EXLSERVICE HOLDINGS, INC. You should read the following discussion in connection with our unaudited consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . Some of the statements in the following discussion are forward looking statements. Dollar amounts within Item 2 are presented as actual, rounded, dollar amounts. We have described in this Quarterly Report on Form 10-Q, the impact of the global Coronavirus Disease 2019 pandemic ("COVID-19") on our financial results for the quarter endedMarch 31, 2020 . However, we are not able to predict at this time what impact, the spread of COVID-19 will have on our 2020 financial results. See "Cautionary Note Regarding Forward-Looking Statements" below and in Item 1A-"Risk Factors" included elsewhere in this Quarterly Report on Form 10-Q for further information regarding risks and uncertainties relating to COVID-19. Cautionary Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements. You should not place undue reliance on these statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. These statements often include words such as "may," "will," "should," "believe," "expect," "anticipate," "intend," "plan," "estimate" or similar expressions. These statements are based on assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this Quarterly Report on Form 10-Q, you should understand that these statements are not guarantees of performance or results. They involve known and unknown risks, uncertainties and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements. Many of the following risks, uncertainties and other factors identified below are, and will be, amplified by COVID-19. These factors include but are not limited to: • our results of operations have been affected and could in the future be adversely impacted by COVID-19; • our dependence on a limited number of clients in a limited number of industries;
• worldwide political, economic or business conditions;
• negative public reaction in the
• fluctuations in our earnings;
• our ability to attract and retain clients including in a timely manner;
• our ability to successfully consummate or integrate strategic acquisitions;
• our ability to accurately estimate and/or manage the costs and/or timing of
winding down businesses;
• restrictions on immigration;
• our ability to hire and retain enough sufficiently trained employees to
support our operations;
• our ability to grow our business or effectively manage growth and
international operations;
• any changes in the senior management team;
• increasing competition in our industry;
• telecommunications or technology disruptions;
• our ability to withstand the loss of a significant customer;
• our ability to realize the entire book value of goodwill and other
intangible assets from acquisitions;
• regulatory, legislative and judicial developments, including changes to or
the withdrawal of governmental fiscal incentives;
• changes in tax laws or decisions regarding repatriation of funds held abroad;
• ability to service debt or obtain additional financing on favorable terms;
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• legal liability arising out of customer contracts;
• technological innovation;
• political or economic instability in the geographies in which we operate;
• operational and information security failures arising as a result of remote
work solutions adopted due to COVID-19;
• cyber security incidents, data breaches, or other unauthorized disclosure
of sensitive or confidential client and customer data; and
• adverse outcome of our disputes with the Indian tax authorities
These and other factors are more fully discussed in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . These and other risks could cause actual results to differ materially from those implied by forward-looking statements in this Quarterly Report on Form 10-Q. The forward-looking statements made by us in this Quarterly Report on Form 10-Q, or elsewhere, speak only as of the date on which they were made. New risks and uncertainties come up from time to time, and it is impossible for us to predict those events or how they may affect us. We have no obligation to update any forward-looking statements in this Quarterly Report on Form 10-Q after the date of this Quarterly Report on Form 10-Q, except as required by federal securities laws. Executive Overview We are a leading operations management and analytics company that helps our clients build and grow sustainable businesses. By orchestrating our domain expertise, data, analytics and digital technology, we look deeper to design and manage agile, customer-centric operating models to improve global operations, drive profitability, enhance customer satisfaction, increase data-driven insights, and manage risk and compliance. We serve customers in multiple industries, including insurance, healthcare, banking and financial services, utilities, travel, transportation and logistics, media and retail, among others. We operate in the business process management ("BPM") industry and we provide operations management and analytics services. EffectiveJanuary 1, 2020 , we made certain operational and structural changes to more closely integrate our businesses and to simplify our organizational structure. We now manage and report financial information through our four strategic business units, Insurance, Healthcare, Analytics and Emerging Business, which reflects how management will review financial information and make operating decisions. These business units develop client specific solutions, build capabilities, maintain a unified go-to-market approach and are integrally responsible for service delivery, customer satisfaction, growth and profitability. In line with our strategy of vertical integration and focus on domain expertise, we have integrated our Finance & Accounting and Consulting operating segments within each of the Insurance and Healthcare operating segments based on the corresponding industry-specific clients. Finance & Accounting and Consulting services provided to clients outside of the Insurance and Healthcare industries is now the part of our newly formed business unit and reportable segment, Emerging Business. In addition, we integrated our former Travel, Transportation and Logistics, Banking and Financial Services, and Utilities operating segments under Emerging Business to further leverage and optimize the operating scale in providing operations management services. Our new reportable segments are as follows: • Insurance, • Healthcare, • Analytics, and • Emerging Business
In conjunction with the new reporting structure, we recasted our segment disclosures for all prior periods presented to conform to the way we internally manage and monitor segment performance.
