer relationship assets are being amortized on a straight-line basis (which approximates the economic pattern of benefits) over the estimated economic life of 10 years .

Refer to Note 24 - Impairment and Restructuring Charges to the consolidated financial statements for further details.

Goodwill and Intangible Assets

The Company transitioned to new segment reporting structure effective January 1, 2020, which resulted in certain changes to its operating segments and reporting units.

The Company reallocated goodwill to its reporting units using a relative fair value approach.

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

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

EXLSERVICE HOLDINGS, INC.

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(In thousands, except share and per share amounts)

The goodwill recognized is attributable primarily to expected synergies from continuing operations of SCIO and the Company.

The amount of goodwill recognized from SCIO's acquisition is not deductible for tax purposes.

The goodwill has been assigned to our Analytics reportable segment based upon the Company’s assessment of nature of services rendered by SCIO.

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

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

Balance at January1, 2019 $ 38,203 $ 19,276 $ — $ 227,289 $ 12,697 $ 47,193 $ 5,326 $ 349,984

Measurement period adjustments

Currency translation adjustments 73 — — — ( 240 ) ( 288 ) — ( 455 )

Impairment charges

Balance at December 31, 2019 $ 38,276 $ 19,276 $ — $ 227,289 $ 12,457 $ 46,905 $ 5,326 $ 349,529

Goodwill reallocation (1)

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

Currency translation adjustments 31 ( 16 ) ( 455 ) ( 1 ) — — — ( 441 )

Balance at December 31, 2020 $ 50,499 $ 21,953 $ 49,348 $ 227,288 $ — $ — $ — $ 349,088

During the fourth quarter of 2019 , the Company performed its annual impairment test of goodwill for those reporting units that had goodwill recorded.

Key assumptions used in determining the fair value of the Company’s reporting units was a long-term revenue growth rate in the terminal year of 3.0 % and discount rates ranging from 9.0 % to 11.0 % .

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

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

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

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

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

The SCIO reporting unit was formed as a result of the SCIO acquisition in July 2018 and its fair value was set at the time of acquisition.

As of December 31, 2019, the goodwill associated with the SCIO reporting unit was $ 163,751 , representing approximately 47.0 % of the Company’s total goodwill, and the percentage by which the fair value of the SCIO reporting unit exceeded the carrying value as of the date of the most recent annual impairment test was approximately 10.0 % .

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

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

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

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

However, keeping all other variables constant, a further 50 basis points increase in discount rate will decrease the percentage by which the fair value exceeds the carrying value of the SCIO reporting unit to 6.0 % .

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

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

There can be no assurances that goodwill will not be impaired in future periods.

Estimating the fair value of reporting units requires the use of estimates and significant judgments that are based on a number of factors including actual operating results.

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

During the fourth quarter of 2018, the Company performed its annual impairment test of goodwill for all its reporting units.

Based on the results, the fair values of each of the Company’s reporting units exceeded their carrying values except for the Health Integrated reporting unit, within the Healthcare operating segment.

The primary factors contributing to a reduction in the fair value of the Health Integrated reporting unit were:

(i) revenues and profitability in 2018 were significantly lower than the Company’s budget;

and (ii) significant changes to the Company's estimated future cash flows and long-term growth assumptions for the Health

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

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

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

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

During the fourth quarter of 2020, the Company performed its annual goodwill quantitative impairment test for those reporting units that had goodwill recorded.

Key assumptions used in determining the fair value of the Company’s reporting units were, a long-term revenue growth rate in the terminal year of 3.0 %, which was based upon expected long-term inflation rate and real gross domestic product growth over a long-term, and discount rates ranging from 10.4 % to 12.0 %, which vary based upon the risks and uncertainties inherent in each individual reporting unit.

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

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

This growth is based on business forecasts and improvement in profitability of the respective reporting units.

The Company continues to maintain its focus on cultivating long-term client relationships as well as attracting new clients.

The Company believes there are significant opportunities for additional growth within its existing clients, and can expand these relationships by:

• Increasing the depth and breadth of the services the Company provides across its clients’ value chains and geographies;

• Offering the full suite of the Company's services that includes operations management and data and analytics;

• Supporting the Company's clients’ geographic expansion leveraging its global footprint.

EXLSERVICE HOLDINGS, INC.

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(In thousands, except share and per share amounts)

Integrated reporting unit driven by loss of customer contracts, cost pressures and the Company’s most recent views of the long-term outlook for the Health Integrated business.

As a result of this analysis, the Company recognized a goodwill impairment charge of $ 14,229 during the fourth quarter to write down the carrying value of Health Integrated’s goodwill to its fair value of $ nil as of December 31, 2018.

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

The Company also considers selective strategic relationships with industry leaders that add new long-term client relationships, enhance the depth and breadth of its services and solutions, and complement its business strategy.

Through its Connected Intelligence Partnership programs, the Company expands its technology and innovation ecosystem with select partnerships, alliances or investments that the Company expects will enhance go-to-market opportunities and expand the scope and effectiveness of the Company’s services and solutions by adding digital assets and intellectual property, which will help the Company to win new clients or allowing it to enter new industry verticals and geographic markets.

There can be no assurances that goodwill will not be impaired in future periods.

Estimating the fair value of reporting units requires the use of estimates and significant judgments that are based on a number of factors including actual operating results.

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

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

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

During the fourth quarter of 2019, the Company performed its annual goodwill quantitative impairment test for all of its reporting units.

These reporting units were based on the segment reporting structure that existed prior to the Company's transition to its new segment reporting structure effective January 1, 2020, which resulted in the former SCIO reporting unit being reflected as an integrated business within the Healthcare Analytics operating segment and reporting unit.

Based on the results of the 2019 annual goodwill quantitative impairment test, the fair values of each of the Company’s reporting units exceeded their carrying values and the Company’s goodwill was not impaired.

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

The former SCIO reporting unit was formed as a result of the SCIO acquisition in July 2018 and its fair value was set at the time of acquisition.

As of December 31, 2019, the goodwill associated with the former SCIO reporting unit was $ 163,751 , representing approximately 47.0 % of the Company’s total goodwill, and the percentage by which the fair value of the former SCIO reporting unit exceeded the carrying value as of the date of the annual impairment test was approximately 10.0 %.

Intangible Assets

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As of December 31, 2020

Carrying Amount

Accumulated Impairment

Carrying Amount Accumulated

Amortization Net Carrying

Finite-lived intangible assets:

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Trade names and trademarks 5,100 ( 3,951 ) 1,149

$ 101,967 $ ( 43,273 ) $ 58,694

Indefinite-lived intangible assets:

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Total intangible assets $ 102,867 $ ( 43,273 ) $ 59,594

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2020

(In thousands, except share and per share amounts)

As of December 31, 2019

Carrying Amount

Accumulated Impairment

Carrying Amount Accumulated

Amortization Net Carrying

Finite-lived intangible assets:

Customer relationships $ 97,602 $ ( 43,330 ) $ 54,272

Leasehold benefits

Developed technology 26,976 ( 10,687 ) 16,289

Non-compete agreements

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

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

Indefinite-lived intangible assets:

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Total intangible assets $ 130,578 $ ( 56,596 ) $ 73,982

The amortization expense for the year is as follows:

The amortization expense recognized in the consolidated statements of income was as follows:

Year ended December 31,

2020 2019 2018

Amortization expense $ 14,412 $ 21,558 $ 20,377

During the fourth quarter of 2018, the Company recognized impairment charges of $ 5,549 and $ 278 related to its customer relationships and trademarks intangible assets, respectively, in the Health Integrated reporting unit, within the Healthcare operating segment.

The Company tested these intangible assets for recoverability due to indicators warranting the impairment test such as:

(i) revenues and profitability in 2018 were significantly lower than the Company’s budget, and (ii) significant changes to the Company's estimated future cash flows and long-term growth assumptions for the Health Integrated reporting unit driven by loss of customer contracts, cost pressures and the Company’s most recent views of the long-term outlook for the Health Integrated business.

