UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



ý☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2019



¨☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROMTO

COMMISSION FILE NUMBER 001-33089

EXLSERVICE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

_________________________________________________________



~~DELAWARE~~Delaware		82-0572194
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

~~280 PARK AVENUE, 38 TH FLOOR,~~ ~~NEW YORK, NEW YORK~~ 320 Park Avenue,	29th Floor,	~~10017~~
New York,	New York	10022
(Address of principal executive offices)		(Zip code)

~~(212)~~ (212) 277-7100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesý☒ No ¨☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesý☒ No ¨☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated ~~filer,”~~filer”, “accelerated ~~filer,”~~filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large ~~accelerated filer~~Accelerated Filer	ý☒	Accelerated filer	¨☐

Non-accelerated filer	¨ ~~(Do not check if a smaller reporting company)~~ ☐	Smaller reporting company	¨☐

Emerging growth company	¨☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No ý☒



Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value per share	EXLS	NASDAQ

As of ~~October 24, 2017,~~July 26, 2019, there were ~~33,942,974~~34,174,860 shares of the registrant’s common stock outstanding, par value $0.001 per share.

Table of Contents

TABLE OF CONTENTS

PAGE
ITEM

Part I. Financial Information
3

1.
FINANCIAL STATEMENTS

Consolidated Balance Sheets as of September 30, 2017 (Unaudited) and December 31, 2016
3

Consolidated Statements of Income (Unaudited) for the Three months and Nine months ended September 30, 2017 and 2016
4

Consolidated Statements of Comprehensive Income (Unaudited) for the Three months and Nine months ended September 30, 2017 and 2016
5

Consolidated Statements of Cash Flows (Unaudited) for the Nine months ended September 30, 2017 and 2016
6

Notes to Consolidated Financial Statements (Unaudited)
7

2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28

3.
Quantitative and Qualitative Disclosures About Market Risk
42

4.
Controls and Procedures
42

Part II. Other Information
42

1.
Legal Proceedings
42

1A.
Risk Factors
42

2.
Unregistered Sales of Equity Securities and Use of Proceeds
42

3.
Defaults Upon Senior Securities
43

4.
Mine Safety Disclosures
43

5.
Other Information
43

6.
Exhibits
43

Signatures
44




		PAGE
ITEM
	Part I. Financial Information	3

1.	FINANCIAL STATEMENTS
	Consolidated Balance Sheets as of June 30, 2019 (Unaudited) and December 31, 2018	3
	Consolidated Statements of Income (Unaudited) for the Three and Six months ended June 30, 2019 and 2018	4
	Consolidated Statements of Comprehensive Income/(Loss) (Unaudited) for the Three and Six months ended June 30, 2019 and 2018	5
	Consolidated Statements of Equity (Unaudited) for the Three and Six months ended June 30, 2019 and 2018	6
	Consolidated Statements of Cash Flows (Unaudited) for the Six months ended June 30, 2019 and 2018	8
	Notes to Consolidated Financial Statements (Unaudited)	9

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44

3.	Quantitative and Qualitative Disclosures About Market Risk	59

4.	Controls and Procedures	59

	Part II. Other Information	59

1.	Legal Proceedings	59

1A.	Risk Factors	59

2.	Unregistered Sales of Equity Securities and Use of Proceeds	59

3.	Defaults Upon Senior Securities	60

4.	Mine Safety Disclosures	60

5.	Other Information	60

6.	Exhibits	60

Signatures		62

Table of Contents

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EXLSERVICE HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

As of
September 30, 2017 December 31, 2016
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 87,665
$ 213,155
Short-term investments 161,702
13,491
Restricted cash 1,913
3,846
Accounts receivable, net 133,862
113,067
Prepaid expenses 6,958
7,855
Advance income tax, net 8,821
6,242
Other current assets 22,333
21,168
Total current assets 423,254
378,824
Property, plant and equipment, net 63,729
49,029
Restricted cash 3,710
3,393
Deferred taxes, net 16,118
14,799
Intangible assets, net 43,568
53,770
Goodwill 187,953
186,770
Other assets 30,672
19,943
Total assets $ 769,004
$ 706,528
Liabilities and Equity
Current liabilities:
Accounts payable $ 3,834
$ 3,288
Short-term borrowings —
10,000
Deferred revenue 8,662
16,615
Accrued employee cost 49,385
50,832
Accrued expenses and other current liabilities 49,040
43,264
Current portion of capital lease obligations 168
232
Total current liabilities 111,089
124,231
Long term borrowings 45,000
35,000
Capital lease obligations, less current portion 315
300
Non-current liabilities 16,234
14,819
Total liabilities 172,638
174,350
Commitments and contingencies (See Note 21)

Preferred stock, $0.001 par value; 15,000,000 shares authorized, none issued —
—
Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized, 36,525,692 shares issued and 33,804,962 shares outstanding as of September 30, 2017 and 35,699,819 shares issued and 33,628,109 shares outstanding as of December 31, 2016 37
36
Additional paid-in capital 311,691
284,646
Retained earnings 436,419
382,722
Accumulated other comprehensive loss (59,290 ) (75,057 )
Total including shares held in treasury 688,857
592,347
Less: 2,720,730 shares as of September 30, 2017 and 2,071,710 shares as of December 31, 2016, held in treasury, at cost (92,698 ) (60,362 )
Stockholders’ equity $ 596,159
$ 531,985
Non-controlling interest 207
193
Total equity $ 596,366
$ 532,178
Total liabilities and equity $ 769,004
$ 706,528



	As of
	June 30, 2019			December 31, 2018
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	84,842		$	95,881
Short-term investments	168,204			184,489
Restricted cash	4,098			5,608
Accounts receivable, net	180,680			164,752
Prepaid expenses	11,616			11,326
Advance income tax, net	7,906			9,639
Other current assets	31,729			28,240
Total current assets	489,075			499,935
Property and equipment, net	78,083			73,510
Operating lease right-of-use assets	93,162			—
Restricted cash	2,507			2,642
Deferred tax assets, net	4,200			6,602
Intangible assets, net	84,402			95,495
Goodwill	350,220			349,984
Other assets	33,194			31,015
Investment in equity affiliate	2,624			2,753
Total assets	$	1,137,467		$	1,061,936
Liabilities and equity
Current liabilities:
Accounts payable	$	3,269		$	5,653
Current portion of long-term borrowings	20,885			21,423
Deferred revenue	11,790			7,722
Accrued employee costs	42,967			54,893
Accrued expenses and other current liabilities	65,007			64,169
Current portion of operating lease liabilities	23,439			—
Income taxes payable	604			1,012
Current portion of finance lease obligations	279			223
Total current liabilities	168,240			155,095
Long term borrowings	231,409			263,241
Finance lease obligations, less current portion	474			315
Deferred tax liabilities, net	6,366			8,445
Operating lease liabilities, less current portion	80,531			—
Other non-current liabilities	9,094			16,521
Total liabilities	496,114			443,617
Commitments and contingencies (Refer Note 26)
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, 38,295,083 shares issued and 34,206,324 shares outstanding as of June 30, 2019 and 37,850,544 shares issued and 34,222,476 shares outstanding as of December 31, 2018	38			38
Additional paid-in capital	378,633			364,179
Retained earnings	511,503			484,244
Accumulated other comprehensive loss	(74,358		)	(83,467		)
Total including shares held in treasury	815,816			764,994
Less: 4,088,759 shares as of June 30, 2019 and 3,628,068 shares as of December 31, 2018, held in treasury, at cost	(174,463		)	(146,925		)
Stockholders’ equity	641,353			618,069
Non-controlling interest	—			250
Total equity	641,353			618,319
Total liabilities and equity	$	1,137,467		$	1,061,936

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

EXLSERVICE HOLDINGS, INC.

~~UNAUDITED~~ CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(In thousands, except share and per share amounts)


	Three months ended September 30,						Nine months ended September 30,						Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016			2019			2018			2019			2018
Revenues, net	$	192,345		$	171,200		$	564,435		$	508,714		$	243,509		$	210,112		$	483,082		$	417,085
Cost of revenues (exclusive of depreciation and amortization)	124,890			111,767			370,458			332,172
Cost of revenues⁽¹⁾													162,446			139,649			319,686			277,750
Gross profit(1)	67,455			59,433			193,977			176,542			81,063			70,463			163,396			139,335
Operating expenses:
General and administrative expenses	26,870			21,854			75,809			63,620			31,228			27,640			63,759			56,906
Selling and marketing expenses	12,222			11,623			38,711			37,875			17,647			15,151			35,694			29,103
Depreciation and amortization	9,708			8,597			28,771			25,000			12,752			10,582			26,419			21,086
Impairment and restructuring charges													5,580			—			6,807			—
Total operating expenses	48,800			42,074			143,291			126,495			67,207			53,373			132,679			107,095
Income from operations	18,655			17,359			50,686			50,047			13,856			17,090			30,717			32,240
Foreign exchange gain, net	2,801			1,741			7,267			3,573			1,202			1,414			2,462			2,029
Interest expense	(482		)	(295		)	(1,379		)	(1,023		)	(3,864		)	(706		)	(7,446		)	(1,244		)
Other income, net	2,922			2,891			8,871			12,197			4,102			2,232			8,525			5,766
Income before income tax expense	23,896			21,696			65,445			64,794
Income before income tax expense and earnings from equity affiliates													15,296			20,030			34,258			38,791
Income tax expense	2,819			5,646			7,202			18,549			2,670			5,510			6,870			1,057
Net income	$	21,077		$	16,050		$	58,243		$	46,245
Earnings per share:
Income before earnings from equity affiliates													12,626			14,520			27,388			37,734
Loss from equity-method investment													62			58			129			114
Net income attributable to ExlService Holdings, Inc. stockholders													$	12,564		$	14,462		$	27,259		$	37,620
Earnings per share attributable to ExlService Holdings, Inc. stockholders:
Basic	$	0.62		$	0.48		$	1.72		$	1.38		$	0.36		$	0.42		$	0.79		$	1.09
Diluted	$	0.60		$	0.46		$	1.66		$	1.34		$	0.36		$	0.41		$	0.78		$	1.07
Weighted-average number of shares used in computing earnings per share:
Weighted-average number of shares used in computing earnings per share attributable to ExlService Holdings, Inc. stockholders:
Basic	33,838,374			33,624,401			33,834,392			33,542,258			34,451,671			34,511,777			34,413,455			34,479,202
Diluted	35,043,987			34,675,485			35,048,672			34,512,815			34,702,547			35,142,388			34,768,203			35,222,838

(1) Exclusive of depreciation and amortization.

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

EXLSERVICE HOLDINGS, INC.