Our global delivery network, which includes highly trained industry and process specialists acrossthe United States ,Latin America ,South Africa ,Europe andAsia (primarilyIndia andthe Philippines ), is a key asset. We have operations centers inIndia , theU.S. ,the Philippines ,Bulgaria ,Colombia ,South Africa ,Romania and theCzech Republic . 38 --------------------------------------------------------------------------------
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The recent outbreak of COVID-19, which has been declared by theWorld Health Organization to be a "public health emergency of international concern," has spread across the globe and is materially impacting worldwide economic activity and levels of business confidence. Through the first fiscal quarter endedMarch 31, 2020 , COVID-19 did not have a significant impact on our business, however COVID-19 is likely to materially impact us and our customers, employees, contractors, suppliers, and other partners, who have been prevented from conducting business activities as usual, including due to shutdowns that have been requested or mandated by governmental authorities. The restrictions have disrupted our ability to provide our services and solutions and resulted in, among other things loss of revenue, increased costs and the possibility of enhanced credit risk on our accounts receivable. The continued spread of COVID-19 and the measures taken by the governments of countries affected has disrupted the continuity of providing services to our customers and adversely impacted our business, financial condition or results of operations. There continues to be significant volatility and economic and geopolitical uncertainty in many markets around the world. Several states inthe United States , includingNew York , where we are headquartered, have declared states of emergency, and several countries around the world, includingthe United States , have significantly restricted travel. We are actively managing our business to respond to the impact. Given the unprecedented uncertainty of this situation, including the unknown duration and severity of the pandemic and the unknown overall impact on our services, we are unable to forecast the full impact on our business; however, we expect that the impacts from COVID-19 and the related economic disruption will have an adverse impact on our consolidated results of operations, consolidated financial position and consolidated cash flow in fiscal 2020. Due to the above circumstances and as described generally in this Quarterly Report on Form 10-Q, our results of operations for the three month period endedMarch 31, 2020 are not necessarily indicative of the results to be expected for the full fiscal year. As ofMarch 31, 2020 , due to the deteriorating macroeconomic conditions arising from the COVID-19 pandemic, we performed a goodwill impairment test for any potential impairment and concluded that there was no impairment. However, there can be no assurances that goodwill will not be impaired in future periods. Estimating the fair value of goodwill requires the use of estimates and significant judgments that are based on a number of factors including actual operating results. These estimates and judgments may not be within the control of us and accordingly it is reasonably possible that the judgments and estimates could change in future periods. Given the continued uncertainty surrounding COVID-19, we have taken certain precautionary measures to maintain financial flexibility during this time, including drawing$100 million from our line of credit under our existing Credit Agreement onMarch 12, 2020 , the proceeds of which were available for working capital, general corporate or other purposes as needed, and which was repaid in full onApril 20, 2020 , temporary suspension of our stock repurchase program, and other cost reduction measures related to employee and vendor expenses and capital expenditure plans.
For additional information and risks related to COVID-19, see Item 1A- "Risk Factors" below.
Revenues
For the three months ended
We serve clients mainly in theU.S. and theU.K. , with these two regions generating 84.5% and 9.5%, respectively, of our total revenues for the three months endedMarch 31, 2020 , and 81.9% and 12.1%, respectively, of our revenues for the three months endedMarch 31, 2019 . For the three months endedMarch 31, 2020 and 2019, our total revenues from our top ten clients accounted for 37.3% and 36.6% of our total revenues, respectively. Our revenue concentration with our top clients remains largely consistent year-over-year and we continue to develop relationships with new clients to diversify our client base. We believe that the loss of any of our top ten clients could have a material adverse effect on our financial performance. Our Business We provide operations management and analytics services. We market our services to our existing and prospective clients through our sales and client management teams, which are aligned by key industry verticals and cross-industry domains such as finance and accounting. Our sales and client management teams operate from theU.S. ,Europe andAustralia .