Based on the results of its testing, the Company determined that the carrying value of the intangible assets was not recoverable, and an

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2019

(In thousands, except share and per share amounts)

impairment charge was recorded to the extent that carrying value exceeded estimated fair value.

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

Subsequent to the impairment test, Health Integrated reporting unit’s customer relationships and trademarks intangibles assets were reduced to $ nil as of December 31, 2018.

The remaining weighted average life of intangible assets is as follows:

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Trade names and trademarks (Finite lived) 2.04

Estimated future amortization expense related to intangible assets as of December 31, 2019 is as follows:

Estimated future amortization expense related to finite-lived intangible assets as of December 31, 2020 was as follows:

2021 $ 12,765

2026 and thereafter 12,868

Total $ 58,694

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2020

(In thousands, except share and per share amounts)

Other Current Assets

Other current assets consist of the following:

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Derivative instruments $ 9,755 $ 4,076

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Deferred contract fulfillment costs 2,888 1,673

Interest accrued on term deposits 169 439

Others 2,919 2,803

Other current assets $ 37,109 $ 24,594

Other assets consist of the following:

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Lease deposits $ 9,788 $ 9,983

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Deferred contract fulfillment costs 2,743 5,582

Others 3,455 4,821

Other assets $ 32,099 $ 36,016

EXLSERVICE HOLDINGS, INC.

4 unchanged sentences

Accrued expenses and other current liabilities consist of the following:

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Accrued expenses $ 39,951 $ 50,097

Payable to statutory authorities 10,594 9,247

Accrued capital expenditures 7,857 3,035

Derivative instruments 435 1,783

Client liabilities 4,740 6,378

Interest payable 1,399 1,492

Other current liabilities 1,205 1,732

Finance lease liabilities 229 253

Accrued expenses and other current liabilities $ 66,410 $ 74,017

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Other non-current liabilities consist of the following:

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Derivative instruments $ 29 $ 1,250

Unrecognized tax benefits 907 1,047

Deferred rent

Retirement benefits 8,940 6,517

Deferred transition revenue 924 1,911

Accrued capital expenditure 3,486 —

Other liabilities 3,568 987

Finance lease liabilities 281 430

Other non-current liabilities $ 18,135 $ 12,142

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2020

(In thousands, except share and per share amounts)

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss (“AOCI”) consists of actuarial gain/(loss) on retirement benefits and changes in the cumulative foreign currency translation adjustments.

Accumulated other comprehensive loss (“AOCI”) consists of actuarial gain/(loss) on retirement benefits and foreign currency translation adjustments.

In addition, the Company enters into foreign currency exchange contracts, which are designated as cash flow hedges in accordance with ASC 815.

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

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

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

December 31, 2019

December 31, 2018

Cumulative foreign currency translation loss

Unrealized gain/(loss) on cash flow hedges

Retirement benefits

Income tax expense relating to above (1)

Accumulated Other Comprehensive Loss

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

Refer to Note 22 to the consolidated financial statements.

Foreign currency translation (loss)/ gain Unrealized (loss)/gain on cash flow hedges Retirement benefits Total

Balance as of January 1, 2019 $ ( 84,105 ) $ ( 333 ) $ 971 $ ( 83,467 )

Gains / (losses) recognized during the year ( 2,857 ) 8,773 ( 2,539 ) 3,377

Reclassification to net income (1)

— ( 3,951 ) ( 159 ) ( 4,110 )

Income tax benefit / (expense) (2)

( 629 ) ( 391 ) 328 ( 692 )

Accumulated other comprehensive loss as of December 31, 2019 $ ( 87,591 ) $ 4,098 $ ( 1,399 ) $ ( 84,892 )

Gains / (losses) recognized during the year ( 547 ) 12,665 ( 2,401 ) 9,717

Reclassification to net income (1)

— ( 801 ) 394 ( 407 )

Income tax benefit / (expense) (2)

1,953 ( 2,163 ) 808 598

Accumulated other comprehensive loss as of December 31, 2020 $ ( 86,185 ) $ 13,799 $ ( 2,598 ) $ ( 74,984 )

Refer to Note 17 - Derivatives and Hedge Accounting and Note 20 - Employee Benefit Plans to the consolidated financial statements for reclassification to net income.

These are income tax benefit / (expense) recognized on changes in the fair values of cash flow hedges, actuarial (loss) / gain on

retirement benefits and foreign currency translation (loss) / gain, net of reclassifications related to the period activity.

Refer to Note 22 - Income Taxes to the consolidated financial statements.

Fair Value Measurements

ASC Topic 820, “Fair Value Measurements and Disclosures ” ("ASC 820") defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability.

The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability as against assumptions specific to the

The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability as against assumptions specific to the entity.

In addition, the fair value of liabilities should include consideration of non-performance risk, including the Company’s own credit risk.

Assets and Liabilities Measured at Fair Value

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

EXLSERVICE HOLDINGS, INC.

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(In thousands, except share and per share amounts)

In addition, the fair value of liabilities should include consideration of non-performance risk, including the Company’s own credit risk.

ASC 820 establishes a three-level hierarchy of fair value measurements based on whether the inputs to those measurements are observable or unobservable.

Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions.

The fair-value hierarchy requires the use of observable market data when available and consists of the following levels:

Level 1—Quoted prices for identical instruments in active markets;

Level 2—Quoted prices for similar instruments in active markets;

quoted prices for identical or similar instruments in markets that are not active;

and model-derived valuations in which all significant inputs are observable in active markets;

Level 3—Valuations derived from valuation techniques in which one or more significant inputs are unobservable.

Assets and Liabilities Measured at Fair Value

The following table sets forth the Company’s assets and liabilities that were accounted for at fair value as of December 31, 2019 and 2018 .

As of December 31, 2019

Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Other Unobservable Inputs

As of December 31, 2020 (Level 1) (Level 2) (Level 3) Total

Mutual funds* $ 160,441 $ — $ — $ 160,441

Derivative financial instruments — 16,688 — 16,688

Total $ 160,441 $ 16,688 $ — $ 177,129

Derivative financial instruments $ — $ 464 $ — $ 464

As of December 31, 2018

Total $ — $ 464 $ — $ 464

Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Other Unobservable Inputs

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

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

Derivative financial instruments — 7,509 — 7,509

Total $ 166,330 $ 7,509 $ — $ 173,839

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

* Represents those short-term investments which are carried at the fair value option under ASC 825 "Financial Instruments" as of December 31, 2019 and 2018 .

Total $ — $ 3,033 $ — $ 3,033

* Represents those short-term investments which are carried at the fair value option under ASC 825 "Financial Instruments".

Derivative Financial Instruments :

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

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

Refer to Note 17 - Derivatives and Hedge Accounting to the consolidated financial statements for further details.

Financial instruments not carried at fair value :

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

The carrying value of the Company’s outstanding revolver credit approximates its fair value because the Company’s interest rate yield is near current

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

Convertible Senior Notes:

The total estimated fair value of the convertible senior notes as of December 31, 2020 and 2019 was $ 152,384 and $ 149,934 , respectively.

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

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

EXLSERVICE HOLDINGS, INC.

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(In thousands, except share and per share amounts)

market rates for comparable debt instruments.

Lease obligations are recognized based on the present value of lease payments over the lease term which approximates fair value

Convertible Senior Notes:

The total estimated fair value of the convertible senior notes as of December 31, 2019 and 2018 was $ 149,934 and $ 130,510 , respectively.

The fair value was determined based on the market yields for similar Notes as of December 31, 2019 and 2018, respectively.

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

Non-recurring fair value measurements of assets:

Non-recurring fair value measurements include impairment tests conducted by the Company during the year ended December 31, 2019 of its long-lived assets and ROU assets related to its Health Integrated business.

Nonrecurring fair value measurements of assets:

Nonrecurring fair value measurements include impairment tests of goodwill conducted by the Company during the year ended December 31, 2020 and 2019.

