Item 2. Management’s Discussion and Analysis
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in connection with our unaudited consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Some of the statements in the following discussion are forward looking statements. Dollar amounts within Item 2 are presented as actual, rounded, dollar amounts.
We have described in this Quarterly Report on Form 10-Q, the impact of the global Coronavirus Disease 2019 pandemic (“COVID-19”) on our financial results for the quarter ended March 31, 2021. See "Cautionary Note Regarding Forward-Looking Statements" below, Item 1A -“Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q and Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 for further information regarding risks and uncertainties relating to COVID-19.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995. You should not place undue reliance on these statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. These statements often include words such as “may,” “will,” “should,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or similar expressions. These statements are based on assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this Quarterly Report on Form 10-Q, you should understand that these statements are not guarantees of performance or results. They involve known and unknown risks, uncertainties and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements. Many of the following risks, uncertainties and other factors identified below have been, and will be, amplified by the COVID-19 pandemic (“COVID-19”). These factors include but are not limited to:
• the impact of COVID-19 and related response measures on our business, results of operations and financial condition, including the impact of governmental lockdowns and other restrictions on our operations and processes and those of our clients and suppliers;
• our dependence on a limited number of clients in a limited number of industries;
• worldwide political, economic or business conditions;
• negative public reaction in the U.S. or elsewhere to offshore outsourcing;
• fluctuations in our earnings;
• our ability to attract and retain clients including in a timely manner;
• our ability to successfully consummate or integrate strategic acquisitions;
• our ability to accurately estimate and/or manage the costs and/or timing of winding down businesses;
• restrictions on immigration;
• our ability to hire and retain enough sufficiently trained employees to support our operations;
• our ability to grow our business or effectively manage growth and international operations;
• any changes in the senior management team;
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• increasing competition in our industry;
• telecommunications or technology disruptions or breaches, natural or other disasters, or medical epidemics or pandemics;
• our ability to withstand the loss of a significant customer;
• our ability to realize the entire book value of goodwill and other intangible assets from acquisitions;
• our ability to make accurate estimates and assumptions in connection with the preparation of our consolidated financial statements;
• regulatory, legislative and judicial developments, including changes to or the withdrawal of governmental fiscal incentives;
• changes in tax laws or decisions regarding repatriation of funds held abroad;
• ability to service debt or obtain additional financing on favorable terms;
• legal liability arising out of customer contracts;
• technological innovation;
• political or economic instability in the geographies in which we operate;
• operational and information security failures arising as a result of remote work solutions adopted due to COVID-19;
• cyber security incidents, data breaches, or other unauthorized disclosure of sensitive or confidential client and customer data; and
• adverse outcome of our disputes with the Indian tax authorities.
These and other factors are more fully discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. These and other risks could cause actual results to differ materially from those implied by forward-looking statements in this Quarterly Report on Form 10-Q.
The forward-looking statements made by us in this Quarterly Report on Form 10-Q, or elsewhere, speak only as of the date on which they were made. New risks and uncertainties come up from time to time, and it is impossible for us to predict those events or how they may affect us. We have no obligation to update any forward-looking statements in this Quarterly Report on Form 10-Q after the date of this Quarterly Report on Form 10-Q, except as required by federal securities laws.
Executive Overview
We are a leading operations management and analytics company that helps our clients build and grow sustainable businesses. By orchestrating our domain expertise, data, analytics and digital technology, we look deeper to design and manage agile, customer-centric operating models to improve global operations, drive profitability, enhance customer satisfaction, increase data-driven insights, and manage risk and compliance. We serve customers in multiple industries, including insurance, healthcare, banking and financial services, utilities, travel, transportation and logistics, media and retail, among others.
We operate in the business process management (“BPM”) industry and we provide operations management and analytics services. We manage and report financial information through our four strategic business units: Insurance, Healthcare, Analytics and Emerging Business.
Our global delivery network, which includes highly trained industry and process specialists across the United States, Latin America, South Africa, Europe and Asia (primarily India and the Philippines), is a key asset. We have operations centers in India, the United States, the United Kingdom, the Philippines, Bulgaria, Colombia, South Africa, Romania and the Czech Republic.