~~UNAUDITED~~ CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~INCOME~~INCOME/(LOSS) (UNAUDITED)

(In thousands)

Three months ended September 30, Nine months ended September 30,
2017
2016 2017 2016
Net income $ 21,077
$ 16,050
$ 58,243
$ 46,245
Other comprehensive income:

Unrealized (loss)/gain on effective cash flow hedges, net of taxes ($162), $1,067, $2,874 and $1,094, respectively (557 ) 2,540
5,900
3,066
Foreign currency translation adjustment (3,030 ) 1,716
10,813
(2,652 )
Retirement benefits, net of taxes nil, $4, nil and $24, respectively —
104
—
409
Reclassification adjustments

Realized gain on cash flow hedges, net of taxes ($129), ($205), ($476) and ($386), respectively⁽¹⁾
(294 ) (261 ) (1,081 ) (486 )
Retirement benefits, net of taxes $30, $1, $77 and $3, respectively⁽²⁾
42
22
135
64
Total other comprehensive income/(loss) $ (3,839 ) $ 4,121
$ 15,767
$ 401
Total comprehensive income $ 17,238
$ 20,171
$ 74,010
$ 46,646



	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018
Net income	$	12,564		$	14,462		$	27,259		$	37,620
Other comprehensive income/(loss):
Unrealized gain/(loss) on effective cash flow hedges, net of taxes $693, ($3,573), $1,882 and ($4,373), respectively	2,595			(8,656		)	7,343			(12,870		)
Foreign currency translation gain/(loss)	604			(18,219		)	3,284			(26,030		)
Reclassification adjustments
Gain on cash flow hedges, net of taxes ($560), ($426), ($206) and ($1,202), respectively⁽¹⁾	(324		)	(1,041		)	(1,349		)	(2,936		)
Retirement benefits, net of taxes ($19), ($3), $90 and ($2), respectively⁽²⁾	(21		)	(35		)	(169		)	(75		)
Total other comprehensive income/(loss)	$	2,854		$	(27,951	)	$	9,109		$	(41,911	)
Total comprehensive income/(loss)	$	15,418		$	(13,489	)	$	36,368		$	(4,291	)


(1)	These are reclassified to net income and are included either in ~~the foreign exchange gain~~cost of revenues or operating expenses, as applicable in the unaudited consolidated statements of income. ~~See~~Refer Note 1317 to the unaudited consolidated financial statements.


(2)	These are reclassified to net income and are included in ~~the computation of~~other income, net ~~periodic pension costs~~ in the unaudited consolidated statements of income. ~~See~~Refer Note 1620 to the unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

EXLSERVICE HOLDINGS, INC.

~~UNAUDITED~~ CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~EQUITY (UNAUDITED)

For the three months ended June 30, 2019 and 2018

(In ~~thousands)~~thousands, except share and per share amounts)

Nine months ended September 30,

2017 2016
Cash flows from operating activities:

Net income $ 58,243
$ 46,245
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 28,771
25,000
Stock-based compensation expense 16,771
14,743
Unrealized gain on short term investments (4,437 ) (4,955 )
Change in fair value of earn-out consideration —
(4,060 )
Unrealized foreign exchange loss/(gain) 446
(147 )
Deferred income tax (benefit)/expense (5,417 ) 4,424
Allowances for doubtful accounts 2,706
37
Others, net 12
(84 )
Change in operating assets and liabilities:

Restricted cash 1,757
(464 )
Accounts receivable (22,064 ) (16,559 )
Prepaid expenses and other current assets 5,194
(587 )
Accounts payable 371
(2,518 )
Deferred revenue (8,155 ) (1,485 )
Accrued employee costs (915 ) (3,812 )
Accrued expenses and other liabilities 267
5,688
Advance income tax, net (2,607 ) (4,748 )
Other assets 1,241
(676 )
Net cash provided by operating activities 72,184
56,042

Cash flows from investing activities:

Purchase of property, plant and equipment (26,759 ) (20,335 )
Business acquisition (net of cash acquired) (724 ) (9,427 )
Purchase of investments (197,897 ) (155,709 )
Proceeds from redemption of investments 54,238
59,229
Net cash used for investing activities (171,142 ) (126,242 )

Cash flows from financing activities:

Principal payments on capital lease obligations (133 ) (292 )
Repayments of borrowings —
(25,000 )
Acquisition of treasury stock (32,336 ) (15,169 )
Proceeds from exercise of stock options 4,275
6,226
Net cash used for financing activities (28,194 ) (34,235 )
Effect of exchange rate changes on cash and cash equivalents 1,662
(2,514 )
Net decrease in cash and cash equivalents (125,490 ) (106,949 )
Cash and cash equivalents, beginning of period 213,155
205,323
Cash and cash equivalents, end of period $ 87,665
$ 98,374



	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive (Loss)/Income			Treasury Stock					Non - Controlling Interest			Total Equity
	Common Stock										Treasury Stock
	Shares	Amount									Shares		Amount
Balance as of March 31, 2019	38,256,036	$	38	$	371,144	$	498,939	$	(77,212	)	(3,890,599	)	$	(162,333	)	$	259		$	630,835
Stock issued against stock-based compensation plans	39,047	—		316		—		—			—		—			—			316
Stock-based compensation	—	—		7,155		—		—			—		—			—			7,155
Acquisition of treasury stock	—	—		—		—		—			(198,160	)	(12,130		)	—			(12,130		)
Purchase of non-controlling interest	—	—		18		—		—			—		—			(259		)	(241		)
Other comprehensive income	—	—		—		—		2,854			—		—			—			2,854
Net income	—	—		—		12,564		—			—		—			—			12,564
Balance as of June 30, 2019	38,295,083	$	38	$	378,633	$	511,503	$	(74,358	)	(4,088,759	)	$	(174,463	)	$	—		$	641,353



	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss			Treasury Stock					Non - Controlling Interest		Total Equity
	Common Stock										Treasury Stock
	Shares	Amount									Shares		Amount
Balance as of March 31, 2018	37,568,973	$	38	$	327,750	$	450,676	$	(59,670	)	(3,126,011	)	$	(117,320	)	$	231	$	601,705
Stock issued against stock-based compensation plans	14,187	—		—		—		—			—		—			—		—
Stock-based compensation	—	—		6,893		—		—			—		—			—		6,893
Acquisition of treasury stock	—	—		—		—		—			(168,835	)	(9,632		)	—		(9,632		)
Non-controlling interest	—	—		—		—		—			—		—			2		2
Other comprehensive loss	—	—		—		—		(27,951		)	—		—			—		(27,951		)
Net income	—	—		—		14,462		—			—		—			—		14,462
Balance as of June 30, 2018	37,583,160	$	38	$	334,643	$	465,138	$	(87,621	)	(3,294,846	)	$	(126,952	)	$	233	$	585,479

Table of Contents

EXLSERVICE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

For the six months ended June 30, 2019 and 2018

(In thousands, except share and per share amounts)



	Common Stock			Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive (Loss)/Income			Treasury Stock					Non - Controlling Interest			Total Equity
	Common Stock											Treasury Stock
	Shares	Amount										Shares		Amount
Balance as of January 1, 2019	37,850,544	$	38	$	364,179		$	484,244	$	(83,467	)	(3,628,068	)	$	(146,925	)	$	250		$	618,319
Stock issued against stock-based compensation plans	444,539	—		338			—		—			—		—			—			338
Stock-based compensation	—	—		14,111			—		—			—		—			—			14,111
Acquisition of treasury stock	—	—		—			—		—			(460,691	)	(27,538		)	—			(27,538		)
Allocation of equity component related to issuance costs on convertible senior notes	—	—		(13		)	—		—			—		—			—			(13		)
Purchase of non-controlling interest, net of its share of income	—	—		18			—		—			—		—			(250		)	(232		)
Other comprehensive income	—	—		—			—		9,109			—		—			—			9,109
Net income	—	—		—			27,259		—			—		—			—			27,259
Balance as of June 30, 2019	38,295,083	$	38	$	378,633		$	511,503	$	(74,358	)	(4,088,759	)	$	(174,463	)	$	—		$	641,353



	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss			Treasury Stock					Non - Controlling Interest		Total Equity
	Common Stock										Treasury Stock
	Shares	Amount									Shares		Amount
Balance as of December 31, 2017	36,790,751	$	37	$	322,246	$	427,064	$	(45,710	)	(2,902,018	)	$	(103,816	)	$	224	$	600,045
Impact of adoption of ASU 2016-09	—	—		—		454		—			—		—			—		454
Balance as of January 1, 2018	36,790,751	$	37	$	322,246	$	427,518	$	(45,710	)	(2,902,018	)	$	(103,816	)	$	224	$	600,499
Stock issued against stock-based compensation plans	792,409	1		430		—		—			—		—			—		431
Stock-based compensation	—	—		11,967		—		—			—		—			—		11,967
Acquisition of treasury stock	—	—		—		—		—			(392,828	)	(23,136		)	—		(23,136		)
Non-controlling interest	—	—		—		—		—			—		—			9		9
Other comprehensive loss	—	—		—		—		(41,911		)	—		—			—		(41,911		)
Net income	—	—		—		37,620		—			—		—			—		37,620
Balance as of June 30, 2018	37,583,160	$	38	$	334,643	$	465,138	$	(87,621	)	(3,294,846	)	$	(126,952	)	$	233	$	585,479

See accompanying notes to unaudited consolidated financial statements.

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EXLSERVICE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)



	Six months ended June 30,
	2019			2018
Cash flows from operating activities:
Net income	$	27,259		$	37,620
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	26,532			21,279
Stock-based compensation expense	14,111			11,967
Amortization of operating lease right-of-use assets	13,701			—
Unrealized gain on short term investments	(4,362		)	(3,940		)
Unrealized foreign exchange loss/(gain), net	1,967			(7,782		)
Deferred income tax (benefit)/expense	(2,631		)	543
Allowance for doubtful accounts receivable	281			(590		)
Loss from equity-method investment	129			114
Amortization of non-cash interest expense related to convertible senior notes	1,218			—
Impairment charges	3,167			—
Others, net	961			123
Change in operating assets and liabilities:
Accounts receivable	(16,478		)	(11,719		)
Prepaid expenses and other current assets	(2,033		)	(2,430		)
Advance income tax, net	1,345			(7,605		)
Other assets	126			(4,287		)
Accounts payable	(2,114		)	(1,343		)
Deferred revenue	5,654			(199		)
Accrued employee costs	(12,567		)	(20,711		)
Accrued expenses and other liabilities	5,200			2,753
Operating lease liabilities	(13,749		)	—
Net cash provided by operating activities	47,717			13,793

Cash flows from investing activities:
Purchase of property and equipment	(22,287		)	(19,296		)
Purchase of non-controlling interest	(241		)	—
Business acquisition (net of cash acquired)	—			(495		)
Purchase of investments	(68,188		)	(40,663		)
Proceeds from redemption of investments	91,669			60,811
Net cash provided by investing activities	953			357

Cash flows from financing activities:
Principal payments on finance lease obligations	(207		)	(83		)
Proceeds from borrowings	46,000			12,000
Repayments of borrowings	(79,590		)	(5,065		)
Payment of debt issuance costs	(117		)	—
Acquisition of treasury stock	(27,538		)	(23,136		)
Proceeds from exercise of stock options	338			431
Net cash used for financing activities	(61,114		)	(15,853		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(240		)	(2,582		)
Net decrease in cash, cash equivalents and restricted cash	(12,684		)	(4,285		)
Cash, cash equivalents and restricted cash at beginning of period	104,131			94,277
Cash, cash equivalents and restricted cash at end of period	$	91,447		$	89,992

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2017~~2019

(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”), operates in the Business Process Management (“BPM”) industry providing operations management services and analytics services that help businesses enhance revenue growth and improve profitability. Using its proprietary platforms, methodologies and tools, the Company looks deeper to help ~~its clients~~companies improve global operations, enhance data-driven insights, increase customer satisfaction, and manage risk and compliance. The Company’s clients are located principally in the United States of America (“U.S.”) and the ~~U.K.~~United Kingdom (“U.K”).