Operations Management Services: We provide our clients with a range of operations management services from our Insurance, Healthcare and Emerging Business operating segments, which typically involve the transfer to EXL business
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operations of a client such as claims processing, clinical operations, or financial transaction processing, after which we administer and manage those operations for our client on an ongoing basis. As part of this transfer, we hire and train employees to work at our operations centers on the relevant business operations, implement a process migration to these operations centers and then provide services either to the client or directly to the client's customers. Each client contract has different terms based on the scope, deliverables and complexity of the engagement. We also provide consulting services related to operations management that include industry-specific digital transformational services as well as cross-industry finance and accounting services as part of the Emerging Business operating segment. We continue to observe a shift in industry pricing models toward transaction-based pricing, outcome-based pricing and other alternative pricing models. We believe this trend will continue and we use such alternative pricing models with some of our current clients and are seeking to move certain other clients from a billing rate model to a transaction-based or other alternative pricing model. These alternative pricing models place the focus on operating efficiency in order to maintain our gross margins. In addition, we have also observed that prospective larger clients are entering into multi-vendor relationships with regard to their outsourcing needs. We believe that the trend toward multi-vendor relationships will continue. A multi-vendor relationship allows a client to seek more favorable pricing and other contract terms from each vendor, which can result in significantly reduced gross margins from the provision of services to such client for each vendor. To the extent our large clients expand their use of multi-vendor relationships and are able to extract more favorable contract terms from other vendors, our gross margins and revenues may be reduced with regard to such clients if we are required to modify the terms of our relationships with such clients to meet competition. Our existing agreements with original terms of three or more years provide us with a relatively predictable revenue base for a substantial portion of our operations management business, however, we have a long selling cycle for our services and the budget and approval processes of prospective clients make it difficult to predict the timing of entering into definitive agreements with new clients. Similarly, new license sales and implementation projects for our technology service platforms and other software-based services have a long selling cycle, however ongoing annual maintenance and support contracts for existing arrangements provide us with a relatively predictable revenue base. Analytics: Our analytics services focus on driving improved business outcomes for our customers by generating data-driven insights across all parts of our customers' business. We also provide care optimization and reimbursement optimization services, for our clients through our healthcare analytics solutions and services. We also offer integrated solutions to help our clients in cost containment by leveraging technology platforms, customizable and configurable analytics and expertise in healthcare reimbursements to help clients enhance their claim payment accuracy. Our teams deliver predictive and prescriptive analytics in the areas of customer acquisition and lifecycle management, risk underwriting and pricing, operational effectiveness, credit and operational risk monitoring and governance, regulatory reporting, payment integrity and care management and data management. We actively cross-sell and, where appropriate, integrate our Analytics services with other operations management services as part of a comprehensive offering for our clients.
We anticipate that revenues from our analytics services will grow as we expand our service offerings and client base, both organically and through acquisitions.
Critical Accounting Policies and Estimates
For a description of our critical accounting policies and estimates, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" and Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 In addition, due to outbreak of COVID-19, we have reassessed those of our accounting policies whose application places the most significant demands on management's judgment, for instance, revenue recognition, allowance for expected credit losses, business combinations, goodwill, intangibles and long-lived assets, stock-based compensation, derivative instruments and hedging activity, borrowings, assumptions related to ROU assets, lease cost, income taxes and assets and obligations related to employee benefit plans. Such reassessments did not have a significant impact on our results of operations and cash flows for the periods presented. 40 --------------------------------------------------------------------------------
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Results of Operations The following table summarizes our results of operations for the three months endedMarch 31, 2020 and 2019: Three months ended March 31, 2020 2019 (dollars in millions) Revenues, net$ 246.0 $ 239.6 Cost of revenues(1) 162.7 157.3 Gross profit(1) 83.3 82.3 Operating expenses: General and administrative expenses 28.9 32.5 Selling and marketing expenses 14.5 18.0 Depreciation and amortization expense 12.4 13.7 Impairment and restructuring charges - 1.2 Total operating expenses 55.8 65.4 Income from operations 27.5 16.9 Foreign exchange gain, net 1.4 1.3 Interest expense (3.1 ) (3.6 ) Other income, net 2.5 4.4
Income before income tax expense and earnings from equity affiliates
28.3 19.0
Income tax expense 5.8 4.2
Income before earnings from equity affiliates 22.5 14.8
Loss from equity-method investment 0.1 0.1
Net income attributable to ExlService Holdings, Inc.
stockholders $ 22.4 $ 14.7 (1) Exclusive of depreciation and amortization expense.