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Continued impact of COVID-19 on Our Business
The global COVID-19 pandemic continues to materially impact worldwide economic activity and levels of business confidence and has had widespread, rapidly-evolving and unpredictable impacts on global societies, economies, financial markets and business practices. During 2020, COVID-19 materially impacted our business, however during the first fiscal quarter of 2021, we saw moderate improvement in key indicators. Over the course of 2020, and continuing into 2021, our customers, contractors, suppliers, and other partners adapted in order to conduct business activities in a COVID-19 environment. The U.S. economy continued on a path to recovery in the first quarter of 2021 with millions of Americans receiving the COVID-19 vaccine, and states and municipalities increasingly reopening. In addition, the U.S. federal government continued to enact policies to provide fiscal stimulus to the economy and relief to those affected by the pandemic. As the global economy begins to emerge from the impact of COVID-19 in 2021, our clients are focused on receiving personalized customer experiences, optimizing costs and supporting resilient operating models. We remain committed to helping our clients adapt and thrive through the ongoing uncertainties caused by COVID-19 and, going forward, to the shifting business environment. Notwithstanding the moderate improvement in conditions during the first quarter of 2021, the COVID-19 pandemic continues, and due to the associated uncertainties, we continue to evaluate the nature and scope of the impact to our business and may take further strategic actions in order to manage our business operations, costs and liquidity in response to the ongoing impacts and changing conditions and markets resulting from COVID-19.
We have a business continuity plan in place and have adapted delivery to a work from home model, while actively working to understand our clients’ changing requirements, continuing to ensure data security, prioritizing critical processes, adjusting service levels and managing discretionary costs (such as travel costs) and fixed costs (such as non-critical personnel costs). We have made ongoing efforts to reduce our reliance on travel by incorporating into our business model the ability to conduct business using virtual conferencing and collaboration tools. Our work from home delivery capability steadily improved throughout 2020 and continued to improve during the first quarter of 2021. We estimate that we are able to deliver a significant portion of our clients’ current requirements in a work from home model given the current lockdown restrictions in the locations in which we operate and certain clients not authorizing us to perform the remaining process work remotely due to its sensitive nature. In addition, we have also worked, and continue to work with national, state, and local authorities to comply with applicable rules and regulations related to COVID-19. There continues to be volatility and economic and geopolitical uncertainty in many markets around the world. Despite the efforts described above, there is a risk that if jurisdictions in which we operate reinstate prior restrictions, stagnate in their reopening processes, or implement new restrictions in response to new outbreaks or continued spread, our operations and business could be materially impacted. In late March 2021, a new serious outbreak of the COVID-19 virus began affecting India with an exorbitant spike in the number of COVID patients. The Indian government has reinstated lockdowns limiting in certain cases the movement of our employees to offices. During the same period, the Philippines also began experiencing a spike in the number of COVID patients. Although at present our Indian and Philippines operations have not been materially affected and we have initiated appropriate business continuity procedures, it is possible that these new developments could adversely affect our business and results of operations.
We also took actions in response to the pandemic that focused on helping our employees. These actions included disseminating guidance and information to our employees, facilitating work from home, implementing best practices for employees while working from home, periodic CEO messaging, various programs aimed at employee wellness, including a global wellness program, enhanced leave for employees affected by COVID-19, enhanced awareness towards information security, and updated cyber security and data privacy policies, among others. We have implemented broad travel restrictions and largely moved to virtual-only events for the safety of our employees and our customers. We also implemented pandemic-specific protocols for our essential employees whose jobs require them to be on-site or with our customers by implementing additional safety measures at all of our facilities, including increased frequency in cleaning and disinfecting, and enhanced hygiene and social distancing practices.
We continue to incur additional costs in order to ensure the continuity of our operations and shift towards a work from home model. Such costs include purchase of desktops and laptops for our employees, software and internet connectivity devices, technology tools for productivity enhancement, accommodation, meal, overtime, transportation and regular sanitization and cleaning costs of our offices and facilities. We also expect that we will continue to incur additional costs to monitor and improve operational efficiency of our work from home model, implement new information technology solutions and security measures to safeguard against information security risks and protect the health and safety of our employees as they gradually return to the office. We believe that these short-to-medium-term costs may benefit us in the long-term, as these steps have
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broadened our “remote working” capabilities, which we expect to become a permanent feature in our future delivery model, as well as our business continuity plans.
In response to certain anticipated impacts from COVID-19, we implemented a series of temporary cost reduction measures in 2020 which continued in the first quarter of 2021 to further preserve financial flexibility. These actions included the postponement of certain discretionary spending including travel and marketing expenses, reevaluating the pace of our capital expenditures, rationalizing certain of our real estate and facilities, deferring non-critical hiring among others.