2. Summary of Significant Accounting Policies

(a) Basis of Preparation and Principles of Consolidation

The unaudited ~~interim~~ consolidated financial statements have been prepared in ~~accordance~~conformity with United States generally accepted accounting principles (“US 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 US 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, ~~2016.~~2018.

The unaudited ~~interim~~ 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. ~~All intercompany~~The standalone financial statements of subsidiaries are fully consolidated on a line-by-line basis. Intra-group balances and transactions, ~~have been~~and income and expenses arising from intra-group transactions, are eliminated ~~in consolidation.~~while preparing those financial statements.

Non-controlling interest is the equity in a subsidiary not attributable, directly or indirectly, to the parent and it represents the minority partner’s interest in the operations of ExlService Colombia S.A.S. Non-controlling interest consistsAccounting policies of the ~~amount~~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 US GAAP.

The Company’s investments in equity affiliates are initially recorded at cost and any excess cost over proportionate share of ~~such interest~~the fair value of the net assets of the investee at the acquisition date ~~of obtaining control over the subsidiary, and the non-controlling interest's~~is recognized as goodwill. The proportionate share of ~~changes in equity since that date. The non-controlling interest in~~net income or loss of the ~~operations for all the periods presented were insignificant and are included under general and administrative expenses~~investee is recognized in the unaudited consolidated statements of income.

(b) Use of Estimates

The preparation of the unaudited consolidated financial statements in conformity with US 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 financial statements include, but are not limited to, allowance for doubtful receivables, expected recoverability from customers with contingent fee arrangements, recoverability of ~~service tax receivables,~~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 incremental borrowing rate to calculate lease liabilities and right-of-use (“ROU”) assets, lease term to calculate lease cost, depreciation and amortization periods, purchase price allocation, recoverability of ~~long-term~~long-lived assets including goodwill and intangibles, and ~~estimates~~estimated costs to complete fixed price contracts.

~~(c) Share-Based Compensation~~

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718). ASU No. 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the Statement of Cash Flows. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company adopted this ASU effective January 1, 2017. The following summarizes the effects of the adoption on the Company's unaudited consolidated financial statements:

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

~~September~~June 30, ~~2017~~2019

(In thousands, except share and per share amounts)

~~Income taxes~~ ~~- Upon adoption~~

Contributions to defined contribution plans are charged to the unaudited consolidated statements of ~~this standard, all excess tax benefits and tax deficiencies are recognized as~~ income ~~tax expense or benefit~~ in the ~~income statement. The tax effects of exercised or vested awards are treated as discrete items in the reporting~~ period in which services are rendered by the covered employees. Current service costs for defined benefit plans are accrued in the period to which they ~~occur.~~ relate. The liability in respect of defined benefit plans is calculated annually by the Company using the projected unit credit method. Prior service cost, if any, resulting from an amendment to a plan is recognized and amortized over the remaining period of service of the covered employees.

The Company ~~also~~ recognizes ~~excess tax benefits regardless of~~its liabilities for compensated absences depending on whether the obligation is attributable to employee services already rendered, relates to rights that vest or accumulate and payment is probable and estimable.

The Company includes the service cost component of the net periodic benefit ~~reduces taxes payable~~cost in the same line item or items as other compensation costs arising from services rendered by the respective employees during the period. The interest cost, expected return on plan assets and amortization of actuarial gains/loss are classified in “Other income, net”. Refer Note 20 to the unaudited consolidated financial statements for details.

(d) Cash and Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments purchased with an original maturity of ninety days or less to be cash equivalents. Pursuant to the Company’s investment policy, surplus funds are invested in highly-rated debt mutual funds, money market accounts and time deposits to reduce its exposure to market risk with regard to these funds.

Restricted cash represents amounts on deposit with banks against bank guarantees issued through banks in favor of relevant statutory authorities for equipment imports, deposits for obtaining indirect tax registrations and for demands against pending income tax assessments (refer Note 26 to the unaudited consolidated financial statements for details). These deposits with banks have maturity dates after June 30, 2020. Restricted cash presented under current ~~period. As a result,~~assets represents funds held on behalf of clients in dedicated bank accounts.

For purposes of the unaudited statements of cash flows, the Company ~~recognized discrete adjustments to income tax expense for the three months ended September 30, 2017~~includes in ~~the amount of $3,488~~its cash and ~~for the nine months ended September 30, 2017 in the amount of $7,169 related to excess tax benefits. No adjustment~~cash-equivalent balances those amounts that have been classified as restricted cash and restricted cash equivalents.

(e) Revenue Recognition

Revenue is ~~recorded for any windfall benefits previously recorded in Additional Paid-In Capital.~~

~~Forfeitures~~ - Prior to adoption, share-based compensation expense was recognized on a straight line basis, net of estimated forfeitures, such that expense was recognized only for share-based awards that are expected to vest. A forfeiture rate was estimated annually and revised, if necessary, in subsequent periods if actual forfeitures differed from initial estimates. Upon adoption, the Company will no longer apply a forfeiture rate and instead will account for forfeitures as they occur. The Company has applied the modified retrospective adoption approach as of January 1, 2017 and has recognized a cumulative-effect adjustment to reduce additional paid-in-capital of $5,999 and retained earnings of $4,546 (net of deferred tax effect of $1,453).

~~Statements of Cash Flows~~ - The Company historically accounted for excess tax benefits on the Statement of Cash Flows as a financing activity. Upon adoption of this standard, excess tax benefits are classified along with other income tax cash flows as an operating activity. The Company has elected to adopt this portion of the standard on a prospective basis beginning in 2017 and accordingly prior periods have not been adjusted.

~~Earnings Per Share~~ - The Company uses the treasury stock method to compute diluted earnings per share, unless the effect would be anti-dilutive. The Company excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of diluted earnings per share.

~~(d) Recent Accounting Pronouncements~~

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, “Revenue from Contracts with Customers”. This standard update along with subsequently issued updates, clarifies the principles for recognizing revenue and develops a common revenue standard for United States generally accepted accounting principles (GAAP) and is effective for reporting periods beginning after December 15, 2017. The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when ~~promised goods or~~ services ~~("performance obligations")~~ are ~~transferred~~provided to the Company's customers, in ~~amounts~~an amount that ~~reflect~~reflects the consideration to which the Company expects to be entitled to in exchange for ~~those goods or~~the services ("provided.

Revenue is measured based on consideration specified in a contract with a customer and excludes discounts and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by providing services to a customer.

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, ~~price"). Adoption of the new rules could impact the timing of revenue recognition for certain contracts. ASU 2014-09 is effective for~~that are collected by the Company ~~in the first quarter~~from a customer, are excluded from revenue.

Nature of fiscal 2018 using either one of two methods: (i) retrospectively to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09 (modified retrospective method).

services

The Company ~~is evaluating~~derives its revenues from operations management and analytics services. The Company operates in the ~~impact of the new standard.~~business process management (“BPM”) industry providing operations management and analytics services helping businesses enhance revenue growth and improve profitability. The ~~ultimate impact on revenue resulting from the application of the new standard will be subject to assessments that are dependent on many variables, including, but not limited~~Company provides BPM or “operations management” services, which typically involve transfer to the ~~terms~~Company of ~~the contractual arrangements~~business operations of a client, after which it administers and ~~the mix of business. Upon adoption, the Company expect that variable consideration when present in a revenue arrangements will need to be estimated based~~manages those operations for its client on ~~its achievability and recognized over the contractual period as compared to recognizing such revenue as the services are performed.~~an ongoing basis. The Company also ~~expects a change in the manner~~provides industry-specific digital transformational services related to operations management services, and analytics services that ~~it recognizes certain incremental and fulfillment costs from expensing them as incurred to deferring and recognizing them over the contractual period.~~

focus on driving improved business outcomes for clients by generating data-driven insights across all parts of their business. The Company ~~intends to adopt the new standard, effective January 1, 2018, using the modified retrospective method. The Company's considerations include, but are not limited to, the comparability of~~also provides care optimization and reimbursement optimization services, for its ~~financial statements~~clients through its healthcare analytics solutions and ~~the comparability within its industry from application of the new standard to its contractual arrangements.~~services. The Company ~~has established an implementation team~~offers integrated solutions to ~~implement the standard update related~~help its clients with cost containment by leveraging technology platforms, customizable and configurable analytics and expertise in healthcare reimbursements to ~~the recognition of revenue from contracts with customers and continues to evaluate the changes to accounting system and processes, and additional disclosure requirements that may be necessary.~~

help clients enhance their claims payment accuracy.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

~~September~~June 30, ~~2017~~2019

(In thousands, except share and per share amounts)

~~In March 2016,~~

Type of Contracts

Revenues under time-and-material, transaction and outcome-based contracts are recognized as the services are performed. When the terms of the client contract specify service level parameters that must be met (such as turnaround time or accuracy), the Company monitors such service level parameters to determine if any service credits or penalties have been incurred. Revenues are recognized net of any penalties or service credits that are due to a client.

Revenues from arrangements involving subcontracting, either in part or whole of the assigned work, are recognized after Company’s assessment of “Principal versus agent considerations”. The Company evaluates whether it is in control of the services before the same are transferred to the customer to assess whether it is Principal or Agent in the arrangement. Revenues are recognized on Gross basis if the Company is in the capacity of Principal and on Net basis if it falls in the capacity of an agent.

Revenues for the Company’s fixed-price contracts are recognized using the proportional performance method when the pattern of performance under the contracts can be reasonably determined. The Company estimates the proportional performance of a contract by comparing the actual number of hours or days worked to the estimated total number of hours or days required to complete each engagement. The use of the proportional performance method requires significant judgment relative to estimating the number of hours or days required to complete the contracted scope of work, including assumptions and estimates relative to the length of time to complete the project and the nature and complexity of the work to be performed. The Company regularly monitors its estimates for completion of a project and record changes in the period in which a change in an estimate is determined. If a change in an estimate results in a projected loss on a project, such loss is recognized in the period in which it is first identified.

Revenue from the Company’s software and related services contracts, which are not significant, are primarily related to annual maintenance renewals or incremental license fees for additional users. Maintenance revenues are generally recognized on a straight-line basis over the annual contract term. Fees for incremental license without any associated services are recognized upon delivery of the related incremental license.

