ExlService Holdings, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS EXLSERVICE HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands, except share and per share amounts) As of September 30, 2021 December 31, 2020 Assets Current assets: Cash and cash equivalents $ 114,581 $ 218,530 Short-term investments 169,739 184,286 Restricted cash 6,810 4,690 Accounts receivable, net 192,170 147,635 Prepaid expenses 9,553 11,344 Advance income tax, net 19,099 5,684 Other current assets 33,223 37,109 Total current assets 545,175 609,278 Property and equipment, net 83,905 92,875 Operating lease right-of-use assets 81,324 91,918 Restricted cash 2,302 2,299 Deferred tax assets, net 26,747 7,749 Intangible assets, net 49,807 59,594 Goodwill 348,699 349,088 Other assets 27,154 32,099 Investment in equity affiliate 2,957 2,957 Total assets $ 1,168,070 $ 1,247,857 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 2,881 $ 6,992 Current portion of long-term borrowings 15,000 25,000 Deferred revenue 11,866 32,649 Accrued employee costs 95,833 67,645 Accrued expenses and other current liabilities 67,926 66,410 Current portion of operating lease liabilities 18,340 18,894 Income taxes payable, net 11,080 3,488 Total current liabilities 222,926 221,078 Long-term borrowings, less current portion 170,000 201,961 Operating lease liabilities, less current portion 73,939 84,874 Income taxes payable 1,790 1,790 Deferred tax liabilities, net 901 847 Other non-current liabilities 13,529 18,135 Total liabilities 483,085 528,685 Commitments and contingencies (Refer to Note 24) Preferred stock, $ 0.001 par value; 15,000,000 shares authorized, none issued — — ExlService Holdings, Inc. Stockholders’ equity: Common stock, $ 0.001 par value; 100,000,000 shares authorized, 39,312,225 shares issued and 33,343,895 shares outstanding as of September 30, 2021 and 38,968,052 shares issued and 33,559,434 shares outstanding as of December 31, 2020 39 39 Additional paid-in capital 385,917 420,976 3 Table of Contents Retained earnings 727,838 641,379 Accumulated other comprehensive loss ( 92,257 ) ( 74,984 ) Total including shares held in treasury 1,021,537 987,410 Less: 5,968,330 shares as of September 30, 2021 and 5,408,618 shares as of December 31, 2020, held in treasury, at cost ( 336,552 ) ( 268,238 ) Stockholders’ equity 684,985 719,172 Total equity 684,985 719,172 Total liabilities and stockholders’ equity $ 1,168,070 $ 1,247,857 See accompanying notes to unaudited consolidated financial statements. 4 Table of Contents EXLSERVICE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except share and per share amounts) Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Revenues, net $ 290,325 $ 241,018 $ 826,804 $ 709,481 Cost of revenues (1) 177,743 152,087 507,265 473,144 Gross profit (1) 112,582 88,931 319,539 236,337 Operating expenses: General and administrative expenses 36,167 26,810 103,369 84,501 Selling and marketing expenses 21,672 15,290 59,631 42,797 Depreciation and amortization expense 12,305 12,425 36,716 37,280 Total operating expenses 70,144 54,525 199,716 164,578 Income from operations 42,438 34,406 119,823 71,759 Foreign exchange gain, net 1,171 716 2,958 3,452 Interest expense ( 1,810 ) ( 2,628 ) ( 6,804 ) ( 8,583 ) Other income, net 1,721 2,485 5,346 9,239 Loss on settlement of convertible notes ( 12,845 ) — ( 12,845 ) — Income before income tax expense and earnings from equity affiliates 30,675 34,979 108,478 75,867 Income tax expense 4,196 8,490 22,019 18,416 Income before earnings from equity affiliates 26,479 26,489 86,459 57,451 Gain / (loss) from equity-method investment 28 ( 71 ) — ( 193 ) Net income attributable to ExlService Holdings, Inc. stockholders $ 26,507 $ 26,418 $ 86,459 $ 57,258 Earnings per share attributable to ExlService Holdings, Inc. stockholders: Basic $ 0.79 $ 0.77 $ 2.57 $ 1.66 Diluted $ 0.77 $ 0.76 $ 2.52 $ 1.65 Weighted-average number of shares used in computing earnings per share attributable to ExlService Holdings Inc. stockholders: Basic 33,449,311 34,327,477 33,583,791 34,404,798 Diluted 34,305,893 34,536,049 34,336,950 34,617,830 (1) Exclusive of depreciation and amortization expense. See accompanying notes to unaudited consolidated financial statements. 5 Table of Contents EXLSERVICE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (UNAUDITED) (In thousands) Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Net income $ 26,507 $ 26,418 $ 86,459 $ 57,258 Other comprehensive income/(loss): Unrealized gain/(loss) on cash flow hedges 261 12,165 ( 42 ) 5,040 Loss on net investment hedges — — ( 1,134 ) — Foreign currency translation gain/(loss) ( 3,789 ) 11,315 ( 10,475 ) ( 7,983 ) Reclassification adjustments (Gain)/loss on cash flow hedges (1) ( 2,150 ) 435 ( 7,845 ) 633 Retirement benefits (2) 178 98 533 296 Income tax effects relating to above (3) ( 12 ) ( 4,956 ) 1,690 1,689 Total other comprehensive income/(loss) $ ( 5,512 ) $ 19,057 $ ( 17,273 ) $ ( 325 ) Total comprehensive income $ 20,995 $ 45,475 $ 69,186 $ 56,933 (1) These are reclassified to net income and are included in cost of revenues and operating expenses, as applicable in the unaudited consolidated statements of income. Refer to Note 16 - Derivatives and Hedge Accounting to the unaudited consolidated financial statements. (2) These are reclassified to net income and are included in other income, net in the unaudited consolidated statements of income. Refer to Note 19 - Employee Benefit Plans to the unaudited consolidated financial statements. (3) These are income tax effects recognized on cash flow hedges, retirement benefits and foreign currency translation gains/(losses). Refer to Note 21 - Income Taxes to the unaudited consolidated financial statements. See accompanying notes to unaudited consolidated financial statements. 6 Table of Contents EXLSERVICE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED) For the three months ended September 30, 2021 and 2020 (In thousands, except share and per share amounts) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Equity Shares Amount Shares Amount Balance as of June 30, 2021 39,283,853 $ 39 $ 439,051 $ 701,331 $ ( 86,745 ) ( 6,034,144 ) $ ( 325,662 ) $ 728,014 Stock issued against stock-based compensation plans 28,372 — 536 — — — — 536 Stock-based compensation — — 10,894 — — — — 10,894 Acquisition of treasury stock — — — — — ( 244,580 ) ( 28,196 ) ( 28,196 ) Issuance of treasury stock — — 19,436 — — 310,394 17,306 36,742 Settlement of convertible notes — — ( 84,000 ) — — — — ( 84,000 ) Other comprehensive loss — — — — ( 5,512 ) — — ( 5,512 ) Net income — — — 26,507 — — — 26,507 Balance as of September 30, 2021 39,312,225 $ 39 $ 385,917 $ 727,838 $ ( 92,257 ) ( 5,968,330 ) $ ( 336,552 ) $ 684,985 Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Equity Shares Amount Shares Amount Balance as of June 30, 2020 38,818,365 $ 39 $ 404,704 $ 582,743 $ ( 104,274 ) ( 4,497,779 ) $ ( 202,284 ) $ 680,928 Stock issued against stock-based compensation plans 22,525 — 85 — — — — 85 Stock-based compensation — — 8,346 — — — — 8,346 Acquisition of treasury stock — — — — — ( 389,575 ) ( 24,906 ) ( 24,906 ) Other comprehensive income — — — — 19,057 — — 19,057 Net income — — — 26,418 — — — 26,418 Balance as of September 30, 2020 38,840,890 $ 39 $ 413,135 $ 609,161 $ ( 85,217 ) ( 4,887,354 ) $ ( 227,190 ) $ 709,928 7 Table of Contents EXLSERVICE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED) For the nine months ended September 30, 2021 and 2020 (In thousands, except share and per share amounts) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Equity Shares Amount Shares Amount Balance as of January 1, 2021 38,968,052 $ 39 $ 420,976 $ 641,379 $ ( 74,984 ) ( 5,408,618 ) $ ( 268,238 ) $ 719,172 Stock issued against stock-based compensation plans 344,173 — 709 — — — — 709 Stock-based compensation — — 28,796 — — — — 28,796 Acquisition of treasury stock — — — — — ( 870,106 ) ( 85,620 ) ( 85,620 ) Issuance of treasury stock — — 19,436 — — 310,394 17,306 36,742 Settlement of convertible notes — — ( 84,000 ) — — — — ( 84,000 ) Other comprehensive loss — — — — ( 17,273 ) — — ( 17,273 ) Net income — — — 86,459 — — — 86,459 Balance as of September 30, 2021 39,312,225 $ 39 $ 385,917 $ 727,838 $ ( 92,257 ) ( 5,968,330 ) $ ( 336,552 ) $ 684,985 Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Equity Shares Amount Shares Amount Balance as of January 1, 2020 38,480,654 $ 39 $ 391,240 $ 551,903 $ ( 84,892 ) ( 4,295,413 ) $ ( 188,289 ) $ 670,001 Stock issued against stock-based compensation plans 360,236 — 1,045 — — — — 1,045 Stock-based compensation — — 20,850 — — — — 20,850 Acquisition of treasury stock — — — — — ( 591,941 ) ( 38,901 ) ( 38,901 ) Other comprehensive loss — — — — ( 325 ) — — ( 325 ) Net income — — — 57,258 — — — 57,258 Balance as of September 30, 2020 38,840,890 $ 39 $ 413,135 $ 609,161 $ ( 85,217 ) ( 4,887,354 ) $ ( 227,190 ) $ 709,928 See accompanying notes to unaudited consolidated financial statements. 