Certain impacts of COVID-19 on our business, results of operations, financial position and cash flow during the first quarter of 2021 has been described above and below, however the full extent of the impact for the period beyond the first quarter of 2021 is currently uncertain and will depend on many factors that are not within our control, including, but not limited to: the duration and scope of the pandemic; the effectiveness of actions taken to contain or mitigate the pandemic and prevent or limit any reoccurrence; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; development and availability of effective treatments and vaccines and the speed at which such vaccines are administered; significant increases in healthcare costs in the event that a significant number of our personnel become infected with COVID-19 and require medical treatment; general economic uncertainty in key global markets and financial market volatility; global economic conditions and levels of economic growth; and the pace of recovery when COVID-19 subsides. Due to the above circumstances and as described generally in this Quarterly Report on Form 10-Q, our financial results, including but not limited to net revenues, income from operations, net income, cash flow and earnings per share, are not necessarily indicative of the results to be expected for the full fiscal year of 2021. We continue to monitor the implications of COVID-19 on our business, as well as our customers’ and suppliers’ businesses.
For additional information and risks related to COVID-19, see Item 1A - “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q and Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Revenues
For the three months ended March 31, 2021, we had revenues of $261.4 million compared to revenues of $246.0 million for the three months ended March 31, 2020, an increase of $15.4 million, or 6.3%.
We serve clients mainly in the United States and the United Kingdom, with these two regions generating 85.8% and 9.5%, respectively, of our total revenues for the three months ended March 31, 2021, and 84.5% and 9.5%, respectively, of our revenues for the three months ended March 31, 2020.
For the three months ended March 31, 2021 and 2020, our total revenues from our top ten clients accounted for 39.3% and 37.3% of our total revenues, respectively. Our revenue concentration with our top clients remains largely consistent year-over-year and we continue to develop relationships with new clients to diversify our client base. We believe that the loss of any of our top ten clients could have a material adverse effect on our financial performance.
Our Business
We provide operations management and analytics services. We market our services to our existing and prospective clients through our sales and client management teams, which are aligned by key industry verticals and cross-industry domains such as finance and accounting. Our sales and client management teams operate from the United States, Europe and Australia.
Operations Management Services: We provide our clients with a range of operations management services from our Insurance, Healthcare and Emerging Business operating segments, which typically involve the transfer by our clients to EXL of certain of their business operations, such as claims processing, clinical operations, or financial transaction processing, after which we administer and manage those operations on an ongoing basis. As part of this transfer, we hire and train employees to work at our operations centers on the relevant business operations, implement a process migration to these operations centers and then provide services either to the client or directly to the client’s customers. Each client contract has different terms based on the scope, deliverables and complexity of the engagement. We also provide consulting services related to operations management that include industry-specific digital transformational services as well as cross-industry finance and accounting services as part of the Emerging Business operating segment.
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We provide our services under contracts with our clients, which typically have terms of three or more years, with some being rolling contracts with no end dates. Typically, our clients can terminate these contracts with or without cause and with short notice periods. These contracts provide us with a relatively predictable revenue base for a substantial portion of our operations management business. However, we have a long selling cycle for our services and the budget and approval processes of prospective clients make it difficult to predict the timing of entering into definitive agreements with new clients. Similarly, new license sales and implementation projects for our technology service platforms and other software-based services have a long selling cycle, however ongoing annual maintenance and support contracts for existing arrangements provide us with a relatively predictable revenue base.
We charge for our services using various pricing models like time-and-material pricing, full-time-equivalent pricing, transaction-based pricing, outcome-based pricing, subscription-based pricing and other alternative pricing models. Outcome-based pricing arrangements are examples of non-linear pricing models where clients link revenues from platforms and solutions and the services we provide to usage or savings rather than the efforts deployed to provide these services. We continue to observe a shift in the industry pricing models toward transaction-based pricing, outcome-based pricing and other alternative pricing models. We believe this trend will continue and we use such alternative pricing models with some of our current clients and are seeking to move certain other clients from a full-time-equivalent pricing model to a transaction-based or other alternative pricing model. These alternative pricing models place the focus on operating efficiency in order to maintain or improve our gross margins.