The fair value determination of the Company's reporting units was based on a combination of the income approach, using DCF model, which are Level 3 inputs, and also the market approach, as applicable, using market multiples for reporting units, which are Level 2 inputs.

During the year ended December 31, 2020 and 2019, the Company did no t recognize any impairment charges on goodwill as the fair values of the reporting units exceeded their carrying value.

Refer to Note 10 - Goodwill and Intangible Assets to the consolidated financial statements for further details.

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

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

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

Refer to Notes 9 and 21 to the consolidated financial statements for further details.

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

Refer to Note 9 - Property and Equipment, net and Note 21 - Leases to the consolidated financial statements for further details.

Derivatives and Hedge Accounting

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

The Company had outstanding cash flow hedges totaling $ 410,390 (including $ 4,300 of range forward contracts) as of December 31, 2019 and $ 362,435 (including $ 6,900 of range forward contracts) as of December 31, 2018 .

The Company had outstanding cash flow hedges totaling $ 451,935 as of December 31, 2020 and $ 410,390 (including $ 4,300 of range forward contracts) as of December 31, 2019.

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

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

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

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

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

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

The Company estimates that approximately $ 2,421 of net derivative gains, excluding tax effects, included in AOCI, representing changes in the value of cash flow hedges, could be reclassified into earnings within the next twelve months based on exchange rates prevailing as of December 31, 2019 .

The Company estimates that approximately $ 9,564 of derivative gains, net, excluding tax effects, included in AOCI, representing changes in the value of cash flow hedges, could be reclassified into earnings within the next twelve months based on exchange rates prevailing as of December 31, 2020.

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

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

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

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

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

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

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

pound sterling and the Philippine peso.

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

Outstanding foreign currency forward contracts amounted to $ 124,045 , GBP 10,843 and EUR 1,289 as of December 31, 2019 and amounted to $ 125,503 , GBP 15,616 and EUR 512 as of December 31, 2018 .

The Company also uses forward contracts designated as net investment hedges to hedge foreign currency risks related to the Company's investment in foreign subsidiaries.

Gains and losses on these forward contracts are recognized in AOCI as part of the foreign currency translation adjustment.

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

Outstanding foreign currency forward contracts amounted to USD 143,394 , GBP 6,753 , EUR 2,447 and COP 8,287,950 as of December 31, 2020 and USD 124,045 , GBP 10,843 and EUR 1,289 as of December 31, 2019.

All the assets and liabilities related to our foreign exchange forward contracts are subject to master netting arrangements with each individual counterparty.

These master netting arrangements generally provide for net settlement of all outstanding

EXLSERVICE HOLDINGS, INC.

2 unchanged sentences

(In thousands, except share and per share amounts)

contracts with the counterparty in the case of an event of default or a termination event.

We have presented all the assets and liabilities related to our foreign exchange forward contracts on a gross basis, with no offsets, in our consolidated statements of financial position.

There is no financial collateral (including cash collateral) provided or received by us related to our foreign exchange forward contracts.

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

Derivatives designated as hedging instruments:

Foreign currency exchange contracts

December 31, 2019

December 31, 2018

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

Other current assets $ 9,740 $ 3,945

Other assets $ 6,933 $ 3,433

Accrued expenses and other current liabilities $ 176 $ 1,524

1 unchanged sentence

Derivatives not designated as hedging instruments :

Foreign currency exchange contracts

December 31, 2019

December 31, 2018

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

Other current assets $ 15 $ 131

3 unchanged sentences

Forward Exchange Contracts:

2020 2019 2018

Unrealized gain/(loss) recognized in AOCI

8 unchanged sentences

Year ended December 31,

As per consolidated statements of income

Gain on foreign currency exchange contracts

As per consolidated statements of income

Gain/(loss) on foreign currency exchange contracts

As per consolidated statements of income

Gain on foreign currency exchange contracts

2020 2019 2018

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

Cash flow hedging relationships

4 unchanged sentences

Depreciation and amortization expense $ 50,462 $ ( 41 ) $ 51,981 $ 212 $ 48,566 $ 181

$ 801 $ 3,951 $ 3,149

Derivatives not designated as hedging instruments

1 unchanged sentence

Foreign exchange gain/(loss), net $ 4,432 $ 3,802 $ 3,752 $ 3,306 $ 4,787 $ ( 3,224 )

$ 4,432 $ 3,802 $ 3,752 $ 3,306 $ 4,787 $ ( 3,224 )

EXLSERVICE HOLDINGS, INC.

2 unchanged sentences

(In thousands, except share and per share amounts)

Effect of net investment hedges on accumulated other comprehensive loss:

Year ended December 31,

Amount of (loss) recognized in AOCI

Net investment hedging relationships

Foreign exchange contracts

Revolver Credit Agreement

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

As of December 31, 2020

Revolving Credit Facility Notes Total

Current portion of long-term borrowings $ 25,000 $ — $ 25,000

Long-term borrowings $ 64,000 $ 150,000 $ 214,000

Unamortized debt discount — ( 11,235 ) ( 11,235 )

Unamortized debt issuance costs* — ( 804 ) ( 804 )

Long-term borrowings $ 64,000 $ 137,961 $ 201,961

Total borrowings $ 89,000 $ 137,961 $ 226,961

As of December 31, 2019

Revolving Credit Facility Structured Payables Notes Total

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

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

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

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

Long-term borrowings $ 59,000 $ — $ 135,131 $ 194,131

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

*Unamortized debt issuance costs for the Company’s revolving Credit Facility of $ 490 and $ 748 as of December 31, 2020 and 2019, respectively, is presented under “Other current assets” and “Other assets” in the consolidated balance sheets.

Credit Agreement

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

4 unchanged sentences

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

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

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

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

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

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

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

The revolving credit commitments under the Credit Agreement are subject to a commitment fee which is also tied to the Company’s total net leverage ratio, and ranges from 0.15 % to 0.30 % per annum on the average daily amount by which the aggregate revolving commitments exceed the sum of outstanding revolving loans and letter of credit obligations.

The Credit Facility carried an effective interest rate of 4.0 % per annum and 3.4 % per annum, respectively, during the years ended December 31, 2019 and 2018 .

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2020

(In thousands, except share and per share amounts)

The revolving Credit Facility carried an effective interest rate as shown below.

Year ended December 31,

2020 2019 2018

Effective interest rate 2.3 % 4.0 % 3.4 %

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

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

As of December 31, 2019, the Company had outstanding indebtedness under the credit facility of $ 99,000 of which $ 40,000 is expected to be repaid within the next twelve months and is included under “current portion of long-term borrowings” and of which $ 59,000 is included under “long-term borrowings, less current portion” in the consolidated balance sheets.

As of December 31, 2018 , the Company had an outstanding indebtedness under the credit facility of $ 150,000 , of which $ 20,000 was

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2019

(In thousands, except share and per share amounts)

included under “current portion of long-term borrowings,” and the balance of $ 130,000 was included under “long-term borrowings, less current portion” in the consolidated balance sheets.

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

The unamortized debt issuance costs as of December 31, 2019 and 2018 was $ 748 and $ 1,006 , respectively and is included under “other current assets” and “other assets” in the consolidated balance sheets.

Convertible Senior Notes

2 unchanged sentences

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

During the year ended December 31, 2019 and 2018 , the Company recognized interest expense of $ 5,206 and $ 1,313 , respectively, on the Notes.

Until October 4, 2020, under the Investment Agreement, the Purchaser was restricted from transferring the Notes or any shares of common stock issuable upon conversion of the Notes, or entering into any transaction that transfers such interests to a third party.

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).

1 unchanged sentence

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

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

The Company presently intends and has the ability to settle the principal amount of the Notes in cash.

In 2018, the Company used the proceeds from the issuance of the Notes to repay $ 150,000 of its outstanding borrowings under the Credit Facility.

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

2 unchanged sentences

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

The unamortized debt issuance costs is presented as a direct reduction from the Notes in the consolidated balance sheets.