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Three Months Ended
The following table summarizes our revenues by reportable segments for the three
months ended
Three months ended March 31, Percentage
2020 2019 Change change
(dollars in millions)
Insurance $ 83.7 $ 81.3 $ 2.4 3.0 %
Healthcare 27.0 22.2 4.8 21.5 %
Emerging Business 42.8 49.1 (6.3 ) (12.8 )%
Analytics 92.5 87.0 5.5 6.3 %
Total revenues, net $ 246.0 $ 239.6 $ 6.4 2.7 %
Revenues for the three months ended March 31, 2020 were $246.0 million , up $6.4
million , or 2.7%, compared to the three months ended March 31, 2019 .
Revenue growth in Insurance of $2.4 million was primarily driven by expansion of
business from our existing clients of $3.3 million . This was partially offset by
$0.9 million mainly attributable to the depreciation of the Australian dollar,
Indian rupee, U.K. pound sterling and South African ZAR against the U.S. dollar
during the three months ended March 31, 2020 compared to the three months ended
March 31, 2019 . Insurance revenues were 34.0% and 33.9% of our total revenues in
the three months ended March 31, 2020 and March 31, 2019 , respectively.
Revenue growth in Healthcare of $4.8 million was primarily driven by expansion
of business from our existing clients and new wins aggregating to $8.7 million ,
partially offset by our December 2019 wind-down of Health Integrated business
revenues of $3.9 million during the three months ended March 31, 2019 , compared
to none in the three months ended March 31, 2020 . Healthcare revenues were 11.0%
and 9.3% of our total revenues in the three months ended March 31, 2020 and
March 31, 2019 , respectively.
Revenue decline in Emerging Business of $6.3 million was primarily driven by
termination of certain existing client contracts of $5.8 million , and $0.5
million attributable to the depreciation of the Indian rupee against the U.S.
dollar during the three months ended March 31, 2020 compared to the three months
ended March 31, 2019 . Emerging Business revenues were 17.4% and 20.5% of our
total revenues in the three months ended March 31, 2020 and March 31, 2019 ,
respectively.
Revenue growth in Analytics of $5.5 million was primarily driven by an increase
in revenues from our recurring and project-based engagements from our existing
and new clients of $5.8 million . This was partially offset by $0.3 million
attributable to the depreciation of the U.K. pound sterling and Indian rupee
against the U.S. dollar during the three months ended March 31, 2020 compared to
the three months ended March 31, 2019 . Analytics revenues were 37.6% and 36.3%
of our total revenues in the three months ended March 31, 2020 and March 31,
2019 , respectively.
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Cost of Revenues and Gross Margin: The following table sets forth cost of revenues and gross margin of our reportable segments.
Cost of Revenues Gross Margin
Three months ended March 31, Change Percentage Three months ended March 31, Change
2020 2019 change 2020 2019
(dollars in millions)Insurance $ 59.0$ 55.2 $ 3.8 6.7 % 29.6 % 32.0 % (2.4 )% Healthcare 19.6 17.8 1.8 10.1 % 27.5 % 20.0 % 7.5 % Emerging Business 25.5 27.3 (1.8 ) (6.6 )% 40.5 % 44.4 % (3.9 )% Analytics 58.6 57.0 1.6 3.0 % 36.6 % 34.6 % 2.0 % Total $ 162.7$ 157.3 $ 5.4 3.4 % 33.9 % 34.4 % (0.5 )% For the three months endedMarch 31, 2020 , cost of revenues was$162.7 million compared to$157.3 million for the three months endedMarch 31, 2019 , an increase of$5.4 million , or 3.4%. Our gross margin for the three months endedMarch 31, 2020 was 33.9% compared to 34.4% for the three months endedMarch 31, 2019 , a decrease of 50 basis points ("bps"), primarily due to the impact of COVID-19 related expenses of 80 bps. The increase in cost of revenues in Insurance of$3.8 million was primarily due to an increase in employee-related costs of$3.0 million on account of higher headcount and wage inflation, higher infrastructure and travel costs of$1.1 million and higher technology and other operating costs of$0.3 million . This was partially offset by currency movements, net of hedging of$0.6 million . Gross margin in Insurance decreased by 240 bps during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 , primarily due to higher operating expenses. The increase in cost of revenues in Healthcare of$1.8 million was primarily due to an increase in employee-related costs of$2.1 million . This was partially offset by lower other operating cost of$0.2 million and currency movements, net of hedging of$0.1 million . Gross margin in Healthcare increased by 750 bps during the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 , primarily due to lower margin in the Heath Integrated business during the three months endedMarch 31, 2019 and higher revenues during the three months endedMarch 31, 2020 . The decrease in cost of revenues in Emerging Business of$1.8 million was primarily due to a decrease in employee-related costs of$1.3 million , lower infrastructure and technology cost of$0.5 million and currency movements, net of hedging of$0.2 million . This was partially offset by higher other operating cost of$0.2 million . Gross margin in Emerging Business decreased by 390 bps during the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 , primarily due to lower revenues and higher operating expenses. The increase in cost of revenues in Analytics of$1.6 million was primarily due to an increase in employee-related costs of$4.0 million on account of higher headcount and wage inflation and higher infrastructure and travel costs$0.7 million . This was partially offset by lower other operating cost$2.6 million and currency movements, net of hedging of$0.5 million . Gross margin in Analytics increased by 200 bps during the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 , primarily due to higher volumes in existing clients. 43 --------------------------------------------------------------------------------
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Selling, General and Administrative ("SG&A") Expenses.