To a lesser extent, certain contracts may include offerings such as sale of licenses, which may be perpetual or subscription-based. The Company recognizes revenue from distinct perpetual licenses upfront at a point in time when the ~~FASB issued ASU 2016-08,~~ software is made available to the client, whereas for a combined software license and services performance obligation, revenue is recognized over the period that the services are performed.

Revenue from ~~Contracts~~distinct subscription based licenses is recognized over the period of service performed. Revenue from any associated maintenance or ongoing support services is recognized over the term of the contract.

Revenues from reimbursement optimization services having contingent fee arrangements are recognized by the Company at the point in time when a performance obligation is satisfied, which is when it identifies an overpayment claim and the same is acknowledged by its customers. In such contracts, the Company’s consideration is contingent upon the actual collections made by its customers and subsequent potential retraction claims. Based on guidance on “variable consideration” in Topic 606, the Company uses its historical experience and projections to determine the expected recoveries from its customers and recognizes revenue based upon such expected recoveries. Any adjustment required due to change in estimates are recorded in the period in which such change is identified.

Modification to contracts

The Company’s contracts may be modified to add, remove or change existing performance obligations. The accounting for modifications to contracts involves assessing whether the services added to an existing contract are distinct and whether the pricing is at the standalone selling price. Services added that are distinct and at standalone selling price are accounted on a prospective basis either as a separate contract, or as a termination of existing contract and creation of a new contract.

Arrangements with ~~Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net). ASU 2016-08 clarifies~~Multiple Performance Obligations

The Company’s contracts with customers do not generally bundle different services together except for software and related services contracts, which are not significant, involving implementation services and post contract maintenance services. In such

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2019

(In thousands, except share and per share amounts)

software and related services contracts, revenue is allocated to each performance obligation based on the ~~implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or~~relative standalone selling price. A separate contract is generally drafted for each type of service ~~before it is transferred~~sold, even if to the ~~customers. The amendments are effective for all entities for fiscal years,~~same customer.

Variable Consideration

Variability in the transaction price arises primarily due to service level agreements, pre-payment and ~~interim periods within those fiscal years, beginning after December 15, 2017.~~ volume discounts.

The Company ~~is currently evaluating~~considers its experience with similar transactions and expectations regarding the ~~impact that~~contract in estimating the ~~adoption~~amount of ~~this guidance will have on its consolidated financial statements.~~

~~In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires the identification of arrangements~~variable consideration that should be ~~accounted~~recognized during a period.

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

Allocation of transaction price to performance obligations

The transaction price is allocated to performance obligations on a relative standalone selling price basis. Standalone selling prices are estimated by reference to the total transaction price less the sum of the observable standalone selling prices of other goods or services promised in the contract. In assessing whether to allocate variable consideration to a specific part of the contract, the Company considers the nature of the variable payment and whether it relates specifically to its efforts to satisfy a specific part of the contract.

Unbilled Receivables

Unbilled receivables represents revenues recognized for services rendered between the last billing date and the balance sheet date. Unbilled receivables also include revenues recognized from reimbursement optimization services when the Company identifies an overpayment claim and the same is acknowledged by its customers, however not invoiced at the balance sheet date. Accordingly, amounts for services that the Company has performed and for which an invoice has not yet been issued to the customers are presented as a part of unbilled receivables under accounts receivables.

Deferred Revenue

The Company has deferred revenue attributable to certain process transition activities, with respect to its customers where such activities do not represent separate performance obligations. Revenues related to such transition activities are contract liabilities classified under “Deferred Revenue” in the Company's consolidated balance sheets and subsequently recognized over the period in which the related services are performed. Costs related to such transition activities are contract fulfillment costs, and thereby classified under “Other Current Assets” and “Other Assets” in the consolidated balance sheets, and are recognized over the estimated expected period of benefit, under Cost of Revenues in the consolidated statements of income. Deferred revenue also includes the amount for which services have been rendered but other conditions of revenue recognition are not met, for example where the Company does not have an enforceable contract.

Contract Acquisition Cost

Direct and incremental costs incurred for acquiring contracts, such as sales commissions are contract acquisition costs and thereby classified under “Other Current Assets” and “Other Assets” in the consolidated balance sheets. Such costs are amortized over the expected period of benefit and recorded under Selling and marketing expenses in the consolidated statements of income.

Upfront payment made to customer

Upfront payments, if any, made to customers are contract assets and classified under “Other Current Assets and Other Assets” in the consolidated balance sheets. Such costs are amortized over the expected period of benefit and are recorded as an adjustment to transaction price and reduced from revenues.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2019

(In thousands, except share and per share amounts)

Out of pocket expenses

Reimbursements of out-of-pocket expenses received from clients are included as part of revenues.

Payment terms

All contracts entered into by the Company specify the payment terms and are defined for each contract separately. Usual payment terms range between 30-60 days. The Company does not have any extended payment terms clauses in existing contracts.

Remaining Performance Obligation

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


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


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

Accounts Receivable

The Company records accounts receivable net of allowances for doubtful accounts. Allowances for doubtful accounts are established through the evaluation of aging of accounts receivables, prior collection experience, current market conditions, clients’ financial condition and the amount of accounts receivables in dispute to estimate the collectability of these accounts receivables.

(f) Leases

The Company determines if an arrangement is a lease at inception. Operating leases ~~by lessees. In general,~~are included in "operating lease right-of-use ("ROU") assets", "current portion of operating lease liabilities" and "operating lease liabilities, less current portion" in the Company's unaudited consolidated balance sheets. Finance leases are included in "property and equipment", "current portion of finance lease obligations" and "finance lease obligations, less current portion" in the Company's unaudited consolidated balance sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease ~~arrangements exceeding a twelve month~~ term ~~these arrangements must now be recognized as~~and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the ~~balance sheet~~present value of lease payments over the ~~lessee. Under ASU 2016-02, a right-of-use asset and~~ lease ~~obligation~~term. For leases in which the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lease terms include options to extend or terminate the lease when it is reasonably certain that the Company will ~~be recorded for all leases, whether operating or financing, while the income statement will reflect lease~~exercise that option. Lease expense for operating lease arrangements is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for separately.

On January 1, 2019, the date of initial application, the Company adopted, Leases (Topic 842), using the modified retrospective method. The modified retrospective method provides a method of recording those leases ~~and amortization/interest expense for financing leases. The balance sheet amount recorded for existing leases at~~which had not expired as of the date of adoption of ASU 2016-02 must be calculated using the applicable incremental borrowing rate at the date of adoption. In addition, ASU 2016-02 requires the use of the modified retrospective method, which will require adjustment to all comparative periods presented in the consolidated financial statements.January 1, 2019. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of this guidance will have on itsprior period unaudited consolidated financial statements have not been retrospectively adjusted and ~~the implementation approach~~continues to be ~~used.~~reported under Topic 840.

The Company elected the practical expedient permitted under the transition guidance under Topic 842, which amongst other matters, allowed the Company (i) not to apply the recognition requirements to short-term leases (leases with a lease term of 12 months or less), (ii) not to reassess whether any expired or existing contracts are or contain leases, (iii) not to reassess the lease classification for any expired or existing leases, and (iv) not to reassess initial direct costs for any existing leases.

The adoption resulted in the recognition of ROU assets of $80,328, net of deferred rent of $8,626 and lease liabilities of $88,954 for operating leases as of January 1, 2019. The Company's accounting for finance leases remained substantially unchanged.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2019

(In thousands, except share and per share amounts)

The adoption had no impact on opening balance of retained earnings. Refer Note 21 to the unaudited consolidated financial statements for details.

(g) Recent Accounting Pronouncements

In June 2016, ~~FASB~~the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-13, Financial Instruments - Credit Losses, which ~~require~~requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is to be deducted from the amortized cost ~~basis~~ of the financial asset(s) so as to present the net carrying value at the amount expected to be collected on the financial asset. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The amendment should be applied through a modified retrospective approach. Early adoption as of the fiscal years beginning after December 15, 2018 is permitted. The Company is currently evaluating the impact that the adoption of ~~ASU 2016-13 is not expected to~~this guidance will have ~~a material effect~~ on ~~the Company's~~its consolidated financial statements.

In August ~~2016,~~2018, FASB issued ASU ~~2016-15, Classification of Certain Cash Receipts and Cash Payments.~~No. 2018-13, Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement. The amendments ~~apply to all entities that are required to present a~~in this ASU modify the disclosure requirements on fair value measurements in Topic 820, based on the concepts in the Concepts Statement, including the consideration of ~~Cash Flows under Topic 230.~~costs and benefits. The amendments ~~are an improvement to GAAP because they provide guidance for each of eight issues identified therein, thereby reducing the current and potential future diversity~~ in ~~practice. The amendments~~ASU are effective for fiscal years beginning after December 15, ~~2017 and~~2019, including interim periods within those ~~annual periods and should be applied using a retrospective transition method~~fiscal years. An entity is permitted to ~~each period presented.~~early adopt either the entire standard or only the provisions that eliminate or modify requirements. The ~~Company does not expect the~~ adoption of this ASU is not expected to have aany material effect on ~~its~~the Company’s consolidated financial ~~position or results of operations.~~statements.

In ~~November 2016,~~August 2018, FASB issued ASU ~~2016-18, Statement of Cash Flows - Restricted cash. The amendments apply~~No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Changes to ~~all entities that have restricted cash or restricted cash equivalents and are required to present a Statement of Cash Flows under Topic 230.~~the Disclosure Requirements for Defined Benefit Plans. The amendments in this ~~update require~~ASU remove disclosures that ~~a Statement~~no longer are considered cost beneficial, clarify the specific requirements of ~~Cash Flows should explain the change during the period~~disclosures, and add disclosure requirements identified as relevant. The amendments in ~~the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The amendments~~ASU are effective for fiscal years beginning after December 15, ~~2017 and interim periods within those annual periods.~~2020. Early adoption is ~~permitted with an adjustment reflected as of the beginning of the fiscal year in which the amendment is adoption.~~permitted. The ~~Company does not expect the~~ adoption of this ASU is not expected to have aany material effect on ~~its~~the Company’s consolidated financial ~~position or results of operations.~~statements.