8 Table of Contents EXLSERVICE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) Nine months ended September 30, 2021 2020 Cash flows from operating activities: Net income $ 86,459 $ 57,258 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 37,159 37,249 Stock-based compensation expense 28,796 20,850 Amortization of operating lease right-of-use assets 20,012 20,484 Unrealized (gain) / loss on short term investments 5,987 ( 4,807 ) Unrealized foreign exchange gain, net ( 3,799 ) ( 484 ) Deferred income tax benefit ( 17,374 ) ( 1,572 ) Allowance / (reversal) for expected credit losses ( 405 ) 353 Loss on settlement of convertible notes 12,845 — Loss from equity-method investment — 193 Amortization of non-cash interest expense related to convertible notes 1,795 1,943 Others, net 590 ( 935 ) Change in operating assets and liabilities: Accounts receivable ( 44,871 ) 16,078 Prepaid expenses and other current assets 3,033 1,797 Advance income tax, net ( 5,685 ) 7,001 Other assets 2,485 3,096 Accounts payable ( 2,333 ) ( 490 ) Deferred revenue ( 21,196 ) 295 Accrued employee costs 26,664 ( 11,854 ) Accrued expenses and other liabilities 3,254 ( 361 ) Operating lease liabilities ( 19,654 ) ( 19,780 ) Net cash provided by operating activities 113,762 126,314 Cash flows from investing activities: Purchases of property and equipment ( 29,026 ) ( 34,614 ) Proceeds from sale of property and equipment 825 624 Investment in equity affiliate — ( 700 ) Purchase of investments ( 76,500 ) ( 57,965 ) Proceeds from redemption of investments 83,183 103,718 Net cash (used for)/provided by investing activities ( 21,518 ) 11,063 Cash flows from financing activities: Principal payments of finance lease liabilities ( 157 ) ( 180 ) Proceeds from borrowings 225,000 110,000 Repayments of borrowings ( 329,000 ) ( 120,393 ) Acquisition of treasury stock ( 85,620 ) ( 38,901 ) Proceeds from exercise of stock options 710 1,045 Net cash used for financing activities ( 189,067 ) ( 48,429 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 5,003 ) 20 Net (decrease)/increase in cash, cash equivalents and restricted cash ( 101,826 ) 88,968 Cash, cash equivalents and restricted cash at the beginning of the period 225,519 127,044 Cash, cash equivalents and restricted cash at the end of the period $ 123,693 $ 216,012 Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 5,833 $ 4,627 Income taxes, net of refunds $ 31,087 $ 11,434 Supplemental disclosure of non-cash investing and financing activities: Settlement of portion of convertible notes through issuance of treasury stock $ 36,742 $ — Assets acquired under finance lease $ 79 $ 90 See accompanying notes to unaudited consolidated financial statements. 9 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2021 (In thousands, except share and per share amounts) 1. Organization ExlService Holdings, Inc. (“ExlService Holdings”) is organized as a corporation under the laws of the state of Delaware. ExlService Holdings, together with its subsidiaries and affiliates (collectively, the “Company”), is a global analytics and digital solutions company that partners with clients to improve business outcomes and unlock growth. Bringing together deep domain expertise with robust data, powerful analytics, cloud, and AI, the Company creates agile, scalable solutions and executes complex operations for the world’s leading corporations in industries including insurance, healthcare, banking and financial services, media, and retail, among others. The Company’s clients are located principally in the United States of America (“U.S.”) and the United Kingdom (“U.K.”). 2. Summary of Significant Accounting Policies (a) Basis of Preparation and Principles of Consolidation The unaudited consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020. The unaudited consolidated financial statements reflect all adjustments (of a normal and recurring nature) that management considers necessary for a fair presentation of such statements for the interim periods presented. The unaudited consolidated statements of income for the interim periods presented are not necessarily indicative of the results for the full year or for any subsequent period. The accompanying unaudited consolidated financial statements include the financial statements of ExlService Holdings and all of its subsidiaries. The standalone financial statements of subsidiaries are fully consolidated on a line-by-line basis. 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. GAAP. 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 unaudited consolidated statements of income. (b) Use of Estimates The preparation of the unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the unaudited consolidated statements of income during the reporting period. Although these estimates are based on management’s best assessment of the current business environment, actual results may be different from those estimates. The significant estimates and assumptions that affect the unaudited consolidated financial statements include, but are not limited to, allowance for expected credit losses, 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, 10 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) estimated costs to complete fixed price 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 September 30, 2021, 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. (c) Recent Accounting Pronouncements In March 2020, Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“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 London Inter-Bank Offered Rate (“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. (d) Recently Adopted Accounting Pronouncements In December 2019, FASB issued ASU No. 2019-12, Income Taxes Simplifying the Accounting for Income Taxes . This ASU eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The Company adopted this ASU on January 1, 2021. The adoption of this ASU did not have a material impact on the Company’s unaudited consolidated financial statements. In October 2020, FASB issued ASU No. 2020-10, Codification Improvements , to provide 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 improve the consistency of the ASC 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 ASC. The Company adopted this ASU on January 1, 2021. The adoption of this ASU did not have a material impact on the Company’s unaudited consolidated financial statements. In January 2021, FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope , to expand the scope of Topic 848 to include derivative instruments affected by changes to the interest rates used for discounting, margining or contract price alignment (commonly referred to as the discounting transition). This ASU extends some of Topic 848’s optional expedients and exceptions for contract modifications and hedge accounting to derivative instruments impacted by discounting transition as a result of the discontinuation of the use of LIBOR as a benchmark interest rate due to reference rate reform. This ASU is effective immediately for all entities with the option to be applied retrospectively as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, and prospectively to any new contract modifications made on or after January 7, 2021 through December 31, 2022. The adoption of this ASU did not have a material impact on the Company’s unaudited consolidated financial statements. 3. Segment and Geographical Information The Company operates in the Business Process Management (“BPM”) industry and is a provider of operations management and analytics services. 11 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) The Company manages and reports financial information through its four strategic business units: Insurance, Healthcare, Analytics and Emerging Business. These business units develop client-specific solutions, build capabilities, maintain a unified go-to-market approach and are integrally responsible for service delivery, customer satisfaction, growth and profitability. 