Three months ended March 31, Change Percentage
2020 2019 change
(dollars in millions)
General and administrative expenses
14.5 18.0 (3.5 ) (19.9 )%
Selling, general and administrative expenses $ 43.4 $ 50.5 $ (7.1 ) (14.2 )%
As a percentage of revenues 17.6 % 21.1 %
The decrease in SG&A expenses of $7.1 million was primarily due to a decrease in
employee-related costs of $2.9 million , a decrease in stock-based compensation
expense of $2.3 million mostly due to revision in estimates related to revenue
linked performance based restricted stock units due to COVID-19, lower travel
costs of $0.8 million , lower other operating costs $0.8 million and currency
movements, net of hedging of $0.3 million .
Depreciation and Amortization.
Three months ended March 31, Change Percentage
2020 2019 change
(dollars in millions)
Depreciation expense $ 8.3 $ 8.1 $ 0.2 1.9 %
Intangible amortization expense 4.1 5.6 (1.5 ) (24.9 )%
Depreciation and amortization expense $ 12.4 $ 13.7 $ (1.3 ) (8.9 )%
As a percentage of revenues 5.1 % 5.7 %
The decrease in intangibles amortization expense of$1.5 million was primarily due to lower weighted average remaining useful lives of intangible assets during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . The increase in depreciation expense of$0.2 million was due to depreciation related to our new operating centers to support our business growth.
Impairment and Restructuring Charges.
Three months ended March 31,
2020 2019 Change Percentage change
(dollars in millions)
Impairment and restructuring charges $ - $ 1.2 $ (1.2 ) (100.0 )%
As a percentage of revenues - % 0.5 %
During the three months ended
Income from Operations. Income from operations increased by$10.6 million , or 63.0%, from$16.9 million for the three months endedMarch 31, 2019 to$27.5 million for the three months endedMarch 31, 2020 . As a percentage of revenues, income from operations increased from 7.0% for the three months endedMarch 31, 2019 to 11.2% for the three months endedMarch 31, 2020 . Foreign Exchange Gain/(Loss). Net foreign exchange gains and losses are primarily attributable to movement of theU.S. dollar against the Indian rupee, theU.K. pound sterling and the Philippine peso during the three months endedMarch 31, 2020 . The average exchange rate of theU.S. dollar against the Indian rupee increased from 70.32 during the three months endedMarch 31, 2019 to 73.08 during the three months endedMarch 31, 2020 . The average exchange rate of theU.K. pound sterling against theU.S. dollar decreased from 1.32 during the three months endedMarch 31, 2019 to 1.28 during the three months endedMarch 31, 2020 . The average exchange rate of theU.S. dollar against the Philippine peso decreased from 52.11 during the three months endedMarch 31, 2019 to 50.83 during the three months endedMarch 31, 2020 . 44 --------------------------------------------------------------------------------
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We recorded a net foreign exchange gain of$1.4 million for the three months endedMarch 31, 2020 compared to the net foreign exchange gain of$1.3 million for the three months endedMarch 31, 2019 . Interest expense. Interest expense decreased from$3.6 million for the three months endedMarch 31, 2019 to$3.1 million for the three months endedMarch 31, 2020 primarily due lower effective interest rates under our Credit Facility during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . Other Income, net. Three months ended March 31, Percentage 2020 2019 Change change (dollars in millions) Gain on sale and mark-to-market of mutual funds $ 2.0$ 3.5 $ (1.5 ) (42.0 )% Interest and dividend income 0.5 0.8 (0.3 ) (33.0 )% Other, net - 0.1 (0.1 ) (158.0 )% Other income, net $ 2.5$ 4.4 $ (1.9 ) (42.8 )% Other income, net decreased by$1.9 million , from$4.4 million for the three months endedMarch 31, 2019 to$2.5 million for the three months endedMarch 31, 2020 , primarily due to lower return on mutual fund investments of$1.5 million and decrease in interest and dividend income of$0.4 million . Income Tax Expense. We recorded income tax expense of$5.8 million and$4.2 million for the three months endedMarch 31, 2020 and 2019. The effective tax rate decreased from 22.1% during the three months endedMarch 31, 2019 to 20.7% during the three months endedMarch 31, 2020 , primarily as a result of recording of higher excess tax benefits related to stock awards of$1.8 million pursuant to ASU No. 2016-09 during the three months endedMarch 31, 2020 compared to$1.0 million during the three months endedMarch 31, 2019 . Net Income. Net income increased from$14.7 million for the three months endedMarch 31, 2019 to$22.4 million for the three months endedMarch 31, 2020 , primarily due to increase in income from operations of$10.6 million , lower interest expense of$0.5 million and higher foreign exchange gain, net of$0.1 million . This was partially offset by lower other income, net of$1.9 million and higher income tax expense of$1.6 million . As a percentage of revenues, net income increased from 6.1% for the three months endedMarch 31, 2019 to 9.1% for the three months endedMarch 31, 2020 . Liquidity and Capital Resources Three months ended March 31, 2020 2019 (dollars in millions)