The unamortized debt issuance costs as of December 31, 2019 and 2018 was $ 1,018 and $ 1,127 , respectively.

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

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

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

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

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

During the year ended December 31, 2019 and 2018 , the Company amortized $ 2,472 and $ 600 respectively of the discount to interest expense, on the Notes.

The unamortized debt discount on the Notes as of December 31, 2019 and 2018 was $ 13,851 and $ 16,323 , respectively.

Borrowings also includes structured payables which are in the nature of debt, amounting to $ 867 and $ 2,114 as of December 31, 2019 and 2018 , respectively, of which $ 867 and $ 1,423 is included under “current portion of long-term borrowings”, $ nil and $ 691 , respectively, included under “long-term borrowings, less current portion ” in the consolidated balance sheets.

EXLSERVICE HOLDINGS, INC.

2 unchanged sentences

(In thousands, except share and per share amounts)

Future principal payments/maturities for all of the Company's borrowings as of December 31, 2019 were as follows:

Revolver Credit

Structured Payables

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

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

During the year ended December 31, 2020, 2019 and 2018 the Company recognized interest expense and amortization of debt discount, on the Notes as below:

Year ended December 31,

2020 2019 2018

Interest expense on the Notes $ 5,250 $ 5,206 $ 1,313

Amortization of debt discount on the Notes $ 2,616 $ 2,472 $ 600

Payments/maturities for all of the Company's borrowings as of December 31, 2020 were as follows:

Notes Revolving Credit Total

2021 $ — $ 25,000 $ 25,000

2022 — 64,000 64,000

2024 150,000 — 150,000

Total $ 150,000 $ 89,000 $ 239,000

Letters of Credit

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

As of December 31, 2019 and 2018 , the Company had outstanding letters of credit of $ 461 and $ nil , respectively, that were not recognized in the consolidated balance sheets.

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

Capital Structure

The Company has one class of common stock outstanding.

During the year ended December 31, 2019 and 2018 , the Company purchased 23,859 and 51,446 shares of common stock, respectively, from employees in connection with withholding tax payments related to the vesting of restricted stock for a total consideration of $ 1,490 and $ 3,122 , respectively.

The weighted average purchase price per share of $ 62.47 and $ 60.68 , respectively, was the closing price of the Company's share of common stock on the Nasdaq Global Select Market on the trading day prior to the vesting date of the shares of restricted stock.

On December 30, 2014, the Company’s Board of Directors authorized a common stock repurchase program (the “2014 Repurchase Program”), under which shares were authorized to be purchased by the Company from time to time from the open market and through private transactions during each of the fiscal years 2017 through 2019 up to an annual amount of $ 20,000 .

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

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

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

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

During the year ended December 31, 2019 , the Company purchased 643,486 shares of its common stock for an aggregate purchase price of approximately $ 39,874 , including commissions, representing an average purchase price per share of $ 61.96 under the 2017 Repurchase Program.

During the year ended December 31, 2018 , the Company purchased 674,604 shares of its common stock for an aggregate purchase price of approximately $ 39,987 , including commissions, representing an average purchase price per share of $ 59.27 under 2017 Repurchase Program.

The Company purchased shares of common stock from employees in connection with withholding tax payments related to the vesting of restricted stock, as below:

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

Year ended December 31, 2020 28,052 $ 2,131 $ 75.96

Year ended December 31, 2019 23,859 $ 1,490 $ 62.47

Year ended December 31, 2018 51,446 $ 3,122 $ 60.68

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

EXLSERVICE HOLDINGS, INC.

2 unchanged sentences

(In thousands, except share and per share amounts)

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

The approval authorized stock repurchases of up to $ 40,000 in each of 2018 and 2019.

On December 16, 2019, the Company’s Board of Directors authorized a $ 200,000 common stock repurchase program beginning January 1, 2020 through December 31, 2022 (the "2019 Repurchase Program" and together with the 2017 Repurchase Program, the “Repurchase Programs”).

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

Repurchases may be discontinued at any time by the management.

The Company purchased shares of its common stock, including commissions, under the 2019 Repurchase Program and the 2017 Repurchase Program, as applicable, as below:

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

Year ended December 31, 2020 1,085,153 $ 77,818 $ 71.71

Year ended December 31, 2019 643,486 $ 39,874 $ 61.96

Year ended December 31, 2018 674,604 $ 39,987 $ 59.27

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

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

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

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

The Company has not paid or declared any cash dividends on its common stock during the years ended December 31, 2020, 2019 and 2018.

1 unchanged sentence

Employee Benefit Plans

The Company’s Gratuity Plans in India ("Gratuity Plan") provide for lump sum payment to vested employees on retirement or upon termination of employment in an amount based on the respective employee’s salary and years of employment with the Company.

Liabilities with regard to the Gratuity Plans are determined by actuarial valuation using the projected unit credit method.

Current service costs for the Gratuity Plan are accrued in the year to which they relate.

Actuarial gains or losses or prior service costs, if any, resulting from amendments to the plans are recognized and amortized over the remaining period of service of the employees.

The Company’s Gratuity Plan in India (the "India Plan") provides for a lump sum payment to vested employees on retirement or upon termination of employment in an amount based on the respective employee’s salary and years of employment with the Company.

In addition, the Company’s subsidiary operating in the Philippines conforms to the minimum regulatory benefit, which provide for lump sum payment to vested employees on retirement from employment in an amount based on the respective employee’s salary and years of employment with the Company (the "Philippines Plan").

The benefit costs of the Philippines Plan for the year are calculated on an actuarial basis.

Liabilities with regard to the India Plan and the Philippines Plan are determined by actuarial valuation using the projected unit credit method.

Current service costs for these Plans are accrued in the year to which they relate.

Actuarial gains or losses or prior service costs, if any, resulting from amendments to the plans are recognized and amortized over the remaining period of service of the employees.

The benefit obligation has been measured as of December 31, 2020.

The following table sets forth the activity and the funded status of the Gratuity Plans and the amounts recognized in the Company’s consolidated financial statements at the end of the relevant periods:

Change in projected benefit obligation:

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2020

(In thousands, except share and per share amounts)

Change in projected benefit obligation, was as follows:

Projected benefit obligation as of January 1 $ 15,311 $ 11,044

Business acquisition

Service cost 2,706 1,953

Interest cost 964 875

Benefits paid ( 878 ) ( 960 )

Actuarial loss/(gain)

Actuarial loss* 2,425 2,577

Effect of exchange rate changes ( 62 ) ( 178 )

4 unchanged sentences

Accumulated benefit obligation $ 12,490 $ 10,743

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2019

(In thousands, except share and per share amounts)

Components of net periodic benefit costs:

Accumulated benefit obligation in excess of plan assets $ 978 $ 1,959

*During the year ended December 31, 2020, actuarial loss was driven by changes in actuarial assumptions, offset by experience adjustments on present value of benefit obligations.

During the year ended December 31, 2019, actuarial loss was driven by experience adjustments on present value of benefit obligations.

Components of net periodic benefit costs, were as follows:

Year ended December 31,

2020 2019 2018

Service cost $ 2,706 $ 1,953 $ 1,735

Interest cost 964 875 714

Expected return on plan assets ( 636 ) ( 568 ) ( 514 )

Amortization of actuarial (gain)/loss

Amortization of actuarial loss/(gain) 394 ( 159 ) ( 153 )

Net periodic benefit cost $ 3,428 $ 2,101 $ 1,782

The components of accumulated other comprehensive (loss)/gain, excluding tax effects, as of December 31, 2019 , 2018 and 2017 are as follows:

The components of actuarial (loss) / gain on retirement benefits included in accumulated other comprehensive (loss)/gain, excluding tax effects, were as follows:

As of December 31,

2020 2019 2018

Net actuarial (loss)/gain $ ( 3,772 ) $ ( 1,762 ) $ 940

1 unchanged sentence

Accumulated other comprehensive (loss)/gain, excluding tax effects $ ( 3,787 ) $ ( 1,780 ) $ 918

The amount in accumulated other comprehensive loss that is expected to be recognized as a component of net periodic benefit cost over the next fiscal year is $ 558 .