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 the three months ended September 30, 2021 and 2020, respectively, for each of the reportable segments, are as follows: Three months ended September 30, 2021 Insurance Healthcare Emerging Business Analytics Total Revenues, net $ 98,008 $ 27,341 $ 44,513 $ 120,463 $ 290,325 Cost of revenues (1) 61,490 17,057 23,660 75,536 177,743 Gross profit (1) $ 36,518 $ 10,284 $ 20,853 $ 44,927 $ 112,582 Operating expenses 70,144 Loss on settlement of convertible notes, foreign exchange gain, interest expense and other income, net ( 11,763 ) Income tax expense 4,196 Gain from equity-method investment 28 Net income $ 26,507 (1) Exclusive of depreciation and amortization expense. Three months ended September 30, 2020 Insurance Healthcare Emerging Business Analytics Total Revenues, net $ 87,830 $ 25,112 $ 37,577 $ 90,499 $ 241,018 Cost of revenues (1) 56,831 17,993 20,792 56,471 152,087 Gross profit (1) $ 30,999 $ 7,119 $ 16,785 $ 34,028 $ 88,931 Operating expenses 54,525 Foreign exchange gain, interest expense and other income, net 573 Income tax expense 8,490 Loss from equity-method investment 71 Net income $ 26,418 (1) Exclusive of depreciation and amortization expense. Revenues and cost of revenues for the nine months ended September 30, 2021 and 2020, respectively, for each of the reportable segments, are as follows: 12 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) Nine months ended September 30, 2021 Insurance Healthcare Emerging Business Analytics Total Revenues, net $ 283,887 $ 85,856 $ 122,871 $ 334,190 $ 826,804 Cost of revenues (1) 176,942 52,133 66,850 211,340 507,265 Gross profit (1) $ 106,945 $ 33,723 $ 56,021 $ 122,850 $ 319,539 Operating expenses 199,716 Loss on settlement of convertible notes, foreign exchange gain, interest expense and other income, net ( 11,345 ) Income tax expense 22,019 Gain / (loss) from equity-method investment — Net income $ 86,459 (1) Exclusive of depreciation and amortization expense. Nine months ended September 30, 2020 Insurance Healthcare Emerging Business Analytics Total Revenues, net $ 252,851 $ 77,119 $ 114,902 $ 264,609 $ 709,481 Cost of revenues (1) 174,909 57,226 68,689 172,320 473,144 Gross profit (1) $ 77,942 $ 19,893 $ 46,213 $ 92,289 $ 236,337 Operating expenses 164,578 Foreign exchange gain, interest expense and other income, net 4,108 Income tax expense 18,416 Loss from equity-method investment 193 Net income $ 57,258 (1) Exclusive of depreciation and amortization expense. Revenues, net by service type, were as follows: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 BPM and related services (1) $ 169,862 $ 150,519 $ 492,614 $ 444,872 Analytics services 120,463 90,499 334,190 264,609 Revenues, net $ 290,325 $ 241,018 $ 826,804 $ 709,481 (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. 13 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Revenues, net United States $ 249,726 $ 203,928 $ 709,382 $ 600,840 Non-United States United Kingdom 27,433 22,903 78,359 65,011 Rest of World 13,166 14,187 39,063 43,630 Total Non-United States 40,599 37,090 117,422 108,641 Revenues, net $ 290,325 $ 241,018 $ 826,804 $ 709,481 Long-lived assets by geographic area, which consist of property and equipment, net and operating lease right-of-use assets were as follows: As of September 30, 2021 December 31, 2020 Long-lived assets India $ 83,625 $ 97,261 United States 46,875 46,659 Philippines 22,970 29,434 Rest of World 11,759 11,439 Long-lived assets $ 165,229 $ 184,793 4. Revenues, net Refer to Note 3 - Segment and Geographical Information to the unaudited consolidated financial statements for revenues disaggregated by reportable segments and geography. Contract balances The following table provides information about accounts receivable, contract assets and contract liabilities from contracts with customers: As of September 30, 2021 December 31, 2020 Accounts receivable, net $ 192,170 $ 147,635 Contract assets $ 2,887 $ 4,437 Contract liabilities Deferred revenue (consideration received in advance) $ 10,631 $ 30,450 Consideration received for process transition activities $ 1,527 $ 2,774 Accounts receivable includes $ 90,736 and $ 63,995 as of September 30, 2021 and December 31, 2020, respectively, representing unbilled receivables. The Company has accrued the unbilled receivables for work performed in accordance with the terms of contracts with customers and considers no significant performance risk associated with its unbilled receivables. 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 14 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) 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. 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 unaudited consolidated balance sheets. The revenues are recognized as (or when) the performance obligation is fulfilled under the contract with customer. Revenue recognized during the three and nine months ended September 30, 2021 and 2020, which was included in the contract liabilities balance at the beginning of the respective periods: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Deferred revenue (consideration received in advance) $ 1,778 $ 1,611 $ 28,731 $ 9,805 Consideration received for process transition activities $ 411 $ 303 $ 1,598 $ 864 Contract acquisition and fulfillment costs The following table provides details of the Company’s contract acquisition and fulfillment costs: Contract Acquisition Costs Three months ended Nine months ended Year ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 December 31, 2020 Opening Balance $ 867 $ 1,270 $ 1,027 $ 1,307 $ 1,307 Additions / (reductions) ( 97 ) 63 277 250 310 Amortization ( 158 ) ( 112 ) ( 692 ) ( 336 ) ( 590 ) Closing Balance $ 612 $ 1,221 $ 612 $ 1,221 $ 1,027 Contract Fulfillment Costs Three months ended Nine months ended Year ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 December 31, 2020 Opening Balance $ 3,694 $ 6,780 $ 5,631 $ 7,255 $ 7,255 Additions 279 116 443 763 779 Amortization ( 693 ) ( 463 ) ( 2,794 ) ( 1,585 ) ( 2,403 ) Closing Balance $ 3,280 $ 6,433 $ 3,280 $ 6,433 $ 5,631 There was no impairment for contract acquisition and contract fulfillment costs as of September 30, 2021 and December 31, 2020. The capitalized costs are amortized over the expected period of benefit of the contract. Allowance 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 15 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) 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. 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 September 30, 2021 December 31, 2020 Accounts receivable, including unbilled receivables $ 192,841 $ 148,824 Less: Allowance for expected credit loss ( 671 ) ( 1,189 ) Accounts receivable, net $ 192,170 $ 147,635 The movement in “Allowance for expected credit losses” on customer balances for the three and nine months ended September 30, 2021 and 2020 and year ended December 31, 2020 was as follows: Three months ended Nine months ended Year ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 December 31, 2020 Balance at the beginning of the period $ 730 $ 1,434 $ 1,189 $ 1,163 $ 1,163 Additions / (reductions) during the period ( 19 ) ( 36 ) ( 414 ) 345 300 Reductions due to write-off of accounts receivable ( 41 ) — ( 114 ) ( 100 ) ( 269 ) Translation adjustment 1 2 10 ( 8 ) ( 5 ) Balance at the end of the period $ 671 $ 1,400 $ 671 $ 1,400 $ 1,189 5. Earnings Per Share 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, and assumed conversion premium of outstanding convertible notes, using the treasury stock method. 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 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. Diluted weighted-average shares outstanding is affected by the treatment of the Company's 3.5 % per annum Convertible Senior Notes due October 1, 2024 (the “Notes”). The Company had a choice to settle the Notes in cash, shares or any combination of the two. The Company intended and had the ability to settle the principal balance of the Notes in cash, and as such, the Company 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 for the portion of the period until actual settlement and 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 . During the three months ended September 30, 2021, the Company settled the Notes by electing a combination of cash and shares of the Company’s common stock and as such included the count of shares issued on settlement in the calculation of basic earnings per share for the portion of the period outstanding. Refer to Note 17 - Borrowings to the unaudited consolidated financial statements for further details. The following table sets forth the computation of basic and diluted earnings per share: 16 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Numerators: Net income $ 26,507 $ 26,418 $ 86,459 $ 57,258 Denominators: Basic weighted average common shares outstanding 33,449,311 34,327,477 33,583,791 34,404,798 Dilutive effect of share-based awards 440,378 208,572 371,145 213,032 Dilutive effect of conversion premium on the Notes 416,204 — 382,014 — Diluted weighted average common shares outstanding 34,305,893 34,536,049 34,336,950 34,617,830 Earnings per share attributable to ExlService Holdings Inc. stockholders: Basic $ 0.79 $ 0.77 $ 2.57 $ 1.66 Diluted $ 0.77 $ 0.76 $ 2.52 $ 1.65 Weighted average potentially dilutive shares considered anti-dilutive and not included in computing diluted earnings per share 40,384 347,126 14,044 385,252 6. Cash, Cash Equivalents and Restricted Cash For the purpose of unaudited statements of cash flows, cash, cash equivalents and restricted cash comprise of the following: As of September 30, 2021 September 30, 2020 December 31, 2020 Cash and cash equivalents $ 114,581 $ 206,423 $ 218,530 Restricted cash (current) 6,810 7,312 4,690 Restricted cash (non-current) 2,302 2,277 2,299 Cash, cash equivalents and restricted cash $ 123,693 $ 216,012 $ 225,519 7. Other Income, net Other income, net consists of the following: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Gain on sale and mark-to-market of mutual funds $ 1,233 $ 1,965 $ 3,991 $ 7,131 Interest and dividend income 761 777 2,052 1,941 Others, net ( 273 ) ( 257 ) ( 697 ) 167 Other income, net $ 1,721 $ 2,485 $ 5,346 $ 9,239 17 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) 8. Property and