In ~~January 2017, the~~August 2018, FASB issued ASU ~~2017-04, Simplifying~~No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): This ASU aligns the ~~Test~~requirements for ~~Goodwill Impairment (Topic 350),~~capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the ASU requires an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in FASB Accounting Standard Codification Subtopic 350-40 on internal-use software to determine which ~~eliminates Step 2 from~~implementation costs to capitalize as an asset related to the ~~goodwill~~service contract and which costs to expense. The ASU 2018-15 also provides guidance on amortization and impairment ~~test. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, however, the loss recognized should not exceed the total amount~~ of ~~goodwill allocated to that reporting unit. ASU 2017-04~~any costs capitalized, along with new presentation and disclosure requirements. The new guidance is effective for ~~annual and interim periods in~~ fiscal years beginning after December 15, 2019. Early adoption is permitted ~~for interim or annual goodwill impairment tests performed after January 1, 2017~~ and ~~should be applied prospectively. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.~~

~~In March, 2017, FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost~~both prospective and Net Periodic Post-retirement Benefit Cost. The ASU amends ASC 715, Compensation — Retirement Benefits, to require employers that present a measure of operating income in their statement of income to include only the service cost component of net periodic pension cost and net periodic post-retirement benefit cost in operating expenses (together with other employee compensation costs). The

~~EXLSERVICE HOLDINGS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)~~

~~September 30, 2017~~

~~(In thousands, except share and per share amounts)~~

~~other components of net benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects,~~retrospective transition methods are to be included in non-operating expenses. The update also stipulates that only the service cost component of net benefit cost is eligible for capitalization. The amendments are effective for fiscal years beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period.allowed. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

In ~~May 2017,~~April 2019, FASB issued ASU ~~2017-09, Compensation - Stock Compensation~~no. 2019-04, Codification Improvements to Financial Instruments-Credit Losses (Topic ~~718): Scope~~326), Derivatives and Hedging (Topic 815), and Financial Instruments: Targeted Transition Relief (Topic 825). The amendments clarify the scope of ~~Modification Accounting.~~the credit losses standard and address issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among other things. With respect to hedge accounting, the amendments address partial-term fair value hedges, fair value hedge basis adjustments, and certain transition requirements, among other things. With respect to recognizing and measuring financial instruments, the amendment in ASU address the scope of the guidance, the requirement for remeasurement under ASC 820 when using the measurement alternative, certain disclosure requirements and which equity securities have to be remeasured at historical exchange rates. This ASU ~~provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. Modification accounting~~ is ~~required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change in terms or conditions. The amendments in this ASU are~~ effective ~~for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period,~~ for public business entities for ~~reporting~~fiscal years beginning after December 15, 2019, including interim periods ~~for which financial statements have not yet been issued. The amendments in this ASU should be applied prospectively to an award modified on or after the~~within that fiscal year. Early adoption ~~date.~~is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

In ~~August 2017,~~May 2019, FASB issued ASU ~~2017-12, Derivatives and Hedging (Topic 815)~~no. 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted ~~Improvements to Accounting for Hedging Activities.~~Transition Relief. This ASU ~~amends and simplifies existing guidance~~provide entities with the option to irrevocably elect the fair value option, on an instrument-by-instrument basis in ~~order~~accordance with Subtopic 825-10, for certain financial instruments that are within the scope of Subtopic 326-20, upon adopting Topic 326. The fair value option election does not apply to ~~allow companies to more accurately present the economic effects of risk management activities in their financial statements.~~held-to-maturity debt securities. The amendments ~~are~~in this Update provide entities with targeted transition relief that is intended to increase comparability of financial statement information for some entities

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2019

(In thousands, except share and per share amounts)

that otherwise would have measured similar financial instruments using different measurement methodologies. This ASU is effective for public business entities for fiscal years beginning after December 15, ~~2018 and~~2019, including interim periods within ~~those~~that fiscal ~~years, with early~~year. Early adoption ~~being~~is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

(h) Recently Adopted Accounting Pronouncements

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842), which requires the identification of arrangements that should be accounted for as leases. Lease arrangements exceeding a twelve months term should be recognized as assets with corresponding liabilities on the balance sheet of the lessee. This ASU requires recognition of an ROU asset and lease obligation for those leases classified as operating leases under Topic 840, while the income statement will reflect lease expense for operating leases. The balance sheet amounts recorded for existing operating leases at the date of adoption of this ASU must be calculated using the applicable incremental borrowing rate. The Company adopted Topic 842 as of January 1, 2019 using the modified retrospective method provided by ASU 2018-11. The adoption had a material impact on the Company's unaudited consolidated balance sheets, but did not have a material impact on the Company's unaudited consolidated income statements and unaudited consolidated statements of cash flows. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while the Company's accounting for finance leases remained substantially unchanged. Refer Note 21 to the unaudited consolidated financial statements for details.

In July 2018, FASB issued ASU No. 2018-11, Leases (Topic 842), which provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP (Topic 840, Leases). The Company adopted Topic 842 as of January 1, 2019 using this ASU. Refer Note 21 to the unaudited consolidated financial statements for details.

3. Segment and Geographical Information

The Company operates in the BPM industry and is a provider of operations management and analytics services. The Company has eight operating segments, which are strategic business units that align its products and services with how it manages its business, approaches its key markets and interacts with its clients. Six of those operating segments provide BPM or “operations management” services, five of which ~~the Company organizes into~~are industry-focused operating segments (Insurance, Healthcare, Travel, Transportation and Logistics, Banking and Financial Services, and Utilities) and one of which is a “capability” operating segment (Finance and Accounting) that provides services to clients in our industry-focused segments as well as clients across other industries. In each of these six operating segments, the Company provides operations management services, which typically involve transfer to the Company of ~~select~~the business operations of a client, after which it administers and manages those operations for its client on an ongoing basis. The remaining two operating segments are Consulting, which provides industry-specific transformational services related to operations management services, and ~~the~~ Analytics, ~~operating segment,~~ which provides services that focus on driving improved business outcomes for clients by generating data-driven insights across all parts of their business.

In prior periods the Company presented two reportable segments: Operations Management (which included its Insurance, Healthcare, Travel, Transportation and Logistics, Finance and Accounting, Banking and Financial services, Utilities and Consulting operating segments) and Analytics. Effective for the quarter and year ended December 31, 2016, theThe Company presents information for the following reportable segments:

• Insurance

• Healthcare

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

• Finance and Accounting (“F&A”),

Analytics, and

~~• Analytics~~

~~The~~All Other (consisting of the Company's remaining operating segments, which ~~includes~~are the ~~banking~~Banking and ~~financial services, utilities~~Financial Services, Utilities and ~~consulting~~Consulting operating ~~segments have been included in a category called “All Other”~~segments). Segment information for all prior periods presented herein has been changed to conform to the current presentation. This change in segment presentation does not affect the Company's unaudited consolidated statements of income and comprehensive income, balance sheets or statements of cash flows.

~~EXLSERVICE HOLDINGS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)~~

~~September 30, 2017~~

~~(In thousands, except share and per share amounts)~~

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.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2019

(In thousands, except share and per share amounts)

The Company does not allocate and therefore the CODM does not evaluate other operating expenses, interest expense or income taxes by segment. Many of the Company’s assets are shared by multiple operating segments. The Company manages these assets on a total Company basis, not by operating segment, and therefore asset information and capital expenditures by operating segment are not presented.

Revenues and cost of revenues for the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively, for each of the reportable segments, are as follows:

Three months ended September 30, 2017
Insurance Healthcare TT&L F&A All Other Analytics Total

Revenues, net $ 59,608
$ 18,871
$ 18,496
$ 21,642
$ 19,984
$ 53,744
$ 192,345
Cost of revenues (exclusive of depreciation and amortization) 39,699
11,966
10,135
13,310
13,629
36,151
124,890
Gross profit $ 19,909
$ 6,905
$ 8,361
$ 8,332
$ 6,355
$ 17,593
$ 67,455
Operating expenses 48,800
Foreign exchange gain, interest expense and other income, net 5,241
Income tax expense 2,819
Net income $ 21,077



	Three months ended June 30, 2019
	Insurance		Healthcare		TT&L		F&A		All Other		Analytics		Total
	Insurance		Healthcare		TT&L		F&A		All Other		Analytics		Total
Revenues, net	$	72,236	$	20,016	$	17,541	$	26,422	$	19,423	$	87,871	$	243,509
Cost of revenues⁽¹⁾	49,906		16,865		9,989		15,994		12,261		57,431		162,446
Gross profit⁽¹⁾	$	22,330	$	3,151	$	7,552	$	10,428	$	7,162	$	30,440	$	81,063
Operating expenses													67,207
Foreign exchange gain, interest expense and other income, net													1,440
Income tax expense													2,670
Loss from equity-method investment													62
Net income													$	12,564

Three months ended September 30, 2016
Insurance Healthcare TT&L F&A All Other Analytics Total

Revenues, net $ 52,801
$ 15,959
$ 17,519
$ 19,858
$ 23,426
$ 41,637
$ 171,200
Cost of revenues (exclusive of depreciation and amortization) 37,797
10,887
10,637
12,012
14,655
25,779
111,767
Gross profit $ 15,004
$ 5,072
$ 6,882
$ 7,846
$ 8,771
$ 15,858
$ 59,433
Operating expenses �� 42,074
Foreign exchange gain, interest expense and other income, net 4,337
Income tax expense 5,646
Net income $ 16,050



	Three months ended June 30, 2018
	Insurance		Healthcare		TT&L		F&A		All Other		Analytics		Total
	Insurance		Healthcare		TT&L		F&A		All Other		Analytics		Total
Revenues, net	$	64,812	$	19,817	$	18,549	$	24,228	$	23,088	$	59,618	$	210,112
Cost of revenues⁽¹⁾	44,033		16,713		10,625		14,543		15,079		38,656		139,649
Gross profit⁽¹⁾	$	20,779	$	3,104	$	7,924	$	9,685	$	8,009	$	20,962	$	70,463
Operating expenses													53,373
Foreign exchange gain, interest expense and other income, net													2,940
Income tax expense													5,510
Loss from equity-method investment													58
Net income													$	14,462

⁽¹⁾ Exclusive of depreciation and amortization.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

~~September~~June 30, ~~2017~~2019

(In thousands, except share and per share amounts)

Revenues and cost of ~~revenues~~revenue for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively, for each of the reportable

segments, are as follows:

Nine months ended September 30, 2017
Insurance Healthcare TT&L F&A All Other Analytics Total

Revenues, net $ 173,784
$ 56,726
$ 53,374
$ 63,694
$ 62,547
$ 154,310
$ 564,435
Cost of revenues (exclusive of depreciation and amortization) 119,004
36,402
30,832
39,163
42,770
102,287
370,458
Gross profit $ 54,780
$ 20,324
$ 22,542
$ 24,531
$ 19,777
$ 52,023
$ 193,977
Operating expenses 143,291
Foreign exchange gain, interest expense and other income, net 14,759
Income tax expense 7,202
Net income $ 58,243

Nine months ended September 30, 2016
Insurance Healthcare TT&L F&A All Other Analytics
Total

Revenues, net $ 151,696
$ 49,788
$ 52,623
$ 58,961
$ 75,434
$ 120,212
$ 508,714
Cost of revenues (exclusive of depreciation and amortization) 108,516
32,440
31,901
35,385
47,836
76,094
332,172
Gross profit $ 43,180
$ 17,348
$ 20,722
$ 23,576
$ 27,598
$ 44,118
$ 176,542
Operating expenses 126,495
Foreign exchange gain, interest expense and other income, net 14,747
Income tax expense 18,549
Net income $ 46,245



	Six months ended June 30, 2019
	Insurance		Healthcare		TT&L		F&A		All Other		Analytics		Total
	Insurance		Healthcare		TT&L		F&A		All Other		Analytics		Total
Revenues, net	$	141,274	$	40,584	$	34,966	$	52,146	$	39,280	$	174,832	$	483,082
Cost of revenues⁽¹⁾	96,598		33,860		19,789		30,268		24,838		114,333		319,686
Gross profit⁽¹⁾	$	44,676	$	6,724	$	15,177	$	21,878	$	14,442	$	60,499	$	163,396
Operating expenses													132,679
Foreign exchange gain, interest expense and other income, net													3,541
Income tax expense													6,870
Loss from equity-method investment													129
Net income													$	27,259

~~Net revenues~~⁽¹⁾ Exclusive of ~~the Company~~depreciation and amortization.