We have also observed that prospective larger clients are entering into multi-vendor relationships with regard to their outsourcing needs. We believe that the trend toward multi-vendor relationships will continue. A multi-vendor relationship allows a client to seek more favorable pricing and other contract terms from each vendor, which can result in significantly reduced gross margins from the provision of services to such client for each vendor. To the extent our large clients expand their use of multi-vendor relationships and are able to extract more favorable contract terms from other vendors, our gross margins and revenues may be reduced with regard to such clients if we are required to modify the terms of our relationships with such clients to meet competition.
Analytics: Our analytics services focus on driving improved business outcomes for our customers by unlocking deep insights from data and create data driven solutions across all parts of our customers’ business. We also provide care optimization and reimbursement optimization services, for our clients through our healthcare analytics solutions and services. We also offer integrated solutions to help our clients in cost containment by leveraging technology platforms, customizable and configurable analytics and expertise in healthcare reimbursements to help clients enhance their claim payment accuracy. Our teams deliver predictive and prescriptive analytics in the areas of customer acquisition and lifecycle management, risk underwriting and pricing, operational effectiveness, credit and operational risk monitoring and governance, regulatory reporting, payment integrity and care management and data management. We enhance, modernize and enrich structured and unstructured data and use a spectrum of advanced analytical tools and techniques, including our in-house Machine Learning (“ML”) and Artificial Intelligence (“AI”) capabilities to create insights and improve decision making for our clients. We actively cross-sell and, where appropriate, integrate our Analytics services with other operations management services as part of a comprehensive offering for our clients.
We anticipate that revenues from our analytics services will grow as we expand our service offerings and client base, both organically and through acquisitions.
Critical Accounting Policies and Estimates
There have been no significant changes in our critical accounting policies and estimates during the three months ended March 31, 2021, as compared to the critical accounting policies and estimates referred in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Critical Accounting Policies and Estimates” and Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
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Results of Operations
The following table summarizes our results of operations for the three months ended March 31, 2021 and 2020:
Three months ended March 31,
2021 2020
(dollars in millions)
Revenues, net $ 261.4 $ 246.0
Cost of revenues (1)
158.8 162.7
Gross profit (1)
102.6 83.3
Operating expenses:
General and administrative expenses 30.7 28.9
Selling and marketing expenses 18.2 14.5
Depreciation and amortization expense 12.1 12.4
Total operating expenses 61.0 55.8
Income from operations 41.6 27.5
Foreign exchange gain, net 0.4 1.4
Interest expense (2.5) (3.1)
Other income, net 1.4 2.5
Income before income tax expense and earnings from equity affiliates 40.9 28.3
Income tax expense 9.0 5.8
Income before earnings from equity affiliates 31.9 22.5
Loss from equity-method investment — 0.1
Net income attributable to ExlService Holdings, Inc. stockholders $ 31.9 $ 22.4
(1) Exclusive of depreciation and amortization expense.
Due to rounding, the numbers presented in the tables included in this Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” may not add up precisely to the totals provided.
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Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
Revenues.
The following table summarizes our revenues by reportable segments for the three months ended March 31, 2021 and 2020:
Three months ended March 31, Percentage
change
2021 2020 Change
(dollars in millions)
Insurance $ 91.1 $ 83.7 $ 7.4 8.9 %
Healthcare 30.3 27.0 3.3 12.0 %
Emerging Business 37.7 42.8 (5.1) (12.0) %
Analytics 102.3 92.5 9.8 10.7 %
Total revenues, net $ 261.4 $ 246.0 $ 15.4 6.3 %
Revenues for the three months ended March 31, 2021 were $261.4 million, up $15.4 million, or 6.3%, compared to the three months ended March 31, 2020.
Revenue growth in Insurance of $7.4 million was primarily driven by expansion of business from our existing clients aggregating to $6.4 million and an increase in revenues of $1.1 million that was mainly attributable to the appreciation of the Australian dollar and the U.K. pound sterling against the U.S. dollar during the three months ended March 31, 2021, compared to the three months ended March 31, 2020. Insurance revenues were 34.9% and 34.0% of our total revenues in the three months ended March 31, 2021 and March 31, 2020, respectively.
Revenue growth in Healthcare of $3.3 million was primarily driven by expansion of business from our new and existing clients aggregating to $3.2 million during the three months ended March 31, 2021. Healthcare revenues were 11.6% and 11.0% of our total revenues in the three months ended March 31, 2021 and March 31, 2020, respectively.
Revenue decline in Emerging Business of $5.1 million was primarily driven by lower travel and transportation volumes due to the impact of COVID-19. Emerging Business revenues were 14.4% and 17.4% of our total revenues in the three months ended March 31, 2021 and March 31, 2020, respectively.