Equipment, net Property and equipment, net consists of the following: Estimated useful lives As of (Years) September 30, 2021 December 31, 2020 Owned Assets: Network equipment and computers 3 - 5 $ 113,499 $ 107,016 Software 3 - 5 101,389 99,708 Leasehold improvements 3 - 8 46,721 48,052 Office furniture and equipment 3 - 8 20,723 22,210 Motor vehicles 2 - 5 609 599 Buildings 30 1,072 1,089 Land — 701 712 Capital work in progress — 6,164 4,647 290,878 284,033 Less: Accumulated depreciation and amortization ( 207,367 ) ( 191,629 ) $ 83,511 $ 92,404 Right-of-use assets under finance leases: Network equipment and computers $ 92 $ 93 Leasehold improvements 1,128 817 Office furniture and equipment 722 255 Motor vehicles 643 688 2,585 1,853 Less: Accumulated depreciation and amortization ( 2,191 ) ( 1,382 ) $ 394 $ 471 Property and equipment, net $ 83,905 $ 92,875 Capital work in progress represents advances paid towards acquisition of property and equipment and costs incurred on internally developed software not yet ready to be placed in service. During the three and nine months ended September 30, 2021, there were no changes in estimated useful lives of property and equipment during the ordinary course of operations. The depreciation and amortization expense, excluding amortization of acquisition-related intangibles, recognized in the unaudited consolidated statements of income was as follows: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Depreciation and amortization expense $ 9,283 $ 9,012 $ 26,936 $ 26,283 The effect of foreign exchange gain/(loss) upon settlement of cash flow hedges recorded under depreciation and amortization, was as follows: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Effect of foreign exchange gain/(loss) $ 120 $ 18 $ 443 $ ( 31 ) 18 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) Internally developed software costs, included under Software, was as follows: As of September 30, 2021 December 31, 2020 Cost $ 18,827 $ 18,371 Less : Accumulated amortization ( 9,155 ) ( 5,998 ) Internally developed software, net $ 9,672 $ 12,373 The amortization expense on internally developed software recognized in the unaudited consolidated statements of income was as follows: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Amortization expense $ 1,086 $ 1,215 $ 3,165 $ 3,892 As of September 30, 2021 and 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. 9. Goodwill and Intangible Assets Goodwill 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: Insurance Healthcare Emerging Business Analytics Total Balance at January 1, 2021 $ 50,499 $ 21,953 $ 49,348 $ 227,288 $ 349,088 Currency translation adjustments ( 77 ) ( 11 ) ( 301 ) — ( 389 ) Balance at September 30, 2021 $ 50,422 $ 21,942 $ 49,047 $ 227,288 $ 348,699 During the fourth quarter of 2020, the Company performed its annual impairment test of goodwill for those reporting units that had goodwill recorded. Based on the results, the fair values of each of the Company’s reporting units exceeded their carrying value and the goodwill was not impaired. As of September 30, 2021, the Company evaluated the continuing effects of COVID-19 and its impact on the global economy on each of the Company’s reporting units to assess whether there was a triggering event during the quarter requiring the Company to perform a goodwill impairment test. The Company considered continued improvements in current and forecasted economic and market conditions and qualitative factors, for instance, the Company’s performance during the first three quarters, business forecasts for the remainder of the year, stock price movements and the Company’s expansion plans. 19 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) The Company did not identify any triggers or indications of potential impairment for its reporting units as of September 30, 2021. 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 continues to monitor the impacts of COVID-19 on the Company and significant changes in key assumptions that could result in future period impairment charges. The recoverability of goodwill is dependent upon the continued growth of cash flows from the Company’s business activities. This growth is based on business forecasts and improvement in profitability of its reporting units. The Company continues to maintain its focus on cultivating long-term client relationships as well as attracting new clients. Intangible Assets Information regarding the Company’s intangible assets is set forth below: As of September 30, 2021 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Finite-lived intangible assets: Customer relationships $ 71,416 $ ( 31,180 ) $ 40,236 Developed technology 23,484 ( 15,242 ) 8,242 Trade names and trademarks 1,400 ( 971 ) 429 $ 96,300 $ ( 47,393 ) $ 48,907 Indefinite-lived intangible assets: Trade names and trademarks $ 900 $ — $ 900 Total intangible assets $ 97,200 $ ( 47,393 ) $ 49,807 As of December 31, 2020 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Finite-lived intangible assets: Customer relationships $ 73,357 $ ( 27,464 ) $ 45,893 Developed technology 23,510 ( 11,858 ) 11,652 Trade names and trademarks 5,100 ( 3,951 ) 1,149 $ 101,967 $ ( 43,273 ) $ 58,694 Indefinite-lived intangible assets: Trade names and trademarks $ 900 $ — $ 900 Total intangible assets $ 102,867 $ ( 43,273 ) $ 59,594 The amortization expense recognized in the unaudited consolidated statements of income was as follows: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Amortization expense $ 3,022 $ 3,413 $ 9,780 $ 10,997 20 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) The remaining weighted average life of intangible assets is as follows: (in years) Customer relationships 6.3 Developed technology 2.0 Trade names and trademarks (Finite lived) 3.1 Estimated future amortization expense related to finite-lived intangible assets as of September 30, 2021 was as follows: 2021 (October 1 - December 31) $ 2,996 2022 11,341 2023 9,049 2024 6,707 2025 5,955 2026 and thereafter 12,859 Total $ 48,907 10. Other Current Assets Other current assets consist of the following: As of September 30, 2021 December 31, 2020 Receivables from statutory authorities $ 16,256 $ 15,658 Derivative instruments 7,371 9,755 Advances to suppliers 3,634 3,906 Deferred contract fulfillment costs 1,606 2,888 Contract assets 1,516 1,814 Interest accrued on term deposits 621 169 Others 2,219 2,919 Other current assets $ 33,223 $ 37,109 11. Other Assets Other assets consist of the following: As of September 30, 2021 December 31, 2020 Lease deposits $ 9,447 $ 9,788 Deposits with statutory authorities 6,425 6,341 Derivative instruments 5,390 6,933 Deferred contract fulfillment costs 1,674 2,743 Contract assets 1,371 2,623 Term deposits 184 216 Others 2,663 3,455 Other assets $ 27,154 $ 32,099 21 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) 12. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following: As of September 30, 2021 December 31, 2020 Accrued expenses $ 39,369 $ 39,951 Payable to statutory authorities 12,093 10,594 Client liabilities 6,500 4,740 Accrued capital expenditures 4,758 7,857 Derivative instruments 1,819 435 Interest payable 377 1,399 Finance lease liabilities 171 229 Other current liabilities 2,839 1,205 Accrued expenses and other current liabilities $ 67,926 $ 66,410 13. Other Non-Current Liabilities Other non-current liabilities consist of the following: As of September 30, 2021 December 31, 2020 Retirement benefits $ 6,073 $ 8,940 Derivative instruments 2,504 29 Unrecognized tax benefits 907 907 Deferred transition revenue 509 924 Finance lease liabilities 254 281 Accrued capital expenditures — 3,486 Others 3,282 3,568 Other non-current liabilities $ 13,529 $ 18,135 14. Accumulated Other Comprehensive Loss Accumulated other comprehensive loss (“AOCL”) 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 and net investment hedges in accordance with ASC 815. Cumulative changes in the fair values of these foreign currency exchange contracts are recognized in AOCL on the Company's unaudited consolidated balance sheets. Upon settlement of foreign exchange contracts designated as cash flow hedges, fair value changes are reclassified from AOCL to net income, whereas such fair value changes related to net investment hedges are included in net income when a foreign operation is disposed or partially disposed. The balances as of September 30, 2021 and 2020 are as follows: 22 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) Foreign currency translation loss Unrealized gain/(loss) on cash flow hedges Retirement benefits Total Balance as of January 1, 2021 $ ( 86,185 ) $ 13,799 $ ( 2,598 ) $ ( 74,984 ) Losses recognized during the period ( 10,475 ) ( 42 ) — ( 10,517 ) Losses on net investment hedges ( 1,134 ) — — ( 1,134 ) Reclassification to net income (1) — ( 7,845 ) 533 ( 7,312 ) Income tax effects (2) 1,859 ( 15 ) ( 154 ) 1,690 Accumulated other comprehensive (loss)/gain as of September 30, 2021 $ ( 95,935 ) $ 5,897 $ ( 2,219 ) $ ( 92,257 ) Balance as of January 1, 2020 $ ( 87,591 ) $ 4,098 $ ( 1,399 ) $ ( 84,892 ) Gains / (losses) recognized during the period ( 7,983 ) 5,040 — ( 2,943 ) Reclassification to net income (1) — 633 296 929 Income tax effects (2) 2,142 ( 669 ) 216 1,689 Accumulated other comprehensive (loss)/gain as of September 30, 2020 $ ( 93,432 ) $ 9,102 $ ( 887 ) $ ( 85,217 ) (1) Refer to Note 16 - Derivatives and Hedge Accounting and Note 19 - Employee Benefit Plans to the unaudited consolidated financial statements for reclassification to net income. (2) These are income tax effects recognized on cash flow hedges, retirement benefits and foreign currency translation gains / (losses). Refer to Note 21 - Income Taxes to the unaudited consolidated financial statements. 