The weighted average actuarial assumptions used to determine benefit obligations and net gratuity cost are:

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2020

(In thousands, except share and per share amounts)

The weighted average actuarial assumptions used to determine benefit obligations and net gratuity cost were:

2020 2019 2018

Discount rate 4.6 % 6.5 % 7.5 %

2 unchanged sentences

The Company evaluates these assumptions annually based on its long-term plans of growth and industry standards.

The discount rates are based on current market yields on government securities adjusted for a suitable risk premium.

The discount rates are either based on current market yields on government securities or yields on government securities adjusted for a suitable risk premium, if available.

Expected benefit payments during the year ending December 31,

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

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

They calculate the annual contribution required to be made by the Company and manage the Gratuity Plans, including any required payouts.

Fund managers manage these funds on a cash accumulation basis and declare interest retrospectively on March 31 of each year.

The Company earned a return of approximately 7.5 % per annum on these Gratuity Plans for the year ended December 31, 2019 .

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2019

(In thousands, except share and per share amounts)

2026 to 2030 $ 6,956

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

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

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

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

The Company earned a return of approximately 7.5 % per annum on the India Plan for the year ended December 31, 2020.

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

Change in Plan Assets

Plan assets at January 1, 2019 $ 7,420

Business acquisition

Actual return 606

8 unchanged sentences

Plan assets at December 31, 2020 $ 11,512

* Benefits payments were substantially made through the plan assets during the year ended December 31, 2019 and 2018.

* Benefits payments were substantially made from the plan assets during the year.

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

The Company may make discretionary contributions of up to a maximum of 4 % of employee compensation within certain limits.

The Company accrued for contributions to the 401(k) Plans of $ 3,617 , $ 3,423 and $ 2,709 during the years ended December 31, 2019 , 2018 and 2017 , respectively.

During the years ended December 31, 2019 , 2018 and 2017 , the Company contributed $ 10,395 , $ 7,614 and $ 7,116 respectively, for various defined contribution plans on behalf of its employees in India, the Philippines, Romania, the Czech Republic, South Africa, Colombia, and Singapore.

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

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2020

(In thousands, except share and per share amounts)

Year ended December 31,

2020 2019 2018

Contribution to the 401(k) Plans $ 3,577 $ 3,617 $ 3,423

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

Year ended December 31,

2020 2019 2018

Contribution to the defined benefit plans $ 11,332 $ 10,614 $ 7,663

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

The Company finances its use of certain motor vehicles and other equipment under various lease arrangements provided by financial institutions.

The Company has performed an evaluation of its contracts with suppliers in accordance with Topic 842 and has determined that, except for leases for office facilities, motor vehicles and other equipment as described above, none of the Company’s contracts contain a lease.

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

The Company had performed an evaluation of its contracts with suppliers in accordance with Topic 842, Leases , and had determined that, except for leases for office facilities, motor vehicles and other equipment as described above, none of the Company’s contracts contain a lease.

In assessment of the lease term, the Company considers the extension option as part of its lease term for those lease arrangements where the Company is reasonably certain of availing the extension option.

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

During the year ended December 31, 2020, the Company changed the lease term for some leases and recognized the resultant amount of the remeasurement of the lease liability as an adjustment to the ROU assets.

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

Such concessions had an insignificant impact on the Company’s consolidated financial statements during the year ended December 31, 2020.

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

EXLSERVICE HOLDINGS, INC.

3 unchanged sentences

Supplemental balance sheet information

December 31, 2019

December 31, 2020 December 31, 2019

Operating Lease

10 unchanged sentences

Total finance lease liabilities $ 510 $ 683

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

Based on the results, the operating lease right-of-use assets carrying value exceeded its fair value.

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

As a result of this analysis, the Company recognized an impairment charge of $ 1,449 during year ended December 31, 2019, to write down the carrying value of operating lease right-of-use assets to its fair value.

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

Refer to Note 24 to the consolidated financial statements for further details.

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

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

Year ended December 31, 2019

Year ended December 31, 2020 Year ended December 31, 2019

Finance lease:

2 unchanged sentences

Operating lease (a)

27,146 27,335

$ 27,146 $ 27,335

Sublease income — ( 146 )

Total lease cost $ 27,462 $ 27,537

Operating lease cost for leases classified as such under Topic 840 for the years ended December 31, 2018 , and 2017 was $ 25,573 and $ 24,015 , respectively.

(a) Includes short-term leases, which are immaterial.

4 unchanged sentences

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

December 31, 2020 Year ended

December 31, 2019

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Right-of-use assets obtained in exchange for new finance lease liabilities $ 45 $ 506

Weighted-average remaining lease term

Weighted-average remaining lease term (in years)

Finance lease 1.8 2.3

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

As of December 31, 2019 , the Company has entered into an operating lease for a facility that has not yet commenced with lease liability of approximately $ 11,900 .

This operating lease will commence in January 2020 and has a lease term of 15 years .

During the year ended December 31, 2020 and 2019, the Company modified certain of its operating leases resulting in a reduction of its lease liabilities by $ 3,143 and $ 0 respectively, with a corresponding reduction in ROU assets.

During the year ended December 31, 2019, the Company performed an impairment test of its long-lived assets of its Health Integrated business.

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

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

As a result of this analysis, the Company recognized impairment on ROU assets of $ 1,449 during year ended December 31, 2019, to write down the carrying value of operating lease right-of-use assets to its fair value.

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

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

Operating Leases

Finance Leases

Operating Leases Finance Leases

2021 $ 25,829 $ 262

2022 24,316 194

2023 22,066 114

2024 17,084 36

2025 9,749 11

2026 and thereafter 34,334 —

6 unchanged sentences

(In thousands, except share and per share amounts)

Maturities of minimum lease payments as of December 31, 2018 are as follows:

During the next twelve months ending December 31,

Operating Leases

Capital Leases

2025 and thereafter

Total minimum lease payment

imputed interest

Present value of minimum lease payments

current portion

Long term capital lease obligation

The components of income before income taxes consist of the following:

The components of income/ (loss) before income taxes consist of the following:

Year ended December 31,

The income tax expense consists of the following:

2020 2019 2018

Domestic $ 30,893 $ ( 16,685 ) $ ( 24,442 )

Foreign 84,436 99,785 84,812

$ 115,329 $ 83,100 $ 60,370

Income tax expense/ (benefit) consists of the following:

Year ended December 31,

2020 2019 2018

Current provision/(benefit):

Domestic $ 7,946 $ 10,823 $ ( 13,249 )

Foreign 14,983 16,694 17,271

$ 22,929 $ 27,517 $ 4,022

Deferred provision/(benefit):

Domestic $ 1,343 $ ( 13,912 ) $ ( 1,999 )

Foreign 1,354 1,567 1,374

$ 2,697 $ ( 12,345 ) $ ( 625 )

Income tax expense $ 25,626 $ 15,172 $ 3,397

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2019

(In thousands, except share and per share amounts)

Income taxes recognized in other comprehensive income are as follows:

Income taxes (deferred) recognized in other comprehensive income/(loss) are as follows:

Year ended December 31,

Deferred taxes (expense)/benefit :

2020 2019 2018

Deferred tax (expense)/benefit recognized on:

Unrealized gain/(loss) on cash flow hedges $ ( 2,251 ) $ ( 683 ) $ 3,888

Reclassification adjustment for cash flow hedges 88 292 915

Retirement benefits 897 312 ( 44 )

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

Reclassification adjustment for retirement benefits ( 89 ) 16 23

Foreign currency translation loss 1,953 ( 629 ) 5,903

Total income tax (expense)/benefit recognized in other comprehensive income/(loss) $ 598 $ ( 692 ) $ 10,685

The effective income tax rate differs from the amount computed by applying the U.S.

federal statutory income tax rate to income before income taxes approximately as follows:

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2020

(In thousands, except share and per share amounts)

Year ended December 31,

2020 2019 2018

Expected tax expense $ 24,219 $ 17,451 $ 12,678

Change in valuation allowance

Impact of tax holiday ( 757 ) ( 5,920 ) ( 5,448 )

6 unchanged sentences

Excess tax benefit on stock-based compensation ( 2,378 ) ( 2,306 ) ( 7,227 )

Research & Development credit

Research and development credits ( 918 ) ( 1,650 ) ( 1,500 )

Prior period items ( 182 ) ( 143 ) ( 1,466 )

Others 30 ( 586 ) ( 94 )

Tax expense $ 25,626 $ 15,172 $ 3,397

The effective tax rate increased from 18.3 % during the year ended December 31, 2019 to 22.2 % during the year ended December 31, 2020.