Revenue growth in Analytics of $9.8 million was attributable to the higher volumes in our annuity and project-based engagements from our new and existing clients of $9.2 million and an increase in revenues of $0.6 million mainly attributable to the appreciation of the U.K. pound sterling against the U.S. dollar during the three months ended March 31, 2021, compared to the three months ended March 31, 2020. Analytics revenues were 39.1% and 37.6% of our total revenues in the three months ended March 31, 2021 and March 31, 2020, respectively.
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Cost of Revenues and Gross Margin : The following table sets forth cost of revenues and gross margin of our reportable segments.
Cost of Revenues Gross Margin
Three months ended March 31, Percentage change Three months ended March 31, Change
2021 2020 Change 2021 2020
(dollars in millions)
Insurance $ 56.1 $ 59.0 $ (2.9) (4.9) % 38.5 % 29.6 % 8.9 %
Healthcare 17.4 19.6 (2.2) (11.2) % 42.5 % 27.5 % 15.0 %
Emerging Business 20.8 25.5 (4.7) (18.2) % 44.7 % 40.5 % 4.2 %
Analytics 64.5 58.6 5.9 10.0 % 37.0 % 36.6 % 0.4 %
Total $ 158.8 $ 162.7 $ (3.9) (2.4) % 39.2 % 33.9 % 5.3 %
For the three months ended March 31, 2021, cost of revenues was $158.8 million compared to $162.7 million for the three months ended March 31, 2020, a decrease of $3.9 million, or 2.4%. Our gross margin for the three months ended March 31, 2021 was 39.2% compared to 33.9% for the three months ended March 31, 2020, an increase of 530 basis points (“bps”) primarily driven by higher revenues and lower operating costs.
The decrease in cost of revenues in Insurance of $2.9 million was primarily due to decreases in travel costs of $1.9 million, lower employee-related costs of $1.1 million and foreign exchange gain, net of hedging of $0.3 million. This was partially offset by higher technology costs of $0.4 million, primarily due to increased usage of the work from home model. Gross margin in Insurance increased by 890 bps during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to higher revenues, expansion in margin in certain existing clients and operational efficiencies during the three months ended March 31, 2021.
The decrease in cost of revenues in Healthcare of $2.2 million was primarily due to decreases in employee-related costs of $2.5 million and lower travel costs of $0.3 million. This was partially offset by higher technology costs of $0.4 million, primarily due to increased usage of the work from home model and facilities cost of $0.2 million. Gross margin in Healthcare increased by 1,500 bps during the three months ended March 31, 2021, compared to the three months ended March 31, 2020, primarily due to higher revenues and increased mix of higher margin business during the three months ended March 31, 2021.
The decrease in cost of revenues in Emerging Business of $4.7 million was primarily due to a decreases in employee-related costs of $3.5 million, lower facilities costs of $0.7 million and lower travel costs of $0.5 million. Gross margin in Emerging Business increased by 420 bps during the three months ended March 31, 2021, compared to the three months ended March 31, 2020, primarily due to decrease in employee-related costs and other operating costs, partially offset by lower revenues during the three months ended March 31, 2021.
The increase in cost of revenues in Analytics of $5.9 million was primarily due to increase in employee-related costs of $4.8 million, higher other operating costs of $3.0 million and higher technology costs of $0.8 million. This was partially offset by lower travel costs of $1.7 million, foreign exchange gain, net of hedging of $0.4 million and lower facilities costs of $0.6 million. Gross margin in Analytics increased by 40 bps during the three months ended March 31, 2021, compared to the three months ended March 31, 2020, primarily due to higher revenues and increased mix of higher margin business during the three months ended March 31, 2021.
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Selling, General and Administrative (“SG&A”) Expenses.
Three months ended March 31, Change Percentage
change
2021 2020
(dollars in millions)
General and administrative expenses $ 30.7 $ 28.9 $ 1.8 6.1 %
Selling and marketing expenses 18.2 14.5 3.7 26.1 %
Selling, general and administrative expenses $ 48.9 $ 43.4 $ 5.5 12.8 %
As a percentage of revenues 18.7 % 17.6 %
The increase in SG&A expenses of $5.5 million was primarily due to higher employee-related costs of $6.9 million, higher other operating costs of $1.2 million, partially offset by lower facilities costs of $1.5 million and lower travel costs of $1.1 million due to COVID-19 cost reduction measures.