15. Fair Value Measurements 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 September 30, 2021 and December 31, 2020. 23 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Other Unobservable Inputs As of September 30, 2021 Level 1 Level 2 Level 3 Total Assets Mutual funds* $ 119,756 $ — $ — $ 119,756 Derivative financial instruments — 12,761 — 12,761 Total $ 119,756 $ 12,761 $ — $ 132,517 Liabilities Derivative financial instruments $ — $ 4,323 $ — $ 4,323 Total $ — $ 4,323 $ — $ 4,323 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 Assets Mutual funds* $ 160,441 $ — $ — $ 160,441 Derivative financial instruments — 16,688 — 16,688 Total $ 160,441 $ 16,688 $ — $ 177,129 Liabilities Derivative financial instruments $ — $ 464 $ — $ 464 Total $ — $ 464 $ — $ 464 * Represents those short-term investments, which are carried at the fair value option under ASC 825 "Financial Instruments.” Derivative Financial Instruments: The Company’s derivative financial instruments consist of foreign currency forward exchange contracts. Fair values for derivative financial instruments are based on independent sources including highly rated financial institutions and are classified as Level 2. Refer to Note 16 - Derivatives and Hedge Accounting to the unaudited consolidated financial statements for further details. Financial instruments not carried at fair value : The Company’s other financial instruments not carried at fair value consist primarily of cash and cash equivalents, short-term investments (except 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. The carrying value of the Company’s outstanding revolving credit facility approximates its fair value because the Company’s interest rate yield is near current market rates for comparable debt instruments. Convertible Senior Notes: The Company settled the Notes during the three months ended September 30, 2021. Refer to Note 17 - Borrowings to the unaudited consolidated financial statements for further details. The total estimated fair value of the Notes as of December 31, 2020 was $ 152,384 . The fair value was determined based on market yields for similar convertible notes as of December 31, 2020. 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. 24 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) 16. Derivatives and Hedge Accounting The Company uses derivative instruments and hedging transactions to mitigate exposure to foreign currency fluctuation risks associated with forecasted transactions denominated in certain foreign currencies so as to minimize earnings and cash flow volatility associated with changes in foreign currency exchange rates. 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 $ 515,850 as of September 30, 2021 and $ 451,935 as of December 31, 2020. 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 these cash flow hedges is recorded along with the underlying hedged item in the same line of unaudited consolidated statements of income as a part of “Cost of revenues,” “General and administrative expenses,” “Selling and marketing expenses,” “Depreciation and amortization expense,” as applicable. 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 $ 5,695 of derivative gains, net, excluding tax effects, included in AOCL, 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 September 30, 2021. At September 30, 2021, the maximum outstanding term of the cash flow hedges was 45 months. The Company also enters into foreign currency forward contracts to economically hedge its intercompany balances and other monetary assets and liabilities denominated in currencies other than functional currencies, against the risk of foreign currency fluctuations associated with remeasurement of such assets and liabilities to functional currency. These derivatives do not qualify as fair value hedges under ASC 815. Changes in the fair value of these derivatives are recognized in the unaudited consolidated statements of income and are included in the foreign exchange gain/(loss) line item. The Company’s primary exchange rate exposure is with the Indian rupee, the U.K. pound sterling (GBP) and the Philippine peso. The Company also has exposure to Colombian pesos (COP), Czech koruna, the Euro (EUR), South African ZAR, the Australian dollar (AUD) and other local currencies in which it operates. Outstanding foreign currency forward contracts amounted to USD 140,119 , GBP 5,911 , EUR 1,005 and COP 4,675,248 as of September 30, 2021 and USD 143,394 , GBP 6,753 , EUR 2,447 and COP 8,287,950 as of December 31, 2020. The Company uses forward contracts designated as net investment hedges to hedge the foreign currency risks related to our investments in foreign subsidiaries. Gains and losses on these net investment hedges are recognized in AOCL as part of foreign currency translation adjustments. All of 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 contracts with the counterparty in the case of an event of default or a termination event. We have presented all of the assets and liabilities related to our foreign exchange forward contracts on a gross basis, with no offsets, in our unaudited 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 unaudited consolidated financial statements: 25 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) Derivatives designated as hedging instruments: As of Foreign currency exchange contracts September 30, 2021 December 31, 2020 Other current assets $ 7,247 $ 9,740 Other assets $ 5,390 $ 6,933 Accrued expenses and other current liabilities $ 1,552 $ 176 Other non-current liabilities $ 2,504 $ 29 Derivatives not designated as hedging instruments: As of Foreign currency exchange contracts September 30, 2021 December 31, 2020 Other current assets $ 124 $ 15 Accrued expenses and other current liabilities $ 267 $ 259 The following tables set forth the effect of foreign currency exchange contracts on the unaudited consolidated statements of income and accumulated other comprehensive loss for the three and nine months ended September 30, 2021 and 2020: Three months ended September 30, Nine months ended September 30, Forward Exchange Contracts: 2021 2020 2021 2020 Unrealized gain/(loss) recognized in AOCL Derivatives in cash flow hedging relationships $ 261 $ 12,165 $ ( 42 ) $ 5,040 Gain/(loss) recognized in consolidated statements of income Derivatives not designated as hedging instruments $ ( 464 ) $ 3,372 $ ( 1,054 ) $ 2,429 26 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) Location and amount of gain/(loss) recognized in unaudited consolidated statements of income for cash flow hedging relationships and derivatives not designated as hedging instruments Three months ended September 30, 2021 2020 As per unaudited consolidated statements of income Gain/(loss) on foreign currency exchange contracts As per unaudited consolidated statements of income Gain/(loss) on foreign currency exchange contracts Cash flow hedging relationships Location in unaudited consolidated statements of income where gain/(loss) was reclassed from AOCL Cost of revenues $ 177,743 $ 1,801 $ 152,087 $ ( 233 ) General and administrative expenses $ 36,167 223 $ 26,810 ( 132 ) Selling and marketing expenses $ 21,672 11 $ 15,290 ( 4 ) Depreciation and amortization expense $ 12,305 115 $ 12,425 ( 66 ) Total before tax 2,150 ( 435 ) Income tax (expense)/benefit relating to above ( 370 ) 47 Net of tax $ 1,780 $ ( 388 ) Derivatives not designated as hedging instruments Location in unaudited consolidated statements of income where gain/(loss) was recognized Foreign exchange gain/(loss), net $ 1,171 $ ( 464 ) $ 716 $ 3,372 $ 1,171 $ ( 464 ) $ 716 $ 3,372 27 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) Location and amount of gain/(loss) recognized in unaudited consolidated statements of income for cash flow hedging relationships and derivatives not designated as hedging instruments Nine months ended September 30, 2021 2020 As per unaudited consolidated statements of income Gain/(loss) on foreign currency exchange contracts As per unaudited consolidated statements of income Gain/(loss) on foreign currency exchange contracts Cash flow hedging relationships Location in unaudited consolidated statements of income where gain/(loss) was reclassed from AOCL Cost of revenues $ 507,265 $ 6,643 $ 473,144 $ ( 272 ) General and administrative expenses $ 103,369 769 $ 84,501 ( 246 ) Selling and marketing expenses $ 59,631 39 $ 42,797 ( 9 ) Depreciation