	Six months ended June 30, 2018
	Insurance		Healthcare		TT&L		F&A		All Other		Analytics		Total
	Insurance		Healthcare		TT&L		F&A		All Other		Analytics		Total
Revenues, net	$	128,715	$	42,614	$	36,048	$	48,200	$	44,788	$	116,720	$	417,085
Cost of revenues⁽¹⁾	86,460		33,955		21,068		29,272		30,264		76,731		277,750
Gross profit⁽¹⁾	$	42,255	$	8,659	$	14,980	$	18,928	$	14,524	$	39,989	$	139,335
Operating expenses													107,095
Foreign exchange gain, interest expense and other income, net													6,551
Income tax expense													1,057
Loss from equity-method investment													114
Net income													$	37,620

⁽¹⁾ Exclusive of depreciation and amortization.

Revenues, net by service type, were as follows:

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
BPM and related services ⁽¹⁾
$ 138,601
$ 129,563
$ 410,125
$ 388,502
Analytics services 53,744
41,637
154,310
120,212
Total $ 192,345
$ 171,200
$ 564,435
$ 508,714



	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
BPM and related services⁽¹⁾	$	155,638	$	150,494	$	308,250	$	300,365
Analytics services	87,871		59,618		174,832		116,720
Revenues, net	$	243,509	$	210,112	$	483,082	$	417,085

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

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

~~September~~June 30, ~~2017~~2019

(In thousands, except share and per share amounts)

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



	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
Revenues, net
United States	$	197,901	$	174,087	$	394,005	$	345,285
Non-United States
United Kingdom	30,155		27,480		59,256		55,496
Rest of World	15,453		8,545		29,821		16,304
Total Non-United States	45,608		36,025		89,077		71,800
Revenues, net	$	243,509	$	210,112	$	483,082	$	417,085

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Revenues, net
United States $ 158,501
$ 137,047
$ 462,676
$ 407,272
Non-United States
United Kingdom 26,824
27,993
81,857
84,284
Rest of World 7,020
6,160
19,902
17,158
Total Non-United States 33,844
34,153
101,759
101,442
$ 192,345
$ 171,200
$ 564,435
$ 508,714

Property ~~plant~~ and equipment, net by geographic area, were as follows:



	As of
	June 30, 2019		December 31, 2018
Property and equipment, net
India	$	33,605	$	36,152
United States	31,378		28,254
Philippines	9,345		5,985
Rest of World	3,755		3,119
Property and equipment, net	$	78,083	$	73,510

4. Revenues, net

Disaggregation of revenues

Refer Note 3 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, 2017 December 31, 2016
Property, plant and equipment, net
India $ 37,139
$ 23,362
United States 14,829
10,809
Philippines 9,031
11,900
Rest of World 2,730
2,958
$ 63,729
$ 49,029



	As of
	June 30, 2019		December 31, 2018
Accounts receivable, net	$	180,680	$	164,752
Contract assets	$	4,885	$	5,445
Contract liabilities:
Deferred revenue (consideration received in advance)	$	10,441	$	6,345
Consideration received for process transition activities	$	3,233	$	1,669

Accounts receivable includes $79,890 and $63,952 as of June 30, 2019 and December 31, 2018, respectively, representing amounts not billed to customers. The Company has accrued the unbilled receivables for work performed in accordance with the terms of contracts with customers and considers no significant performance risk associated with its unbilled receivables.

Contract assets represents upfront payments made to customers. These costs are amortized over the expected period of benefit and are recorded as an adjustment to transaction price and reduced from revenues.

Contract liabilities represents that portion of deferred revenue for which payments have been received in advance from customers including revenues attributable to certain process transition activities for which costs have been capitalized by the

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2019

(In thousands, except share and per share amounts)

Company as contract fulfillment costs. The contract liabilities are included within deferred revenues in the unaudited consolidated balance sheet and are recognized as revenue as (or when) the performance obligation is fulfilled under the contract.

Revenue recognized during the three and six months ended June 30, 2019 that was included in the contract liabilities balance at the beginning of the period was $1,450 and $4,226, respectively, and revenue recognized during the three and six months ended June 30, 2018 that was included in the contract liabilities balance at the beginning of the period was $2,671 and $6,381, respectively.

Contract acquisition costs

The Company had contract acquisition costs of $469 as of June 30, 2019 and $713 as of December 31, 2018. Further, there was no additional capitalization made during the three and six months ended June 30, 2019, respectively. The Company amortized $44 and $244 during the three and six months ended June 30, 2019, respectively, and amortized $80 and $153 during the three and six months ended June 30, 2018, respectively. There was no impairment loss in relation to costs capitalized. The capitalized costs will be amortized on a straight line basis over the life of contract.

Contract fulfillment costs

The Company had deferred contract fulfillment costs relating to transition activities amounting to $5,608 as of June 30, 2019 and $4,051 as of December 31, 2018. Further, the Company capitalized an additional $1,441 and $2,167 during the three and six months ended June 30, 2019, respectively. The Company amortized $305 and $610 during the three and six months ended June 30, 2019, respectively, and $254 and $395 during the three and six months ended June 30, 2018, respectively. There was no impairment loss in relation to costs capitalized. The capitalized costs will be amortized on a straight line basis over the life of contract.

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

4.5. Earnings Per Share

Basic earnings per share is computed by dividing net income to common stockholders by the weighted average number of common shares outstanding during each period. Diluted earnings per share is computed using the weighted average number of common shares plus the potentially dilutive effect of common stock equivalents (outstanding stock options, restricted stock and restricted stock units) issued and outstanding at the reporting date, using the treasury stock method. Stock options, restricted stock and restricted stock units that are anti-dilutive are excluded from the computation of weighted average shares outstanding.

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



	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
Numerators:
Net income	$	12,564	$	14,462	$	27,259	$	37,620
Denominators:
Basic weighted average common shares outstanding	34,451,671		34,511,777		34,413,455		34,479,202
Dilutive effect of share based awards	250,876		630,611		354,748		743,636
Diluted weighted average common shares outstanding	34,702,547		35,142,388		34,768,203		35,222,838
Earnings per share attributable to ExlService Holdings Inc. stockholders:
Basic	$	0.36	$	0.42	$	0.79	$	1.09
Diluted	$	0.36	$	0.41	$	0.78	$	1.07
Weighted average potentially dilutive shares considered anti-dilutive and not included in computing diluted earnings per share	69		336,599		212,751		242,561

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Numerators:
Net income $ 21,077
$ 16,050
$ 58,243
$ 46,245
Denominators:
Basic weighted average common shares outstanding 33,838,374
33,624,401
33,834,392
33,542,258
Dilutive effect of share based awards 1,205,613
1,051,084
1,214,280
970,557
Diluted weighted average common shares outstanding 35,043,987
34,675,485
35,048,672
34,512,815
Earnings per share:
Basic $ 0.62
$ 0.48
$ 1.72
$ 1.38
Diluted $ 0.60
$ 0.46
$ 1.66
$ 1.34
Weighted average common shares considered anti-dilutive in computing diluted earnings per share —
32,516
151,961
97,574

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

~~September~~June 30, ~~2017~~2019

(In thousands, except share and per share amounts)

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
	June 30, 2019		June 30, 2018
Cash and cash equivalents	$	84,842	$	84,091
Restricted cash (current)	4,098		2,256
Restricted cash (non-current)	2,507		3,645
Cash, cash equivalents and restricted cash	$	91,447	$	89,992

7. Other Income, net

Other income, net consists of the following:



	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
Gain on sale and mark-to-market of mutual funds	$	3,318	$	1,694	$	6,844	$	4,827
Interest and dividend income	697		329		1,493		637
Others, net	87		209		188		302
Other income, net	$	4,102	$	2,232	$	8,525	$	5,766

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2019

(In thousands, except share and per share amounts)

Three months ended September 30, Nine months ended September 30,

2017 2016 2017 2016
Interest and dividend income $ 322
$ 354
$ 1,317
$ 1,208
Gain on mutual fund investments 2,556
2,562
6,777
6,191
Change in fair value of earn-out consideration —
—
—
4,060
Other, net 44
(25 ) 777
738
Other income, net $ 2,922
$ 2,891
$ 8,871
$ 12,197

6.8. Property ~~Plant~~ and Equipment, net

Property ~~Plant~~ and ~~Equipment consist~~equipment, net consists of the following:


	Estimated useful lives	As of						Estimated useful lives	As of
	(Years)	September 30, 2017			December 31, 2016			(Years)	June 30, 2019			December 31, 2018
Owned Assets:
Network equipment and computers	3-5	$	73,728		$	65,381		3-5	$	91,514		$	85,921
Software	3-5	56,369			44,617			3-5	73,308			69,752
Leasehold improvements	3-8	36,741			31,192			3-8	43,577			39,533
Office furniture and equipment	3-8	18,397			15,426			3-8	22,034			20,097
Motor vehicles	2-5	645			580			2-5	723			635
Buildings	30	1,218			1,171			30	1,152			1,140
Land	—	797			766			—	754			746
Capital work in progress	—	9,624			4,964			—	14,637			11,026
		197,519			164,097				247,699			228,850
Less: Accumulated depreciation and amortization		(134,245		)	(115,568		)		(170,316		)	(155,798		)
		$	63,274		$	48,529			$	77,383		$	73,052
Assets under capital leases:
Right-of-use assets under finance leases:
Leasehold improvements		$	889		$	854			$	798		$	778
Office furniture and equipment		138			133				348			53
Motor vehicles		644			810				742			628
		1,671			1,797				1,888			1,459
Less: Accumulated depreciation and amortization		(1,216		)	(1,297		)		(1,188		)	(1,001		)
		$	455		$	500			$	700		$	458
Property, Plant and Equipment, net		$	63,729		$	49,029
Property and equipment, net									$	78,083		$	73,510

Capital work in progress represents advances paid towards acquisition of property ~~plant~~ and equipment and ~~cost of property, plant and equipment and internally generated~~costs incurred to develop software ~~costs~~ not yet ready to be placed in service.