The Company recorded income tax expense of $ 25,626 and $ 15,172 for the year ended December 31, 2020 and 2019, respectively.

The effective tax rate increased from 5.6 % during the year ended December 31, 2018 to 18.3 % during the year ended December 31, 2019 primarily as a result of:

(i) recording of a one-time tax benefit of $ 6,274 with respect to unused 2018 foreign branch income tax credits under the Internal Revenue Code of 1986, as amended, during the year ended December 31, 2018 , (ii) recording of higher excess tax benefits related to stock awards of $ 7,227 pursuant to ASU No.

2016-09 during the year ended December 31, 2018 compared to $ 2,306 during the year ended December 31, 2019, (iii) lower tax expense of $ 3,072 on account of impairment and restructuring charges recorded during the year ended December 31, 2018 compared to $ 888 during the year ended December 31, 2019, partially offset by (iv) higher tax exemptions/incentives and a lower tax rate for qualifying Indian subsidiaries due to a change in legislation during the year ended December 31, 2019.

The increase in income tax expense was primarily as a result of:

(i) higher profit during the year ended December 31, 2020 and (ii) recording of a one-time tax expense of $ 1,320 due to electing a new tax regime for two of the Company’s Indian subsidiaries which provides for a lower tax rate on earnings in exchange for foregoing certain tax credits during the year ended December 31, 2020, compared to a benefit of $ 1,449 recorded during the year ended December 31, 2019.

During the year 2018, the Company made an election to change the tax status of most of its controlled foreign corporations (“CFC”) to disregarded entities for U.S.

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The Transition Tax resulted in previously taxed income (“PTI”) which may be subject to withholding taxes and currency gains or losses upon repatriation.

The Company presently does not intend to distribute its PTI and has not recorded any deferred taxes related to its investment in foreign subsidiaries.

If, in the future, the Company changes its present intention regarding the distribution of PTI, additional taxes may be required and would be recorded in the period the intention changes.

The Company periodically evaluate opportunities to repatriate PTI held by its foreign subsidiaries to fund its operations in the United States and other geographies, and as and when it decides to repatriate such PTI, it may have to accrue additional taxes in accordance with local tax laws, rules and regulations in the relevant foreign jurisdictions.

The Company has adopted an accounting policy to treat Global Intangible Low-Taxed Income (“GILTI”) as a period cost.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2019

(In thousands, except share and per share amounts)

Certain operations centers in India, which were established in Special Economic Zones (“SEZs”), are eligible for tax incentives until 2025.

Certain operations centers in India, which were established in SEZs, are eligible for tax incentives until 2025.

These operations centers are eligible for a 100 % income tax exemption for first 5 years of operations and 50 % exemption for a period of 5 years thereafter.

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The new tax regime is optional and provides for a lower tax rate for Indian companies, subject to certain conditions which among other things includes not availing of specified exemptions or incentives.

Some of the Indian subsidiaries have opted for the new tax regime to obtain the benefit of a lower tax rate.

In 2019 and 2020, the Company elected this new tax regime for its Indian subsidiaries to obtain the benefit of a lower tax rate.

The Company has also benefitted from a corporate tax holiday in the Philippines for our operations centers established there over the last several years.

The tax holiday expired for few of our centers in 2014, 2016, 2018 and in 2019 and will expire for other centers by year 2022, which may lead to an increase in our overall tax rate.

Following the expiry of the tax exemption, income generated from centers in the Philippines will be taxed at the prevailing annual tax rate, which is currently 5.0 % on gross income.

The tax holiday expired for few of the Company’s operations centers in the last few years and will expire for other operations centers by year 2022, which may lead to an increase in the Company’s overall tax rate.

Following the expiry of the tax exemption, income generated from operations centers in the Philippines will be taxed at the prevailing annual tax rate, which is currently 5.0 % on gross income.

The diluted earnings per share effect of the tax holiday is $ 0.02 , $ 0.17 and $ 0.16 for the years ended December 31, 2020, 2019 and 2018, respectively.

The components of the deferred tax balances as of December 31, 2019 and 2018 are as follows:

December 31, 2019

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2020

(In thousands, except share and per share amounts)

The components of the deferred tax balances as of December 31, 2020 and 2019 are as follows:

December 31, 2020 December 31, 2019

Deferred tax assets:

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Deferred rent 4,782 4,503

Others 281 745

$ 38,797 $ 40,717

Valuation allowance ( 188 ) ( 202 )

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Unamortized discount on convertible senior notes 2,753 3,395

Others 6,566 5,030

Deferred tax liabilities $ 31,707 $ 29,626

Net deferred tax assets/(liabilities)

Net deferred tax assets $ 6,902 $ 10,889

Deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the financial statement carrying values of assets and liabilities and their respective tax bases and operating loss carry forwards.

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Accordingly, the Company had recorded a valuation allowance of $ 188 and $ 202 as of December 31, 2020 and 2019, respectively.

The Company also recorded a valuation allowance of $ nil and $ 79 related to the tax credit carry forward as of December 31, 2019 and 2018 , respectively.

The Company in connection with its recent acquisitions has acquired federal and state net operating losses in the United States.

As of December 31, 2019 and 2018 , the Company has federal net operating loss carry forward of $ nil and $ 444 , respectively, which expire through various years until 2032 .

The Company’s federal net operating losses carry forward are subject to certain

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2019

(In thousands, except share and per share amounts)

annual utilization limitations under Section 382 of the Code.

The Company also has state and local net operating losses carry forwards of varying amounts, which are subject to limitations under the applicable rules and regulations of those taxing jurisdictions.

The Company estimates that it will be able to utilize substantially all of the losses before their expiration.

The Company’s income tax expense also includes the impact of provisions established for uncertain income tax positions determined in accordance with ASC 740.

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The following table summarizes the activity related to the unrecognized tax benefits for the years ended December 31, 2020, 2019 and 2018.

2020 2019 2018

Balance as of January 1 $ 1,047 $ 804 $ 824

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Increases related to current year tax positions 184 330 300

Effect of exchange rate changes

Balance as of December 31 $ 907 $ 1,047 $ 804

The unrecognized tax benefits as of December 31, 2020 of $ 907 , if recognized, would impact the effective tax rate.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2020

(In thousands, except share and per share amounts)

The Company has no t recognized any interest in each of the years ended December 31, 2020, 2019 and 2018.

As of December 31, 2019 and 2018 , the Company has not accrued interest and penalties relating to unrecognized tax benefits.

As of December 31, 2020 and 2019, the Company has no t accrued interest and penalties relating to unrecognized tax benefits.

Stock Based Compensation

On June 15, 2018, at the Company’s 2018 Annual Meeting of Stockholders, the Company's stockholders approved the 2018 Plan, which replaced and superseded the 2015 Plan, which was an amendment and restatement of the Company’s 2006 Omnibus Award Plan to, among other things, reserves 3,175,000 shares of the Company’s common stock for grants of awards under the 2018 Plan.

On June 15, 2018, at the Company’s 2018 Annual Meeting of Stockholders, the Company's stockholders approved the 2018 Plan, which among other things, reserves 3,175,000 shares of the Company’s common stock for grants of awards under the 2018 Plan.