and amortization expense $ 36,716 394 $ 37,280 ( 106 ) Total before tax 7,845 ( 633 ) Income tax benefit/(expense) relating to above ( 1,186 ) 69 Net of tax $ 6,659 $ ( 564 ) Derivatives not designated as hedging instruments Location in unaudited consolidated statements of income where gain/(loss) was recognized Foreign exchange gain/(loss), net $ 2,958 $ ( 1,054 ) $ 3,452 $ 2,429 $ 2,958 $ ( 1,054 ) $ 3,452 $ 2,429 Effect of net investment hedges on accumulated other comprehensive loss: Three months ended September 30, Nine months ended September 30, Amount of loss recognized in AOCL Amount of loss recognized in AOCL Net investment hedging relationships 2021 2020 2021 2020 Foreign exchange contracts $ — $ — $ 1,134 $ — 28 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) 17. Borrowings The following tables summarizes the Company’s debt position as of September 30, 2021 and December 31, 2020. As of September 30, 2021 As of December 31, 2020 Revolving Credit Facility Total Revolving Credit Facility Notes Total Current portion of long-term borrowings $ 15,000 $ 15,000 $ 25,000 $ — $ 25,000 Long-term borrowings $ 170,000 $ 170,000 $ 64,000 $ 150,000 $ 214,000 Unamortized debt discount — — — ( 11,236 ) ( 11,236 ) Unamortized debt issuance costs* — — — ( 803 ) ( 803 ) Long-term borrowings $ 170,000 $ 170,000 $ 64,000 $ 137,961 $ 201,961 Total borrowings $ 185,000 $ 185,000 $ 89,000 $ 137,961 $ 226,961 *Unamortized debt issuance costs for the Company’s revolving Credit Facility of $ 297 and $ 490 as of September 30, 2021 and December 31, 2020, respectively, are presented under “Other current assets” and “Other assets,” as applicable in the consolidated balance sheets. Credit Agreement The Company’s $ 300,000 revolving credit facility pursuant to its credit agreement (the “Credit Agreement”) with certain lenders and Citibank N.A. as Administrative Agent (the “Credit Facility”) carried an effective interest rate as shown below. Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Effective Interest Rate 2.3 % 1.9 % 2.0 % 2.4 % As of September 30, 2021 and December 31, 2020, the Company was in compliance with all financial and non-financial covenants listed under the Credit Agreement. Convertible Senior Notes On October 1, 2018, the Company entered into an investment agreement (the “Investment Agreement”) with Orogen Echo LLC (the “Purchaser”), an affiliate of The Orogen Group LLC, relating to the issuance to the Purchaser of $ 150,000 , in an aggregate principal amount of the Notes. The transactions contemplated by the Investment Agreement, including the issuance of the Notes, closed on October 4, 2018. The Notes carried interest at a rate of 3.5 % per annum, payable semi-annually in arrears in cash on April 1 and October 1 of each year. The Notes were convertible at an initial conversion rate of 13.3333 shares of the common stock per one thousand dollar principal amount of the Notes (which represented an initial conversion price of approximately $ 75 per share). The Company had the option to 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 exceeded 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 had the option to 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 Notes carried an effective interest rate as shown below: 29 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Effective Interest Rate 3.6 % 3.6 % 3.6 % 3.6 % On August 27, 2021, the Company entered into a Payoff and Termination Agreement (the “Payoff and Termination Agreement”) with the Purchaser, pursuant to which the Company prepaid and settled its outstanding obligations under the Notes for an aggregate consideration of $ 236,742 , excluding accrued and unpaid interest under the Notes calculated through, and including, August 26, 2021, in the form of a combination of cash and shares of the Company’s common stock. As a result, the Company made a cash payment of $ 200,000 to the Purchaser and satisfied the remainder of the obligation under the Notes by issuing to the Purchaser 310,394 shares of the Company’s common stock calculated at $ 118.37 per share based on a 20 -day volume weighted average price ending on, and including, August 26, 2021. The Company satisfied the cash payment obligation under the Payoff and Termination Agreement by drawing $ 200,000 from its existing revolving Credit Facility, and the Company’s common stock was issued from its existing treasury shares. Refer to Note 18 - Capital Structure to the unaudited consolidated financial statements for further details. The aggregate consideration of $ 236,742 was allocated between the debt and equity components in an amount of $ 152,742 and $ 84,000 , respectively. The consideration was first allocated to the fair value of debt component and the remaining was allocated to the equity component. The fair value of the debt component was calculated using a discounted cash flow technique, which considered debt issuances with similar features of the Company’s debt, without the conversion feature. The resulting effective interest rate for the Notes was 2.9 % per annum at the time of settlement. The portion allocated to the equity component was recorded as additional paid-in capital. Immediately prior to the settlement of the Notes, the carrying amount of the debt component of the Notes, net of unamortized debt discount and issuance costs, was $ 139,897 . During the three months ended September 30, 2021, the Company recognized a loss on settlement of the Notes of $ 12,845 , representing the difference between the fair value of the consideration allocated to the debt component and the carrying value of the debt component immediately before settlement, and is presented as “Loss on settlement of convertible notes,” in the Company’s unaudited consolidated statements of income. During the three and nine months ended September 30, 2021 and 2020, the Company recognized interest expense and amortization of debt discount, on the Notes as below: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Interest expense on the Notes $ 817 $ 1,313 $ 3,442 $ 3,938 Amortization of debt discount on the Notes $ 431 $ 654 $ 1,795 $ 1,943 Expected payments for all of the Company's borrowings as of September 30, 2021 were as follows: Revolving Credit Facility 2021 (October - December) $ 15,000 2022 170,000 Total $ 185,000 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 September 30, 2021 and December 31, 2020, the Company had outstanding letters of credit of $ 461 , each, that were not recognized in the consolidated balance sheets. 30 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) 18. Capital Structure Common Stock The Company has one class of common stock outstanding. The Company purchased shares of common stock from employees in connection with withholding tax payments related to the vesting of restricted stock units and performance-based restricted stock units, as below: Shares repurchased Total consideration Weighted average purchase price per share (1) Three months ended September 30, 2021 — $ — $ — Three months ended September 30, 2020 — $ — $ — Nine months ended September 30, 2021 25,450 $ 2,015 $ 79.18 Nine months ended September 30, 2020 26,601 $ 2,012 $ 75.63 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"). Under the 2019 Repurchase Program, 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, as below: Shares repurchased Total consideration Weighted average purchase price per share (1) Three months ended September 30, 2021 244,580 $ 28,196 $ 115.28 Three months ended September 30, 2020 389,575 $ 24,906 $ 63.93 Nine months ended September 30, 2021 844,656 $ 83,605 $ 98.98 Nine months ended September 30, 2020 565,340 $ 36,889 $ 65.25 (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. 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. In connection with the settlement of the Notes, the Company issued to the Purchaser 310,394 shares of the Company's common stock. This common stock was issued from the Company’s existing treasury shares. The excess of issuance price of the Company’s treasury stock over its weighted average cost was recognized in additional paid-in-capital. 19. Employee Benefit Plans 31 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) 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"). 