Opening cash, cash equivalents and restricted cash
$ 104.1 Net cash (used for)/provided by operating activities (13.6 ) 8.3 Net cash provided by/(used for) investing activities 36.0 (37.2 ) Net cash provided by financing activities 86.7
19.8
Effect of exchange rate changes (2.6 ) (0.4 ) Closing cash, cash equivalents and restricted cash$ 233.5
As ofMarch 31, 2020 and 2019, we had$367.4 million and$302.7 million , respectively, in cash, cash equivalents and short-term investments, of which$227.0 million , and$273.9 million , respectively, is located in foreign jurisdictions that upon distribution may be subject to withholding and other taxes and we do not currently intend to distribute such amounts. If, in the future, we change our intention regarding distributions, additional taxes may be required and would be recorded in the period the intention changes. Operating Activities: Cash flows used for operating activities were$13.6 million for the three months endedMarch 31, 2020 as compared to cash flows provided by operating activities of$8.3 million during the three months endedMarch 31, 2019 . Generally, factors that affect our earnings-, for instance, pricing, volume of services, costs and productivity, affect our cash flows used or provided from operations in a similar manner. However, while management of working capital, including 45 --------------------------------------------------------------------------------
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timing of collections and payments affects operating results only indirectly, the impact on the working capital requirements and cash flows provided by operating activities can be significant.
Cash flows used for operating activities for the three months endedMarch 31, 2020 was$13.6 million . This comprised of net income plus the net effect of non-cash items, such as depreciation and amortization, expense, stock-based compensation expense, amortization of operating lease right-of-use assets, unrealized gains on short-term investment, deferred income taxes, and others aggregating to$46.1 million . The primary working capital use of net cash of$59.7 million during the three months endedMarch 31, 2020 was driven by decrease in accrued employee costs and operating lease liabilities, increase in accounts receivables and current and non-current assets. Investing Activities: Cash flows provided by investing activities were$36.0 million for the three months endedMarch 31, 2020 as compared to cash flows used for investing activities of$37.2 million for the three months endedMarch 31, 2019 . The increase in cash flows is mainly due to net higher redemption of investments of$49.0 million during the three months endedMarch 31, 2020 as compared to net purchase of investments of$26.3 million during the three months endedMarch 31, 2019 . This was partially offset by higher capital expenditures of$1.4 million during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 and additional investment in equity affiliate of$0.7 million during the three months endedMarch 31, 2020 . Financing Activities: Cash flows provided by financing activities were$86.7 million during the three months endedMarch 31, 2020 as compared to cash flows provided by financing activities of$19.8 million during the three months endedMarch 31, 2019 . The increase in cash flows provided from financing activities was primarily due to higher net borrowings of$99.8 million (net of repayment) under our Credit Facility (as described below in "Financing Arrangements") during the three months endedMarch 31, 2020 as compared to net borrowings (net of repayment) of$35.4 million during the three months endedMarch 31, 2019 and lower purchases of treasury stock by$1.4 million under our share repurchase program during the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 . We expect to use cash from operating activities to maintain and expand our business by making investments primarily related to new facilities and capital expenditures associated with leasehold improvements to build our facilities, and purchase telecommunications equipment and computer hardware and software in connection with managing client operations. We incurred$12.3 million of capital expenditures in the three months endedMarch 31, 2020 . We expect to incur capital expenditures of between$32.0 million and$38.0 million in 2020, primarily to meet our growth requirements, including additions to our facilities as well as investments in technology applications, product development, digital technology, advanced automation, robotics and infrastructure. In connection with any tax assessment orders that have been issued or may be issued against us or our subsidiaries, we may be required to deposit