As of December 31, 2020, the Company had 2,333,557 shares available for grant under the 2018 Plan (includes 76,145 shares against vested performance-based restricted stock units for which the underlying common stock was issued subsequent to December 31, 2020).

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The vesting period for the equity award issued is determined on the date of the grant and is non-transferable during the life of the equity award.

The majority of options expire ten years from the date of grant.

The equity awards of the type restricted stock units generally vest proportionally over a period of four years from the date of grant, unless specified otherwise.

The Company applies the provisions of ASC 718, Compensation - Stock Compensation , to account for its stock based compensation, using the modified prospective method of transition.

Under the provisions of this guidance, the estimated fair value of stock-based awards granted under stock incentive plans is recognized as compensation expense based on straight-line method over the vesting period.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2019

(In thousands, except share and per share amounts)

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

The majority of options expire within ten years from the date of grant.

Restricted stock units generally vest proportionally over a period of four years from the date of grant, unless specified otherwise.

The Company applies the provisions of ASC 718, Compensation - Stock Compensation , to account for its stock based compensation.

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

Year ended December 31,

2020 2019 2018

Cost of revenues $ 6,300 $ 5,895 $ 4,924

1 unchanged sentence

Selling and marketing expenses 10,926 10,163 8,606

Total $ 28,235 $ 26,070 $ 23,901

Stock Options

3 unchanged sentences

The Company accounts for the forfeitures as and when the actual forfeitures occur.

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2020

(In thousands, except share and per share amounts)

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

Number of Options

Weighted- Average Exercise Price

Aggregate Intrinsic Value

Weighted- Average Remaining Contractual Life (Years)

Number of Options Weighted- Average Exercise Price Aggregate Intrinsic Value Weighted- Average Remaining Contractual Life (Years)

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

Granted — — — —

Exercised ( 66,896 ) 22.44 3,488 —

Forfeited — — — —

Outstanding at December 31, 2020 31,265 $ 25.43 $ 1,866 1.85

Vested and exercisable at December 31, 2020 31,265 $ 25.43 $ 1,866 1.85

The unrecognized compensation cost for unvested options as of December 31, 2019 is $ nil .

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

The Company did not grant any options during the years ended December 31, 2020, 2019 and 2018.

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Options Outstanding, Vested and Exercisable

Range of Exercise Prices

Range of Exercise Prices Shares Weighted-Average

Exercise Price

$ 21.01 to $ 28.00

$21.01 to $28.00

31,265 $ 25.43

Year ended December 31,

2020 2019 2018

Cash received from options exercised during the year $ 1,501 $ 986 $ 1,397

EXLSERVICE HOLDINGS, INC.

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

Restricted Stock

Restricted Stock Units

Restricted Stock Restricted Stock Units

Number Weighted-

Fair Value Number Weighted-

Outstanding at December 31, 2019 **

27,386 $ 48.72 913,094 $ 59.61

Granted — — 395,708 76.99

Vested* ( 27,386 ) 48.72 ( 331,340 ) 56.55

Forfeited — — ( 73,796 ) 65.71

Outstanding at December 31, 2020 **

— $ — 903,666 $ 67.84

* Includes 14,368 and 11,517 restricted stock units vested during the years ended December 31, 2020 and 2019, respectively, for which the underlying common stock is yet to be issued.

2 unchanged sentences

As of December 31, 2020, unrecognized compensation cost of $ 42,317 is expected to be expensed over a weighted average period of 2.51 years.

The weighted-average fair value of restricted stock and restricted stock units granted during the years ended December 31, 2019 , 2018 and 2017 was $ 64.29 , $ 60.64 and $ 48.02 , respectively.

The total grant date fair value of restricted stock and restricted stock units vested during the years ended December 31, 2019 , 2018 and 2017 was $ 22,084 , $ 19,865 and $ 19,430 , respectively.

Performance Based Stock Awards

Under the 2018 Plan, the Company grants performance-based restricted stock units (“PRSUs”) to executive officers and other specified employees.

50 % of the PRSUs cliff vest at the end of a three -year period based on an aggregated revenue target for a three year period (“PUs”).

The remaining 50 % is based on a market condition (“MUs”) that is contingent on the Company's meeting the total shareholder return (“TSR”) relative to a group of peer companies specified under the program measured over a three -year performance period.

The award recipient may earn up to two hundred percent ( 200 % ) of the PRSUs granted based on the actual achievement of targets.

The weighted-average fair value of restricted stock units granted was as follows:

Year ended December 31,

2020 2019 2018

Weighted-average fair value $ 76.99 $ 64.29 $ 60.64

EXLSERVICE HOLDINGS, INC.

2 unchanged sentences

(In thousands, except share and per share amounts)

The total grant date fair value of restricted stock and restricted stock units vested was as follows:

Year ended December 31,

2020 2019 2018

Total grant date fair value $ 20,072 $ 22,084 $ 19,865

Performance Based Stock Awards

Under the 2018 Plan, the Company grants PRSUs to executive officers and other specified employees.

Generally the grants provide that 50 % of the PRSUs cliff vest at the end of a three-year period based on an aggregated revenue target for a three year period (“PUs”).

The award recipient may earn up to 200 % of the PRSUs granted based on the actual achievement of targets.

However, the features of the equity incentive compensation program are subject to change by the Compensation Committee of our Board of Directors.

The fair value of each PU is determined based on the market price of one common share on a day prior to the date of grant, and the associated stock compensation expense is calculated on the basis that performance targets at 100 % are probable of being achieved.

12 unchanged sentences

The fair value of each MU granted to employees is estimated on the date of grant using the following weighted average assumptions:

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2020

(In thousands, except share and per share amounts)

Year ended December 31,

2020 2019 2018

Dividend yield — — —

Expected life (years) 2.86 2.86 2.86

Risk free interest rate

Risk free interest rate for expected life 3.85 % 2.46 % 2.38 %

Volatility for expected life 34.30 % 20.52 % 21.79 %

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

Revenue Based PRSUs

Market Condition Based PRSUs

Revenue Based PRSUs Market Condition Based PRSUs

Number Weighted Average

Fair Value Number Weighted Average

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

Granted 61,368 78.29 61,352 102.10

Adjustment upon final determination of level of performance goal achievement* — — ( 4,701 ) 70.97

Vested ( 40,425 ) 60.58 ( 35,720 ) 70.97

Forfeited ( 2,736 ) 66.20 ( 2,734 ) 85.68

Outstanding at December 31, 2020 105,892 $ 72.32 105,867 $ 97.85

1 unchanged sentence

As of December 31, 2020, unrecognized compensation cost of $ 7,993 is expected to be expensed over a weighted average period of 1.75 years.

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

Impairment and Restructuring Charges

In March 2020, the Company completed the wind down of the operations of the Health Integrated business, which was reported within the former Healthcare reportable segment.

The Healthcare reportable segment was based on segment reporting structure that existed prior to the Company's transition to new segment reporting structure effective January 1, 2020, which resulted in certain changes to its reportable segments.

In connection with the wind down process, the Company recorded pre-tax costs in the consolidated statements of income under “Impairment and restructuring charges”.

The following table summarizes the activity related to the restructuring costs incurred and paid for the wind down during the year ended December 31, 2020 and 2019:

EXLSERVICE HOLDINGS, INC.

2 unchanged sentences

(In thousands, except share and per share amounts)

Impairment and Restructuring Charges

On December 31, 2019 , the Company completed substantially the previously announced wind down of the operations of the Health Integrated business, which is reported within the Healthcare reportable segment.

The operating results of this business were significantly below the Company's estimates and actual cash flows were impacted due to loss of customer contracts and cost pressures, and the Company incurred losses from this business.

The commencement of the process of winding down the Health Integrated business was previously disclosed by the Company in the Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on April 4, 2019 as amended by a Current Report on Form 8-K/A filed with the SEC on July 16, 2019.

In connection with the wind down process, the Company recorded pre-tax costs in the consolidated statements of income under “Impairment and restructuring charges”.