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. Components of net periodic benefit costs, were as follows: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Service cost $ 874 $ 679 $ 2,648 $ 2,021 Interest cost 231 242 700 722 Expected return on plan assets ( 199 ) ( 159 ) ( 600 ) ( 477 ) Amortization of actuarial loss, gross of tax 178 98 533 296 Net gratuity cost $ 1,084 $ 860 $ 3,281 $ 2,562 Income tax benefit on amortization of actuarial loss ( 32 ) ( 32 ) ( 154 ) ( 96 ) Amortization of actuarial loss, net of tax $ 146 $ 66 $ 379 $ 200 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 expects to earn a return of approximately 6.8 % per annum on the India Plan for the year ended December 31, 2021. Change in Plan Assets Plan assets at January 1, 2021 $ 11,512 Actual return 628 Employer contribution 3,375 Benefits paid ( 1,188 ) Effect of exchange rate changes ( 204 ) Plan assets at September 30, 2021 $ 14,123 The Company maintains several 401(k) plans (the “401(k) Plans”) under Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”), covering all eligible employees, as defined in the Code as a defined contribution plan. The Company may make discretionary contributions of up to a maximum of 4.0 % of employee compensation within certain limits. The Company's accrual for contributions to the 401(k) Plans were as follows: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Contribution to the 401(k) Plans $ 789 $ 2,661 $ 2,841 $ 2,916 32 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) The Company's contribution for various defined benefit plans on behalf of employees in India, the Philippines, the Czech Republic, South Africa, Colombia, Australia and Singapore were as follows: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Contribution to the defined benefit plans $ 3,580 $ 2,758 $ 10,617 $ 8,382 20. Leases 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 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. As part of the Company’s effort to moderate the impact of COVID-19, the Company continued to evaluate its office facilities to determine where it can exit, consolidate, or otherwise optimize its use of office space. During the nine months ended September 30, 2021 and year ended December 31, 2020, the Company changed the lease term for certain of its leases and recognized the resultant amount of the remeasurement of the lease liability as an adjustment to the ROU assets. 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. Supplemental balance sheet information 33 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) As of September 30, 2021 December 31, 2020 Operating Lease Operating lease right-of-use assets $ 81,324 $ 91,918 Operating lease liabilities - Current $ 18,340 $ 18,894 Operating lease liabilities - Non-current 73,939 84,874 Total operating lease liabilities $ 92,279 $ 103,768 Finance Lease Property and equipment, gross $ 2,585 $ 1,853 Accumulated depreciation ( 2,191 ) ( 1,382 ) Property and equipment, net $ 394 $ 471 Finance lease liabilities - Current $ 171 $ 229 Finance lease liabilities - Non-current 254 281 Total finance lease liabilities $ 425 $ 510 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 unaudited consolidated statements of income, are as follows: Lease cost Three months ended September 30, Nine months ended September 30, Finance lease: 2021 2020 2021 2020 Amortization of right-of-use assets $ 47 $ 52 $ 149 $ 177 Interest on lease liabilities 10 10 49 60 Operating lease (a) 6,380 6,781 20,012 20,484 Total lease cost $ 6,437 $ 6,843 $ 20,210 $ 20,721 (a) Includes short-term leases, which are immaterial. Supplemental cash flow and other information related to leases are as follows: 34 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) Nine months ended September 30, 2021 2020 Cash payments for amounts included in the measurement of lease liabilities : Operating cash outflows for operating leases $ 19,654 $ 19,780 Operating cash outflows for finance leases $ 49 $ 60 Financing cash outflows for finance leases $ 157 $ 180 Right-of-use assets obtained in exchange for new operating lease liabilities $ 4,647 $ 19,900 Right-of-use assets obtained in exchange for new finance lease liabilities $ 79 $ 90 Weighted-average remaining lease term (in years) Finance lease 1.9 years 1.9 years Operating lease 5.9 years 6.4 years Weighted-average discount rate Finance lease 14.3 % 10.3 % Operating lease 7.3 % 7.5 % The Company determines the incremental borrowing rate by adjusting the benchmark reference rates, with appropriate financing spreads applicable to the respective geographies where the leases were entered and lease specific adjustments for the effects of collateral. During the nine months ended September 30, 2021 and year ended December 31, 2020, the Company modified certain of its operating leases, resulting in a reduction of its lease liabilities by $ 1,022 and $ 3,143 respectively, with a corresponding reduction in ROU assets. As of September 30, 2021, the Company did not have any significant leases that have not yet commenced but that create significant rights and obligations for the Company. Maturities of lease liabilities as of September 30, 2021 were as follows: Operating Leases Finance Leases 2021 (October 1 - December 31) $ 6,032 $ 71 2022 24,371 190 2023 23,091 145 2024 17,643 69 2025 10,727 34 2026 and thereafter 34,698 14 Total lease payments $ 116,562 $ 523 Less: Imputed interest 24,283 98 Present value of lease liabilities $ 92,279 $ 425 Maturities of lease liabilities as of December 31, 2020 were as follows: 35 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) 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 — Total lease payments $ 133,378 $ 617 Less: Imputed interest 29,610 107 Present value of lease liabilities $ 103,768 $ 510 21. Income Taxes The Company determines the tax provision for interim periods using an estimate of its annual effective tax rate. Each quarter, the Company updates its estimate of annual effective tax rate, and if its estimated tax rate changes, the Company makes a cumulative adjustment. The impact of COVID-19 on the economic environment is uncertain and may change the annual effective tax rate, which could impact tax expense. The Company's effective tax rate decreased from 24.3 % during the three months ended September 30, 2020 to 13.7 % during the three months ended September 30, 2021. The Company recorded income tax expense of $ 4,196 and $ 8,490 for the three months ended September 30, 2021 and 2020, respectively. The decrease in income tax expense was primarily a result of (i) the recording of a one-time deferred tax benefit of $ 2,400 on settlement of the Notes during the three months ended September 30, 2021, (ii) the recording of excess tax benefits related to stock awards of $ 528 pursuant to ASU No. 2016-09 during the three months ended September 30, 2021, and (iii) lower profit during the three months ended September 30, 2021, compared to the three months ended September 30, 2020. The Company's effective tax rate decreased from 24.3 % during the nine months ended September 30, 2020 to 20.3 % during the nine months ended September 30, 2021. The Company recorded income tax expense of $ 22,019 and $ 18,416 for the nine months ended September 30, 2021 and 2020, respectively. The increase in the income tax expense was primarily a result of higher profit during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, and the recording of higher excess tax benefits related to stock awards of $ 1,874 pursuant to ASU No. 2016-09 during the nine months ended September 30, 2020, compared to $ 1,556 during the nine months ended September 30, 2021, partially offset by (i) the recording of a one-time deferred tax benefit of $ 2,400 on settlement of the Notes during the nine months ended September 30, 2021, and (ii) the recording of a one-time tax expense of $ 1,320 due to election of a new tax regime, during the nine months ended September 30, 2020, for two of the Company's Indian subsidiaries that provides for a lower tax rate on earnings in exchange for foregoing certain tax credits, including minimum alternative tax credits. During the three months ended September 30, 2021, the Company repatriated to the United States $ 17,000 (net of $ 908 withholding taxes) from India. During the nine months ended September 30, 2021, the Company repatriated to the United States $ 66,000 (net of $ 3,494 withholding taxes) from India and $ 42,500 (net of $ 7,494 withholding taxes) from the Philippines. As of September 30, 2021, the Company accrued withholding taxes of $ 10,988 associated with these distributions and increased the Company’s deferred tax assets. These distributions do not constitute a change in the Company’s permanent reinvestment assertion. The Company bases its decision to continue to indefinitely reinvest earnings in India and the Philippines on its estimate of the working capital required to support its operations in these geographies and periodically reviews its capital initiatives to support and expand the Company’s global operations, as well as an economically viable rate of return on its investments made in India and the Philippines as compared to those made in the United States. Income tax (deferred) recognized in “Other comprehensive income / (loss)” were as follows: 36 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Deferred taxes benefit / (expense) recognized on: Unrealized loss on cash flow hedges $ ( 980 ) $ ( 2,728 ) $ ( 1,201 ) $ ( 600 ) Reclassification adjustment for cash flow hedges 370 ( 47 ) 1,186 ( 69 ) Reclassification adjustment for retirement benefits ( 32 ) ( 32 ) ( 154 ) ( 96 ) Effect of tax rate changes on retirement benefits — — — 312 Foreign currency translation gain/(loss) 630 ( 2,149 ) 1,859 2,142 Total income tax benefit / (expense) recognized in other comprehensive income / (loss) $ ( 12 ) $ ( 4,956 ) $ 1,690 $ 1,689 22. Stock-Based