Depreciation and Amortization.
Three months ended March 31, Change Percentage
change
2021 2020
(dollars in millions)
Depreciation expense $ 8.7 $ 8.3 $ 0.4 5.3 %
Intangible amortization expense 3.4 4.1 (0.7) (19.1) %
Depreciation and amortization expense $ 12.1 $ 12.4 $ (0.3) (2.8) %
As a percentage of revenues 4.6 % 5.1 %
The decrease in intangibles amortization expense of $0.7 million was primarily due to end of useful lives for certain intangible assets during the three months ended March 31, 2021, compared to the three months ended March 31, 2020. The increase in depreciation expense of $0.4 million was primarily due to depreciation related to our investments in new operating centers, internally developed software and accelerated depreciation resulting from a reduction in useful lives related to certain operating centers, due to the impact of COVID-19.
Income from Operations. Income from operations increased by $14.1 million, or 51.2%, from $27.5 million for the three months ended March 31, 2020 to $41.6 million for the three months ended March 31, 2021, primarily due to higher revenues and lower cost of revenues, partially offset by higher SG&A expenses during the three months ended March 31, 2021. As a percentage of revenues, income from operations increased from 11.2% for the three months ended March 31, 2020 to 15.9% for the three months ended March 31, 2021.
Foreign Exchange Gain/(Loss). Net foreign exchange gains and losses are primarily attributable to the movement of the U.S. dollar against the Indian rupee, the U.K. pound sterling, the Philippine peso and the South African ZAR during the three months ended March 31, 2021. The average exchange rate of the U.S. dollar against the Indian rupee increased from 73.08 during the three months ended March 31, 2020 to 73.17 during the three months ended March 31, 2021. The average exchange rate of the U.K. pound sterling against the U.S. dollar increased from 1.28 during the three months ended March 31, 2020 to 1.38 during the three months ended March 31, 2021. The average exchange rate of the U.S. dollar against the Philippine peso decreased from 50.83 during the three months ended March 31, 2020 to 48.39 during the three months ended March 31, 2021. The average exchange rate of the U.S. dollar against the South African ZAR decreased from 16.13 during the three months ended March 31, 2020 to 15.02 during the three months ended March 31, 2021.
We recorded a net foreign exchange gain of $0.4 million for the three months ended March 31, 2021 compared to the net foreign exchange gain of $1.4 million for the three months ended March 31, 2020.
Interest expense. Interest expense decreased from $3.1 million for the three months ended March 31, 2020 to $2.5 million for the three months ended March 31, 2021, primarily due to lower outstanding borrowings and lower effective interest rates of 2.0% under our Credit Facility during the three months ended March 31, 2021, compared to 3.0% during the three months ended March 31, 2020.
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Other Income, net.
Three months ended March 31, Percentage
change
2021 2020 Change
(dollars in millions)
Gain on sale and mark-to-market of mutual funds $ 1.1 $ 2.0 $ (0.9) (46.4) %
Interest and dividend income 0.6 0.5 0.1 13.2 %
Other, net (0.3) — (0.3) 100.0 %
Other income, net $ 1.4 $ 2.5 $ (1.1) (44.2) %
Other income, net decreased by $1.1 million, from $2.5 million for the three months ended March 31, 2020 to $1.4 million for the three months ended March 31, 2021, primarily due to lower return on mutual fund investments of $1.0 million during the three months ended March 31, 2021, compared to the three months ended March 31, 2020.
Income Tax Expense. The effective tax rate increased from 20.7% during the three months ended March 31, 2020 to 21.9% during the three months ended March 31, 2021. We recorded income tax expense of $9.0 million and $5.8 million for the three months ended March 31, 2021 and 2020, respectively. The increase in income tax expense was primarily as a result of higher profit during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.
Net Income. Net income increased from $22.4 million for the three months ended March 31, 2020 to $31.9 million for the three months ended March 31, 2021, primarily due to increase in income from operations of $14.1 million and lower interest expense of $0.6 million, partially offset by higher income tax expense of $3.2 million, lower other income, net of $1.1 million and lower foreign exchange gain, net of $1.0 million. As a percentage of revenues, net income increased from 9.1% for the three months ended March 31, 2020 to 12.2% for the three months ended March 31, 2021.