additional amounts with respect to such assessment orders (see Note 24 to our unaudited consolidated financial statements herein for further details). We anticipate that we will continue to rely upon cash from operating activities to finance our smaller acquisitions, capital expenditures and working capital needs. If we have significant growth through acquisitions, we may need to obtain additional financing. During the quarter endedMarch 31, 2020 , to enhance our liquidity position in response to COVID-19, management has taken certain precautionary measures, including: drawing$100.0 million from our line of credit under our existing Credit Agreement onMarch 12, 2020 , the proceeds of which were available for working capital, general corporate or other purposes as needed, and which was repaid in full onApril 20, 2020 ; and electing to temporarily suspend share repurchases under our 2019 Repurchase Program, and other cost reduction measures related to employee and vendor expenses and capital expenditure plans. The 2019 Repurchase Program remains authorized by the Board of Directors and management has the discretion to resume share repurchases in the future at any time, depending upon market conditions, our capital needs and other factors. Financing Arrangements (Debt Facility) Credit Agreement OnNovember 21, 2017 , we and each of our wholly owned material domestic subsidiaries entered into a credit agreement with certain lenders, andCitibank, N.A . as Administrative Agent (the "Credit Agreement"). The Credit Agreement provides for a$200.0 million revolving credit facility (the "Credit Facility") with an option to increase the commitments by up to$100.0 million , subject to certain approvals and conditions as set forth in the Credit Agreement. The Credit Agreement also includes a letter of credit sub facility. The Credit Facility has a maturity date ofNovember 21, 2022 and is voluntarily pre-payable from time to time without premium or penalty. Borrowings under the Credit Agreement may be used for working 46 --------------------------------------------------------------------------------
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capital and general corporate purposes, including permitted acquisitions. OnJuly 2, 2018 , we exercised our option under the Credit Agreement to increase the commitments by$100.0 million thereby utilizing the entire revolver under the Credit Facility of$300.0 million . The incremental commitments were made pursuant to (and constitute part of) the existing commitments and shall be subject to the terms and conditions applicable to the existing commitments as set forth in the Credit Agreement.
As of
OnOctober 1, 2018 , we entered into a second amendment (the "Amendment") to our Credit Agreement, as amended, among the Company, as borrower, with certain lenders, andCitibank, N.A . as Administrative Agent to, among other things, permit the issuance by the Company of the Convertible Senior Notes described below, and settlement upon maturity or conversion thereof, in accordance with the Investment Agreement, the indenture dated as ofOctober 4, 2018 and the other documents entered into in connection therewith. See Note 17 to our unaudited consolidated financial statements herein for further details on our debt facilities. As ofMarch 31, 2020 , we had outstanding indebtedness under the Credit Facility of$199.0 million , of which$100.0 million is expected to be repaid within the next twelve months and is included under "current portion of long-term borrowings" and of which$99.0 million is included under "long-term borrowings", less current portion" in the unaudited consolidated balance sheets. As ofDecember 31, 2019 , we had outstanding indebtedness under the Credit Facility of$99.0 million , of which$40.0 million was included under "current portion of long-term borrowings" and the balance of$59.0 million was included under "long-term borrowings, net of current portion" in the consolidated balance sheets. Convertible Senior Notes OnOctober 1, 2018 , we entered into an investment agreement (the "Investment Agreement") withOrogen Echo LLC , an affiliate ofThe Orogen Group LLC , relating to the issuance toOrogen Echo LLC of$150.0 million in an aggregate principal amount of 3.50% Convertible Senior Notes dueOctober 1, 2024 (the "Notes"). The Notes were issued onOctober 4, 2018 . The Notes bear interest at a rate of 3.50% per annum, payable semi-annually in arrears in cash onApril 1 andOctober 1 of each year. During the three months endedMarch 31, 2020 andMarch 31, 2019 , we recognized interest expense of$1.3 million and$1.3 million , respectively, on the Notes. The Notes are convertible at an initial conversion rate of 13.3333 shares of the common stock perone thousand dollar principal amount of the Notes (which represents an initial conversion price of approximately$75 per share). With certain exceptions, upon a fundamental change, as defined in the Indenture, the holders of the Notes may require