The following table summarizes the activity related to the restructuring costs incurred and paid for the wind down during the year ended December 31, 2019 :

Contract Termination Costs

Employee-Related Costs

Other Associated Costs

Contract Termination Costs Employee-Related Costs Other Associated Costs Total

Balance as of January 1, 2019

$ — $ — $ — $ —

Costs incurred during the year

2,597 1,375 1,072 5,044

Payments during the year

( 1,000 ) ( 269 ) ( 701 ) ( 1,970 )

Balance as of December 31, 2019

Additionally, the Company recognized impairment of ROU assets and long-lived assets of $ 3,627 during the year ended December 31, 2019 in the consolidated statements of income under "Impairment and restructuring charges".

$ 1,597 $ 1,106 $ 371 $ 3,074

Change in estimated costs during the year

( 556 ) — — ( 556 )

Payments during the year ( 1,041 ) ( 1,106 ) ( 371 ) ( 2,518 )

Balance as of December 31, 2020 $ — $ — $ — $ —

Additionally, the Company recognized impairment of ROU assets and long-lived assets of $ 0 and $ 3,627 during the years ended December 31, 2020 and 2019, respectively, in the consolidated statements of income under “Impairment and restructuring charges".

Related Party Disclosures

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

Refer to Note 18 to the consolidated financial statements for details.

The Company provides consulting services to PharmaCord, LLC.

One of the Company’s directors, Nitin Sahney, is the member-manager and chief executive officer of PharmaCord, LLC.

The Company recognized revenue of $ nil , $ 225 and $ 1,748 for the years ended December 31, 2019 , 2018 and 2017 , respectively, for services provided.

As of December 31, 2019 and 2018 , the Company had accounts receivable of $ nil and $ 5 , respectively, related to these services.

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

Refer to Note 18 – Borrowings to the consolidated financial statements for details.

Year ended December 31

2020 2019 2018

Interest expense on Notes $ 5,250 $ 5,206 $ 1,313

Commitments and Contingencies

Capital Commitments

At December 31, 2019 and 2018, the Company has committed to spend approximately $ 6,500 and $ 6,300 , respectively under agreements to purchase property and equipment.

At December 31, 2020 and 2019, the Company had committed to spend approximately $ 6,100 and $ 6,500 , respectively under agreements to purchase property and equipment.

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

Other Commitments

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

Certain units of the Company’s Indian subsidiaries were established as 100 % Export-Oriented units or under the STPI or 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.

The Company has undertaken to pay custom duties, service taxes, levies, and liquidated damages payable, if any, in respect of imported and indigenous capital goods, stores and spares consumed

EXLSERVICE HOLDINGS, INC.

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(In thousands, except share and per share amounts)

Company has undertaken to pay custom duties, service taxes, levies, and liquidated damages payable, if any, in respect of imported and indigenous capital goods, stores and spares consumed duty free, in the event that certain terms and conditions are not fulfilled.

duty free, in the event that certain terms and conditions are not fulfilled.

The Company’s management believes, however, that these units have in the past satisfied and will continue to satisfy the required conditions.

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The Company’s management believes that these centers have in the past satisfied and will continue to satisfy the required criteria.

In March 2017, the Company was named as a defendant in a putative class action lawsuit filed in California, which challenged the classification of independent contractors.

The parties participated in a mediation in early 2018.

As the result of the mediation, a settlement was reached pursuant to which the Company agreed, without admission of wrongdoing, to pay a total of $ 2,400 , of which $ 1,200 was paid in 2018 and the remainder was paid in 2019.

Contingencies

13 unchanged sentences

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

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

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

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

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Due to such challenges and a lack of interpretive guidance, and based on legal advice, the Company believes it is currently impracticable to reliably estimate the timing and amount of any payments the Company may be required to make.

Accordingly, the Company will re-evaluate the amount of a potential provision, if any, upon further developments.

From time to time, the Company and/or its present officers or directors, on individual basis, may be or have been, named as a defendant in litigation matters, including employment-related claims.

The plaintiffs in those cases seek damages, including, where applicable, compensatory damages, punitive damages and attorney’s fees.

With respect to pending litigation matters as of the reporting date, the Company believes that the damages amounts claimed in such cases are not meaningful indicators of the

The Company will continue to monitor and evaluate its position based on future events and developments in this matter for the implications on the financial statements, if any.

In September 2020, the Indian Parliament passed various consolidating labor codes, including the Code on Social Security, 2020 (the “Indian Social Security Code”) which aims to rationalize labor laws.

The Indian Social Security Code has implications on defined social security contribution plans, provision of certain benefits or facilities to employees at employer’s costs and post-retirement benefits.

Most specifically, it broadens the definition of an employee and wages and liberalizes the definition of “continuous period” for the purpose of determining employee benefits, amongst others.

However, the rules for the Indian Social Security Code are yet to be published and the effective date from which these changes are applicable is yet to be notified.

The Company will complete its evaluation once the subject rules are notified and will give appropriate impact in the

EXLSERVICE HOLDINGS, INC.

2 unchanged sentences

(In thousands, except share and per share amounts)

potential liabilities of the Company, that these matters are without merit, and that the Company intends to vigorously defend each of them.

financial statements in the period in which, the Indian Social Security Code becomes effective and the related rules to determine the financial impact are published.

From time to time, the Company and/or its present officers or directors, on individual basis, may be or have been, named as a defendant in litigation matters, including employment-related claims.

The plaintiffs in those cases seek damages, including, where applicable, compensatory damages, punitive damages and attorney’s fees.

With respect to pending litigation matters as of the reporting date, the Company believes that the damages amounts claimed in such cases are not meaningful indicators of the potential liabilities of the Company, that these matters are without merit, and that the Company intends to vigorously defend each of them.

The outcomes of legal actions are unpredictable and subject to significant uncertainties, and thus it is inherently difficult to determine the likelihood of the Company incurring a material loss or quantification of any such loss.

1 unchanged sentence

Based on the Company’s assessment, including the availability of insurance recoveries, the Company’s management does not believe that currently pending litigation, individually or in aggregate, will have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows.

Impact of adoption of accounting guidance on prior year’s presentation and disclosures

Effective January 1, 2018, the Company adopted ASU No.

2017-07, Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post Retirement Benefit Cost .

Accordingly, the Company retrospectively included only the service cost component of the net periodic benefit cost in the same line item or items on the consolidated statements of income as other compensation costs arising from services rendered by the respective employees during the period.

The other components of net periodic benefit cost, which included interest cost, expected return on plan assets and amortization of actuarial gains/loss, were reclassified from “Cost of revenues”, “General and administrative expenses” and “Selling and marketing expenses” to “Other income, net”.

The effect of the adoption of ASU No.

2017-07 (Topic 715) on 2017 financial information is summarized as follows:

Year ended December 31,

Previously reported

Effect of change increase/(decrease)

Location in consolidated statements of income

Cost of revenues

General and administrative expenses

Selling and marketing expenses

Other income, net

Year ended December 31,

Cost of revenues previously reported

Cost of revenues as revised

Effect of change increase/(decrease)

Segment information (refer Note 3)

Operating Expenses

Foreign exchange gain, interest expense and other income, net

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

December 31, 2019

(In thousands, except share and per share amounts)

Effective January 1, 2018, the Company adopted ASU 2016-18, Statements of Cash Flows (Topic 230), Restricted Cash.

Accordingly, for 2017, restricted cash and restricted cash equivalents is included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the consolidated statements of cash flows.

The effect of the adoption of ASU No.

2016-18 (Topic 230) on 2017 financial information is summarized as follows:

Year ended December 31,

Previously reported

Effect of change increase/(decrease)

Consolidated statements of cash flows

Net cash provided by operating activities

Effect of exchange rate changes on cash, cash equivalents and restricted cash

Net increase/(decrease) in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash - beginning of year

Cash, cash equivalents and restricted cash - end of year

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

What changed 10-K

Item 9A. Controls and Procedures