Liquidity and Capital Resources
Three months ended March 31,
2021 2020
(dollars in millions)
Opening cash, cash equivalents and restricted cash $ 225.5 $ 127.0
Net cash provided by/(used for) operating activities 15.2 (13.6)
Net cash (used for)/provided by investing activities (26.0) 36.0
Net cash (used for)/provided by financing activities (29.0) 86.7
Effect of exchange rate changes (1.0) (2.6)
Closing cash, cash equivalents and restricted cash $ 184.7 $ 233.5
As of March 31, 2021 and 2020, we had $375.8 million and $367.4 million, respectively, in cash, cash equivalents and short-term investments, of which $337.5 million, and $273.9 million, respectively, is located in foreign jurisdictions that upon distribution may be subject to withholding and other taxes. We periodically evaluate opportunities regarding distribution to fund our operations in the United States and other geographies, and as and when we decide to distribute, we may have to accrue additional taxes in accordance with local tax laws, rules and regulations in the relevant foreign jurisdictions.
Operating Activities:
Net cash provided by operating activities was $15.2 million for the three months ended March 31, 2021 compared to net cash used by operating activities of $13.6 million for the three months ended March 31, 2020, reflecting higher cash earnings along with lower working capital needs. The major drivers contributing to the increase of $28.8 million year-over-year included the following:
• Increase in net income of $9.5 million in the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to an increase in income from operations of $14.1 million driven by higher revenues
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and lower cost of revenues, offset by higher income tax expense of $3.1 million and lower other income, net of interest expense of $1.5 million.
• Changes in accounts receivable, including advance billings, contributed lower cash flow of $14.9 million in the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The decrease was a result of the advance collections from certain customers during the three months ended December 31, 2020, partially offset by higher collections of our accounts receivables during the three months ended March 31, 2021. Our accounts receivable days sales outstanding improved to 54 days as of March 31, 2021 from 68 days as of March 31, 2020.
• Increase in accrued employee costs, accrued expenses and other liabilities contributed higher cash flow of $24.2 million in the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increase was primarily due to lower payment and higher provisions of annual performance incentive of $12.3 million and higher accrued expenses of $11.9 million, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.
• Other drivers increasing cash flows in the three months ended March 31, 2021 compared to the three months ended March 31, 2020 included: income tax expense, net of advances and deferred taxes, of $9.9 million, primarily due to higher income tax provisions and timing of payments.
Investing Activities: Cash flows used for investing activities were $26.0 million for the three months ended March 31, 2021 as compared to cash flows provided by investing activities of $36.0 million for the three months ended March 31, 2020. The decrease is mainly due to net purchase of investments of $13.5 million during three months ended March 31, 2021 as compared to net redemption of investments of $49.0 million during the three months ended March 31, 2020, higher capital expenditures for purchase of long-lived assets, including investments in infrastructure, technology assets, software and product developments of $0.3 million, partially offset by an acquisition of an additional stake in our equity affiliate of $0.7 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2021.
Financing Activities: Cash flows used for financing activities were $29.0 million during the three months ended March 31, 2021 as compared to cash flows provided by financing activities of $86.7 million during the three months ended March 31, 2020. The decrease was primarily due to net proceeds of $99.8 million under our revolving Credit Facility and higher proceeds received from the exercise of stock options of $0.9 million during the three months ended March 31, 2020. This was partially offset by higher purchases of treasury stock by $15.0 million under our share repurchase program during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.
We expect to use cash from operating activities to maintain and expand our business by making investments, primarily related to new facilities and capital expenditures associated with leasehold improvements to build our facilities, digital capabilities and purchase telecommunications equipment and computer hardware and software in connection with managing client operations.
We incurred $12.7 million of capital expenditures in the three months ended March 31, 2021. We expect to incur total capital expenditures of between $35.0 million to $40.0 million in 2021, primarily to meet our growth requirements, including additions to our facilities as well as investments in technology applications, product development, digital technology, advanced automation, robotics and infrastructure.
In connection with any tax assessment orders that have been issued or may be issued against us or our subsidiaries, we may be required to deposit additional amounts with respect to such assessment orders (see Note 24 - Commitments and Contingencies to our unaudited consolidated financial statements herein for further details). We anticipate that we will continue to rely upon cash from operating activities to finance our smaller acquisitions, capital expenditures and working capital needs. If we have significant growth through acquisitions, we may need to obtain additional financing.