Compensation The following costs related to the Company’s stock-based compensation plan are included in the unaudited consolidated statements of income: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Cost of revenues $ 2,198 $ 1,723 $ 5,588 $ 4,765 General and administrative expenses 4,431 3,358 12,337 8,038 Selling and marketing expenses 4,265 3,265 10,871 8,047 Total $ 10,894 $ 8,346 $ 28,796 $ 20,850 As of September 30, 2021, the Company had 1,732,630 shares available for grant under the 2018 Omnibus Incentive Plan. Stock Options 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) Outstanding at December 31, 2020 31,265 $ 25.43 $ 1,866 1.9 Granted — — — — Exercised ( 28,172 ) 25.19 2,475 — Forfeited — — — — Outstanding at September 30, 2021 3,093 $ 27.62 $ 295 2.3 Vested and exercisable at September 30, 2021 3,093 $ 27.62 $ 295 2.3 Restricted Stock Units 37 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) Restricted stock unit activity under the Company’s stock-based compensation plans is shown below: Restricted Stock Number Weighted Average Fair Value Outstanding at December 31, 2020* 903,666 $ 67.84 Granted 547,866 96.28 Vested ( 334,905 ) 63.69 Forfeited ( 63,104 ) 73.21 Outstanding at September 30, 2021* 1,053,523 $ 83.63 * As of September 30, 2021 and December 31, 2020 restricted stock units vested for which the underlying common stock is yet to be issued was 200,542 and 181,638 respectively. As of September 30, 2021, unrecognized compensation cost of $ 70,370 is expected to be expensed over a weighted average period of 2.7 years. Performance Based Stock Awards Under the 2018 Plan, the Company grants performance-based restricted stock units (“PRSUs”) to executive officers and other specified employees. During the nine months ended September 30, 2021, the Company granted PRSUs that cliff vest at the end of a three year period based on a market condition that is contingent on the Company's meeting the 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 targets. Performance restricted stock unit activity under the Company’s stock plans is shown below: Revenue Based PRSUs Market Condition Based PRSUs Number Weighted Average Fair Value Number Weighted Average Fair Value Outstanding at December 31, 2020 105,891 $ 72.33 105,869 $ 97.84 Granted — — 121,180 119.80 Vested — — — — Forfeited ( 157 ) 78.34 ( 157 ) 102.10 Outstanding at September 30, 2021 105,734 $ 72.32 226,892 $ 109.57 As of September 30, 2021, unrecognized compensation cost of $ 15,264 is expected to be expensed over a weighted average period of 1.9 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 unaudited consolidated statements of income. 23. Related Party Disclosures On October 1, 2018, the Company entered into the Investment Agreement with the Purchaser relating to the issuance to the Purchaser of $ 150,000 aggregate principal amount of the Notes. In connection with the investment, Vikram S. Pandit, Chairman and CEO of The Orogen Group LLC (an affiliate of the Purchaser), was appointed to Company’s Board of Directors. The Company settled the Notes on August 27, 2021. Refer to Note 17 - Borrowings to the unaudited consolidated financial statements for further details. 38 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) The principal amount outstanding for the Notes was nil as of September 30, 2021 and $ 150,000 as of December 31, 2020, and interest accrued of nil and $ 1,313 as of September 30, 2021 and December 31, 2020, respectively, related to the Investment Agreement. The following transactions with the Purchaser were recognized by the Company in connection with the Notes: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Repayment of the Notes in cash $ 200,000 $ — $ 200,000 $ — Issuance of shares of the Company's common stock $ 36,742 $ — $ 36,742 $ — Interest expense on the Notes $ 817 $ 1,313 $ 3,442 $ 3,938 24. Commitments and Contingencies Capital Commitments At September 30, 2021, the Company had committed to spend approximately $ 5,200 under agreements to purchase property and equipment. This amount is net of capital advances paid which are recognized in the unaudited consolidated balance sheets as “Capital work in progress” under “Property and equipment, net”. 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 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. 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 duty free, in the event that certain terms and conditions are not fulfilled. The Company believes, however, that these units have in the past satisfied and will continue to satisfy the required conditions. The Company’s operations centers in the Philippines are registered with the Philippine Economic Zone Authority. The registration provides the Company with certain fiscal incentives on the import of capital goods and local purchase of services and materials and requires ExlService Philippines, Inc. to meet certain performance and investment criteria. The Company believes that these centers have in the past satisfied and will continue to satisfy the required criteria. Contingencies Transfer pricing regulations generally require that any controlled intercompany transactions involving related entities be at an arm’s-length price. Accordingly, the Company determines the appropriate transfer prices for transactions among its related entities on the basis of a detailed functional and economic analysis involving benchmarking against transactions among entities that are unrelated. Tax authorities have jurisdiction to review transfer pricing results, and in the event that they determine that the transfer price applied was not appropriate, the Company may incur additional tax, interest and penalties. The Company is currently involved in transfer pricing disputes with Indian tax authorities regarding transactions with some of its related entities. Further, the Company and a U.S. subsidiary are engaged in tax litigation with Indian tax authorities regarding a permanent establishment matter. For the United States, the Philippines and India, tax year 2016 and subsequent tax years remain open for examination by the tax authorities as of September 30, 2021. The aggregate amount demanded by Indian tax authorities (net of advance payments, if any) from the Company related to its transfer pricing and other corporate tax issues for tax years 2003 to 2019 and its permanent establishment issues for tax years 2003 to 2006 as of September 30, 2021 and December 31, 2020 is $ 34,399 and $ 16,748 , respectively. The Company has made payments and/or provided bank guarantees against these demands in the amounts of $ 8,014 and $ 8,120 , respectively. Amounts paid as deposits in respect of such assessments aggregating to $ 6,229 and $ 6,307 as of September 30, 2021 and December 31, 2020, respectively, are included in “Other assets” and amounts deposited for bank guarantees aggregating to $ 1,785 and $ 1,813 39 Table of Contents EXLSERVICE HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued) September 30, 2021 (In thousands, except share and per share amounts) as of September 30, 2021 and December 31, 2020, respectively, are included in “Restricted cash” in the non-current assets section of the Company’s unaudited and audited consolidated balance sheets, respectively. Based on the facts underlying the Company’s position and its experience with these types of assessments, the Company believes that its position will more likely than not be sustained upon final examination by the tax authorities based on its technical merits as of the reporting date and accordingly has not accrued any amount with respect to these matters in its unaudited consolidated financial statements. The Company does not expect any impact from these assessments on its future income tax expense. It is possible that the Company might receive similar orders or assessments from tax authorities for subsequent years. Accordingly, even if these disputes are resolved, the Indian tax authorities may still serve additional orders or assessments. 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. As of the reporting date, it is unclear whether the interpretation set out in the pronouncement has retrospective application. If applied retrospectively, the interpretation may result in a significant increase in contributions payable by the Company for past periods for certain of its India-based employees. There are numerous interpretative challenges concerning the retrospective application of the judgment. 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. 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 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, its subsidiaries, and/or their 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. With respect to pending litigation matters as of the reporting date, based on information currently available, including the Company’s assessment of the facts underlying each matter and advice of counsel, the amount or range of reasonably possible losses, if any, cannot be reasonably estimated. 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. 40 Table of Contents