us to repurchase all or part of the principal amount of the Notes at a purchase price equal to the principal amount plus accrued and unpaid interest. We may redeem the principal amount of the Notes, at our option, in whole but not in part, at a purchase price equal to the principal amount plus accrued and unpaid interest on or afterOctober 1, 2021 , if the closing sale price of the common stock exceeds 150% of the then-current conversion price for 20 or more trading days in the 30 consecutive trading day period preceding our exercise of this redemption right (including the trading day immediately prior to the date of the notice of redemption). We may elect to settle conversions of the Notes by paying or delivering, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock. We used the proceeds from the issuance of Notes to repay$150.0 million of our outstanding borrowings under the Credit Facility. We accounted for the liability and equity components of the Notes separately to reflect its non-convertible debt borrowing rate. The estimated fair value of the liability component at issuance of$133.1 million was determined using a discounted cash flow technique, which considered debt issuances with similar features of our debt, excluding the conversion feature. The resulting effective interest rate for the Notes was 5.75% per annum. The excess of the gross proceeds received over the estimated fair value of the liability component totaling$16.9 million , was allocated to the conversion feature (equity component, recorded as additional paid-in capital) with a corresponding offset recognized as a discount to reduce the net carrying value of the Notes. The discount is being amortized to interest expense over a six-year period endingOctober 1, 2024 (the expected life of the liability component) using the effective interest method. Under the terms of the Notes, we are not prohibited from paying cash dividends unless payment would trigger an event of default or if one currently exists. We do not anticipate paying any cash dividends in the foreseeable future. 47 --------------------------------------------------------------------------------
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Off-Balance Sheet Arrangements In the ordinary course of business, we provide standby letters of credit to third parties primarily for facility leases. As ofMarch 31, 2020 andDecember 31, 2019 , we had outstanding letters of credit of$0.5 million each, respectively, that were not recognized in our unaudited and audited consolidated balance sheets, respectively. These are not reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We had no other off balance sheet arrangements or obligations. Contractual Obligations The following table sets forth our contractual obligations as ofMarch 31, 2020 : Payment Due by Period Less than 1-3 4-5 After 1 year years years 5 years Total (dollars in millions) Finance leases$ 0.3 $ 0.4 $ 0.1 $ -$ 0.8 Operating leases(a) 25.8 45.9 34.5 40.3 146.5 Purchase obligations 12.3 - - - 12.3 Other obligations(b) 2.4 4.2 3.4 5.7 15.7 Borrowings: Principal payments 100.7 99.0 150.0 - 349.7 Interest payments(c) 7.0 13.2 10.5 - 30.7 Total contractual cash obligations(d)$ 148.5 $ 162.7 $ 198.5 $ 46.0 $ 555.7
(a) Represents lease liabilities payable for the expected lease term.
(b) Represents estimated payments under the Gratuity Plan.
(c) Interest on borrowings is calculated based on the interest rate on the
outstanding borrowings as of
(d) Excludes
of the amount and timing of payment is currently not reliably estimable or
determinable.
Certain units of our Indian subsidiaries were established as 100%
Export-Oriented units under the Software Technology Parks of India ("STPI") or
Special Economic Zone ("SEZ") scheme promulgated by the Government of India .
These units are exempt from customs, central excise duties, and levies on
imported and indigenous capital goods, stores, and spares. We have undertaken to
pay custom duties, service taxes, levies, and liquidated damages payable, if
any, in respect of imported and indigenous capital goods, stores, and spares
consumed duty free, in the event that certain terms and conditions are not
fulfilled. We believe, however, that these units have in the past satisfied and
will continue to satisfy the required conditions.
Our operations centers in the Philippines are registered with the Philippine
Economic Zone Authority ("PEZA"). The registration provides us with certain
fiscal incentives on the import of capital goods and local purchase of services
and materials and requires that ExlService Philippines, Inc. to meet certain
performance and investment criteria. We believe that these centers have in the
past satisfied and will continue to satisfy the required criteria.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, see Note 2-"Recent
Accounting Pronouncements" to the unaudited consolidated financial statements
contained herein.
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