The Coronavirus Aid, Relief, and Economic Security Act, (the “CARES Act”) allows employers to defer the payment of the employer share of Federal Insurance Contributions Act (“FICA”) taxes for the period from April 1, 2020 and ending December 31, 2020. As of March 31, 2021 and December 31, 2020, we deferred our contributions to FICA of $6.3 million,
respectively, under the CARES Act. The deferred amount will be payable as follows: (1) 50% of the deferred amount will be paid on December 31, 2021 and (2) the remaining 50% of the deferred amount will be paid on December 31, 2022.
Financing Arrangements (Debt Facility and Notes)
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The following tables summarizes our Debt balances as of March 31, 2021 and December 31, 2020.
As of March 31, 2021
(dollars in millions)
Revolving Credit
Facility Notes Total
Current portion of long-term borrowings $ 25.0 $ — $ 25.0
Long-term borrowings $ 64.0 $ 150.0 $ 214.0
Unamortized debt discount — (10.6) (10.6)
Unamortized debt issuance costs* — (0.8) (0.8)
Long-term borrowings $ 64.0 $ 138.7 $ 202.7
Total borrowings $ 89.0 $ 138.7 $ 227.7
As of December 31, 2020
(dollars in millions)
Revolving Credit
Facility Notes Total
Current portion of long-term borrowings $ 25.0 $ — $ 25.0
Long-term borrowings $ 64.0 $ 150.0 $ 214.0
Unamortized debt discount — (11.2) (11.2)
Unamortized debt issuance costs* — (0.8) (0.8)
Long-term borrowings $ 64.0 $ 138.0 $ 202.0
Total borrowings $ 89.0 $ 138.0 $ 227.0
*Unamortized debt issuance costs for our revolving Credit Facility of $0.4 million and $0.5 million as of March 31, 2021 and December 31, 2020, respectively, is presented under “Other current assets” and “Other assets” in our consolidated balance sheets.
See Note 17 - Borrowings to our unaudited consolidated financial statements herein for further details on our debt facilities.
Off-Balance Sheet Arrangements
In the ordinary course of business, we provide standby letters of credit to third parties primarily for facility leases. As of March 31, 2021 and December 31, 2020, we had outstanding letters of credit of $0.5 million, each, that were not recognized in our unaudited and audited consolidated balance sheets, respectively. These are not reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We had no other off balance sheet arrangements or obligations.
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Contractual Obligations
The following table sets forth our contractual obligations as of March 31, 2021:
Payment Due by Period
Less than 1-3 4-5 After
1 year years years 5 years Total
(dollars in millions)
Finance leases $ 0.3 $ 0.3 $ — $ — $ 0.6
Operating leases (a)
25.1 46.6 24.3 32.3 128.3
Purchase obligations 3.3 — — — 3.3
Other obligations (b)
2.8 5.0 3.9 7.0 18.7
Borrowings:
Principal payments (c)
25.0 64.0 150.0 — 239.0
Interest payments (d)
6.1 10.9 5.3 — 22.3
Total contractual cash obligations (e)
$ 62.6 $ 126.8 $ 183.5 $ 39.3 $ 412.2
(a) Represents undiscounted operating lease liabilities payable over the lease term.
(b) Represents estimated employee benefit payments under the Gratuity Plan.
(c) Represents our intent and ability to settle the principal amount of our Notes of $150 million in cash and does not reflect any assumptions about our ability or intent to settle the Notes before their maturity.
(d) Interest on borrowings is calculated based on the interest rate on the outstanding borrowings as of March 31, 2021.
(e) Excludes $0.9 million related to uncertain tax positions, since the extent of the amount and timing of payment is currently not reliably estimable or determinable.
Certain units of our Indian subsidiaries were established as 100% Export-Oriented units under the Software Technology Parks of India or Special Economic Zone scheme promulgated by the Government of India. These units are exempt from customs, central excise duties, and levies on imported and indigenous capital goods, stores, and spares. We have undertaken to pay custom duties, service taxes, levies, and liquidated damages payable, if any, in respect of imported and indigenous capital goods, stores, and spares consumed duty free, in the event that certain terms and conditions are not fulfilled. We believe, however, that these units have in the past satisfied and will continue to satisfy the required conditions.
Our operations centers in the Philippines are registered with the Philippine Economic Zone Authority. The registration provides us with certain fiscal incentives on the import of capital goods and local purchase of services and materials and requires that ExlService Philippines, Inc. to meet certain performance and investment criteria. We believe that these centers have in the past satisfied and will continue to satisfy the required criteria.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, see Note 2—“Recent Accounting Pronouncements” to the unaudited consolidated financial statements contained herein.
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