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



	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
Depreciation and amortization	$	7,198	$	6,821	$	15,337	$	13,378

The depreciation and amortization set forth above includes the effect of foreign exchange gain/(loss) upon settlement of cash flow hedges, amounting to $56 and $42 for the three months ended and $113 and $193 for the six months ended June 30, 2019 and 2018, respectively. Refer Note 17 to the unaudited consolidated financial statements for further details.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

~~September~~June 30, ~~2017~~2019

(In thousands, except share and per share amounts)

~~The depreciation and amortization expense excluding amortization of acquisition-related intangibles~~Internally developed software costs, included under Software, was as follows:



	As of
	June 30, 2019			December 31, 2018
Cost	$	10,522		$	8,783
Less : Accumulated amortization	(3,449		)	(2,393		)
Internally developed software, net	$	7,073		$	6,390

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Depreciation and amortization expense $ 6,221
$ 5,749
$ 18,279
$ 16,719

During the three and six months ended June 30, 2019, the Company performed an impairment test of its long-lived assets of its Health Integrated business. Based on the results, the long-lived assets carrying value exceeded their fair value. The primary factor contributing to a reduction in the fair value is the commencement of the wind down of the Health Integrated business, and an anticipated reduction to the Company's estimated future cash flows. As a result of this analysis, the Company recognized impairment charges of $951 and $2,178 during the three and six months ended June 30, 2019, respectively, to write down the carrying value of property and equipment to its fair value. This impairment charge was recorded in the unaudited consolidated statements of income under "Impairment and restructuring charges". Refer Note 24 to the unaudited consolidated financial statements for further details.

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



	Three months ended June 30				Six months ended June 30
	2019		2018		2019		2018
Amortization expense	$	559	$	254	$	1,206	$	472

Software - Internally developed:
As of
September 30, 2017 December 31, 2016
Cost $ 2,364
$ 2,242
Less : Accumulated amortization expense 791
336
$ 1,573
$ 1,906

9. Business Combinations, Goodwill and Intangible Assets

~~Goodwill~~

SCIOinspire Holdings Inc.

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

SCIO is a health analytics solution and services company serving healthcare organizations including providers, health plans, pharmacy benefit managers, employers, health services and global life sciences companies. The acquisition is expected to significantly strengthen the Company’s capability in the high growth cost optimization and care optimization markets. The acquisition of SCIO is included in the Analytics reportable segment.

The ~~following table sets forth details~~aggregate purchase consideration was $245,044, including cash and cash equivalents acquired and post-closing adjustments. The aggregate base purchase consideration payable at closing of the ~~Company’s goodwill balance~~merger was $236,500 based on completion of diligence, which was adjusted based on, among other things, SCIO’s cash, debt, working capital position and other adjustments as of ~~September 30, 2017:~~the Closing as set forth in the Merger Agreement. To finance the acquisition at Closing, the Company utilized its revolving Credit Facility in the amount of $233,000, issued 69,459 shares of restricted common stock of the Company in the amount of $4,080 and paid the balance with available cash on hand.

Insurance Healthcare TT&L F&A All Other Analytics Total
Balance as at January 1, 2016 $ 35,824
$ 19,276
$ 13,278
$ 47,891
$ 5,326
$ 49,940
$ 171,535
Acquisitions 2,510
—
—
—
—
13,598
16,108
Currency translation adjustments (224 ) —
(295 ) (354 ) —
—
(873 )
Balance as at December 31, 2016 $ 38,110
$ 19,276
$ 12,983
$ 47,537
$ 5,326
$ 63,538
$ 186,770
Currency translation adjustments 204
—
445
534
—
—
1,183
Balance as at September 30, 2017 $ 38,314
$ 19,276
$ 13,428
$ 48,071
$ 5,326
$ 63,538
$ 187,953
Pursuant to the Company’s business combinations accounting policy, the total purchase consideration for SCIO was allocated to identifiable net tangible and intangible assets based upon their preliminary fair values. The excess of the purchase consideration over fair value of identifiable net tangible and intangible assets was recorded as goodwill. In order to allocate the consideration transferred for SCIO, the fair values of all identifiable assets and liabilities were established. For accounting and financial reporting purposes, fair value is defined under ASC No. 820, Fair Value Measurement and Disclosure, as the price that would be received

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

~~September~~June 30, ~~2017~~2019

(In thousands, except share and per share amounts)

upon sale of an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date. Market participants are assumed to be buyers and sellers in the principal (most advantageous) market for the asset or liability. Additionally, fair value measurements for an asset assume the highest and best use of that asset by market participants. Use of different estimates and judgments could yield different results.

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



Assets:
Cash and cash equivalents	$	9,842
Restricted cash	2,790
Accounts receivable	19,924
Other current assets	2,076
Property and equipment	1,824
Other assets	1,751
Intangible assets
Customer relationships	47,800
Developed technology	21,400
Trade names and trademarks	3,700
	111,107
Liabilities:
Current liabilities	(12,482		)
Deferred tax liabilities, net	(17,132		)
Other non-current liabilities	(200		)
	(29,814		)

Net assets acquired	$	81,293
Goodwill	163,751
Total purchase consideration	$	245,044

The fair values of the trade names and trademarks intangible assets were determined by using an “income approach”, specifically the relief-from-royalty approach. The basic principle of the relief-from-royalty method is that without ownership of the subject intangible asset, the user of that intangible asset would have to make a stream of payments to the owner of the asset in return for the rights to use that asset. By acquiring the intangible asset, the user avoids these payments. Therefore, a portion of SCIO’s earnings, equal to the after-tax royalty that would have been paid for the use of the asset, can be attributed to the firm’s ownership. The trade names and trademarks are being amortized on a straight-line basis (which approximates the economic pattern of benefits) over the estimated economic life of 3 years.

The fair values of the developed technology intangible assets were also determined by the relief-from-royalty approach. Similarly, this approach is based on the assumption that in lieu of ownership, a firm would be willing to pay a royalty in order to exploit the related benefits of the technology. Therefore, a portion of SCIO’s earnings, equal to the after-tax royalty that would have been paid for the use of the technology, can be attributed to the firm’s ownership of the technology. The technology assets are being amortized on a straight-line basis (which approximates the economic pattern of benefits) over the estimated economic life of 5 years.

The fair values of the customer relationships were determined by using an “income approach”, specifically the Multi-Period Excess Earnings Method ("MPEEM"). The MPEEM is a specific application of the discounted cash flow method. The principle behind the MPEEM is that the value of an intangible asset is equal to the present value of the incremental after-tax cash flows attributable only to the subject intangible asset after deducting Contributory Asset Charges ("CAC"). The principle behind a CAC is that an intangible asset ‘rents’ or ‘leases’ from a hypothetical third party all the assets it requires to produce the cash flows

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2019

(In thousands, except share and per share amounts)

resulting from its development, that each project rents only those assets it needs (including elements of goodwill) and not the ones that it does not need, and that each project pays the owner of the assets a fair return on (and of, when appropriate) the value of the rented assets. The customer relationship assets are being amortized on a straight-line basis (which approximates the economic pattern of benefits) over the estimated economic life of 10 years.

The goodwill recognized is attributable primarily to expected synergies from continuing operations of SCIO and the Company. The amount of goodwill recognized from SCIO's acquisition is not deductible for tax purposes. The goodwill has been assigned to our Analytics reportable segment based upon the Company’s assessment of nature of services rendered by SCIO.

Goodwill

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



	Insurance			Healthcare			TT&L			F&A			All Other		Analytics		Total
Balance at January 1, 2018	$	38,333		$	35,233		$	13,679		$	48,372		$	5,326	$	63,538	$	204,481
Acquisitions	—			—			—			—			—		163,751		163,751
Measurement period adjustments	—			(1,728		)	—			—			—		—		(1,728		)
Currency translation adjustments	(130		)	—			(982		)	(1,179		)	—		—		(2,291		)
Impairment charges	—			(14,229		)	—			—			—		—		(14,229		)
Balance at December 31, 2018	$	38,203		$	19,276		$	12,697		$	47,193		$	5,326	$	227,289	$	349,984
Currency translation adjustments	(20		)	—			116			140			—		—		236
Balance at June 30, 2019	$	38,183		$	19,276		$	12,813		$	47,333		$	5,326	$	227,289	$	350,220

During the fourth quarter of 2018, the Company performed its annual impairment test of goodwill for all its reporting units. Based on the results, the fair values of each of the Company’s reporting units exceeded their carrying values except for the Health Integrated reporting unit, within the Healthcare operating segment. The primary factors contributing to a reduction in the fair value of the Health Integrated reporting unit were: (i) revenues and profitability in 2018 were significantly lower than the Company’s budget; and (ii) significant changes to the Company's estimated future cash flows and long-term growth assumptions for the Health Integrated reporting unit driven by loss of customer contracts, cost pressures and the Company’s most recent views of the long-term outlook for the Health Integrated business. As a result of this analysis, the Company recognized a goodwill impairment charge of $14,229 during the fourth quarter to write down the carrying value of Health Integrated’s goodwill to its fair value of $nil as of December 31, 2018. This impairment charge was recorded in the consolidated statements of income under "Impairment and restructuring charges".

As of June 30, 2019, the Company believes no other goodwill impairment exists, apart from the impairment charges discussed above, and that the remaining goodwill is recoverable for all of its reporting units; however, there can be no assurances that additional 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. It is reasonably possible that the judgments and estimates described above could change in future periods.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2019

(In thousands, except share and per share amounts)

Intangible Assets

Information regarding the Company’s intangible assets is set forth below:


	As of September 30, 2017							As of June 30, 2019
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment			Net Carrying Amount
Finite-lived intangible assets:
Customer relationships	$	75,372	$	(40,975	)	$	34,397	$	129,784	$	(63,261	)	$	(5,549	)	$	60,974
Leasehold benefits	2,826		(2,490		)	336		2,673		(2,673		)	—			—
Developed technology	14,314		(8,177		)	6,137		37,141		(17,899		)	—			19,242
Non-compete agreements	2,045		(1,739		)	306		2,045		(2,012		)	—			33
Trade names and trademarks	5,379		(3,887		)	1,492		9,637		(6,106		)	(278		)	3,253
	$	99,936	$	(57,268	)	$	42,668	$	181,280	$	(91,951	)	$	(5,827	)	$	83,502
Indefinite-lived intangible assets:
Trade names and trademarks	$	900	$	—		$	900	900		—			—			900
Total intangible assets	$	100,836	$	(57,268	)	$	43,568	$	182,180	$	(91,951	)	$	(5,827	)	$	84,402



	As of December 31, 2018
	Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment			Net Carrying Amount
Finite-lived intangible assets:
Customer relationships	$	129,790	$	(56,367	)	$	(5,549	)	$	67,874
Leasehold benefits	2,644		(2,567		)	—			77
Developed technology	37,154		(14,653		)	—			22,501
Non-compete agreements	2,045		(1,937		)	—			108
Trade names and trademarks	9,639		(5,326		)	(278		)	4,035
	$	181,272	$	(80,850	)	$	(5,827	)	$	94,595
Indefinite-lived intangible assets:
Trade names and trademarks	900		—			—			900
Total intangible assets	$	182,172	$	(80,850	)	$	(5,827	)	$	95,495

As of December 31, 2016

Gross
Carrying Amount

Accumulated
Amortization

Net Carrying
Amount
Finite-lived intangible assets:
Customer relationships $ 75,181
$ (32,968 ) $ 42,213
Leasehold benefits 2,715
(2,247 ) 468
Developed technology 14,186
(6,468 ) 7,718
Non-compete agreements 2,045
(1,612 ) 433
Trade names and trademarks 5,360
(3,322 ) 2,038
$ 99,487
$ (46,617 ) $ 52,870
Indefinite-lived intangible assets:
Trade names and trademarks $ 900
$ —
$ 900
Total intangible assets $ 100,387
$ (46,617 ) $ 53,770

The amortization ~~expenses~~expense for the period is as follows:



	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
Amortization expense	$	5,554	$	3,761	$	11,082	$	7,708

During the fourth quarter of 2018, the Company recognized impairment charges of $5,549 and $278 related to its customer relationships and trademarks intangible assets, respectively, in the Health Integrated reporting unit, within the Healthcare operating segment. The Company tested these intangible assets for recoverability due to indicators warranting the impairment test such as: (i) revenues and profitability in 2018 were significantly lower than the Company’s budget, and (ii) significant changes to the Company's estimated future cash flows and long-term growth assumptions for the Health Integrated reporting unit driven by loss of customer contracts, cost pressures and the Company’s most recent views of the long-term outlook for the Health Integrated business. Based on the results of its testing, the Company determined that the carrying value of the intangible assets was not recoverable, and an impairment charge was recorded to the extent that carrying value exceeded estimated fair value. This impairment charge was recorded in the consolidated statements of income under "Impairment and restructuring charges". Subsequent to the

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2019

(In thousands, except share and per share amounts)

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Amortization expense $ 3,487
$ 2,848
$ 10,492
$ 8,281

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

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



	(in years)
Customer relationships	~~5.15~~7.77
Leasehold benefits	~~1.67~~—
Developed ~~technologies~~technology	~~3.77~~3.99
Non-compete agreements	~~1.93~~0.22
Trade names and trademarks (Finite lived)	~~5.23~~2.74



Estimated future amortization expense related to intangible assets as of June 30, 2019 is as follows:
2019 (July 1 - December 31)	$	10,472
2020	14,438
2021	12,740
2022	11,329
2023	9,040
2024 and thereafter	25,483
Total	$	83,502

10. Investment in Equity Affiliate

On December 12, 2017, the Company acquired preferred stock in Corridor Platform Inc. (“Corridor”), a big data credit risk management platform for $3,000. The Company has determined that based on its ownership interest and other rights, Corridor is an equity method affiliate. The Company has the right and option to acquire additional preferred stock from Corridor as per the terms of the agreement. The Company's proportionate share of net loss for the three and six months ended June 30, 2019 was $62 and $129, and for the three and six months ended June 30, 2018 was $58 and $114, respectively.

11. Other Current Assets

Other current assets consist of the following:



	As of
	June 30, 2019		December 31, 2018
Derivative instruments	$	5,367	$	4,059
Advances to suppliers	3,007		2,910
Receivables from statutory authorities	15,796		14,145
Contract assets	1,203		1,201
Deferred contract fulfillment costs	1,267		1,236
Others	5,089		4,689
Other current assets	$	31,729	$	28,240

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

~~September~~June 30, ~~2017~~2019

(In thousands, except share and per share amounts)

Estimated amortization of intangible assets during the next twelve months ending September 30,
2018 $ 12,667
2019 11,947
2020 5,705
2021 3,207
2022 2,461
2023 and thereafter 6,681
Total $ 42,668

8.12. Other ~~current assets~~Assets

Other ~~current~~ assets ~~consists~~consist of the following:



	As of
	June 30, 2019		December 31, 2018
Lease deposits	$	9,328	$	8,891
Derivative instruments	3,992		1,971
Deposits with statutory authorities	6,327		6,259
Term deposits	430		315
Contract assets	3,682		4,244
Deferred contract fulfillment costs	4,341		2,815
Others	5,094		6,520
Other assets	$	33,194	$	31,015

As of
September 30, 2017 December 31, 2016
Derivative instruments $ 8,236
$ 3,324
Advances to suppliers 3,681
1,091
Receivables from statutory authorities 5,784
11,870
Others 4,632
4,883
Other current assets $ 22,333
$ 21,168

9.13. Accrued ~~expenses~~Expenses and ~~other current liabilities~~Other Current Liabilities

Accrued expenses and other current liabilities ~~consists~~consist of the following:



	As of
	June 30, 2019		December 31, 2018
Accrued expenses	$	48,797	$	44,711
Derivative instruments	928		3,204
Client liabilities	6,493		6,933
Other current liabilities	8,789		9,321
Accrued expenses and other current liabilities	$	65,007	$	64,169

As of
September 30, 2017 December 31, 2016
Accrued expenses $ 39,250
$ 30,690
Derivative instruments 1,330
1,430
Client liability account 2,090
4,005
Others 6,370
7,139
Accrued expenses and other current liabilities $ 49,040
$ 43,264

~~10. Non-current~~14. Other Non-Current Liabilities

Other non-current liabilities

~~Non-current liabilities consists~~ consist of the following:



	As of
	June 30, 2019		December 31, 2018
Derivative instruments	$	1,140	$	3,075
Unrecognized tax benefits	804		804
Deferred rent	—		7,834
Retirement benefits	4,002		3,616
Deferred transition revenue	2,472		945
Others	676		247
Other non-current liabilities	$	9,094	$	16,521

As of
September 30, 2017 December 31, 2016
Derivative instruments $ 1,553
$ 828
Unrecognized tax benefits 692
3,640
Deferred rent 7,890
7,237
Retirement benefits 2,917
1,977
Others 3,182
1,137
Non-current liabilities $ 16,234
$ 14,819

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

~~September~~June 30, ~~2017~~2019

(In thousands, except share and per share amounts)

~~11.~~

15. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consists of amortization of actuarial ~~gain /~~ gain/(loss) on retirement benefits and changes in the cumulative foreign currency translation adjustments. In addition, the Company enters into foreign currency exchange contracts, which are designated as cash flow hedges in accordance with ASC ~~topic 815~~ ~~“Derivatives and Hedging” (“ASC No. 815”)~~.815. Changes in the fair values of forward contracts ~~that~~ are ~~deemed effective are recorded as a component of~~recognized in accumulated other comprehensive loss on the Company's unaudited consolidated balance sheets until the settlement of those contracts. The balances as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 are as follows:



	As of
	June 30, 2019			December 31, 2018
Cumulative foreign currency translation loss	$	(80,821	)	$	(84,105	)
Unrealized gain/(loss) on cash flow hedges, net of taxes of $1,791 and $115, respectively	5,661			(333		)
Retirement benefits, net of taxes of $37 and ($53), respectively	802			971
Accumulated other comprehensive loss	$	(74,358	)	$	(83,467	)

As of
September 30, 2017 December 31, 2016
Cumulative currency translation adjustments $ (66,486 ) $ (77,299 )
Unrealized gain on cash flow hedges, net of taxes of $3,605 and $1,207 7,559
2,740
Retirement benefits, net of taxes of ($265) and ($342) (363 ) (498 )
Accumulated other comprehensive loss $ (59,290 ) $ (75,057 )

~~12.~~16. 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~~June 30, ~~2017~~2019 and December 31, ~~2016. The table excludes accounts receivable, accounts payable and accrued expenses for which fair values approximate their carrying amounts.~~2018.


As of September 30, 2017	Level 1		Level 2		Level 3		Total
As of June 30, 2019									Level 1		Level 2		Level 3		Total
Assets
Money market and mutual funds*	$	146,477	$	—	$	—	$	146,477
Mutual funds*									$	136,699	$	—	$	—	$	136,699
Derivative financial instruments	—		14,395		—		14,395		—		9,359		—		9,359
Total	$	146,477	$	14,395	$	—	$	160,872	$	136,699	$	9,359	$	—	$	146,058
Liabilities
Derivative financial instruments	$	—	$	2,883	$	—	$	2,883	$	—	$	2,068	$	—	$	2,068
Total	$	—	$	2,883	$	—	$	2,883	$	—	$	2,068	$	—	$	2,068

As of December 31, 2016	Level 1		Level 2		Level 3		Total
As of December 31, 2018									Level 1		Level 2		Level 3		Total
Assets
Money market and mutual funds	$	—	$	—	$	—	$	—
Mutual funds*									$	142,408	$	—	$	—	$	142,408
Derivative financial instruments	—		6,318		—		6,318		—		6,030		—		6,030
Total	$	—	$	6,318	$	—	$	6,318	$	142,408	$	6,030	$	—	$	148,438
Liabilities
Derivative financial instruments	$	—	$	2,258	$	—	$	2,258	$	—	$	6,279	$	—	$	6,279
Total	$	—	$	2,258	$	—	$	2,258	$	—	$	6,279	$	—	$	6,279

*Represents short-term investments carried on fair value option under ASC 825 “Financial Instruments” as of ~~September~~June 30, ~~2017.~~2019 and December 31, 2018.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

~~September~~June 30, ~~2017~~2019

(In thousands, except share and per share amounts)

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. ~~See~~Refer Note 1317 to the unaudited consolidated financial statements ~~contained herein~~ for further ~~details~~details.

Financial instruments not carried at fair value:

The Company’s other financial instruments not carried at fair value consist primarily of accounts receivable, accounts payable and accrued expenses for which fair values approximate their carrying amounts due to their short-term nature.

Convertible Senior Notes:

The total estimated fair value of the convertible senior notes as of June 30, 2019 and December 31, 2018 was $143,740 and $130,510, respectively. The fair value was determined based on ~~Derivatives~~the market yields for similar Notes as of the June 30, 2019 and ~~Hedge Accounting.~~December 31, 2018. 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.

Nonrecurring fair value measurements of assets:

Nonrecurring fair value measurements include impairment tests conducted by the Company during the three and six months ended June 30, 2019 of its ROU assets and long-lived assets related to its Health Integrated business. The fair value determination for ROU assets was based on third party quotes, which are Level 2 inputs and for other long-lived assets, it was based on Company’s internal assessment, which are Level 3 inputs. During the three and six months ended June 30, 2019, the Company recognized impairment charges on ROU assets and long-lived assets to write down the carrying value to their fair values. Refer Note 8 and 21 to the unaudited consolidated financial statements for further details.

~~13.~~17. 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 and 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 ~~forward~~ 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 ~~$297,643~~$412,675 (including ~~$1,500~~$8,800 of range forward contracts) as of ~~September~~June 30, ~~2017~~2019 and ~~$218,545~~$362,435 (including $6,900 of range forward contracts) as of December 31, ~~2016. The~~2018.

Changes in the fair value of these cash flow hedges ~~is included~~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) are recorded along with the underlying hedged item in the ~~other comprehensive loss on the Company's~~same line of unaudited consolidated ~~balance sheet.~~statements of income as either part of “Cost of revenues”, “General and administrative expenses”, “Selling and marketing expenses”, “Depreciation and amortization”, as applicable.

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. 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 foreign exchange gain/~~loss.~~(loss). The Company’s primary exchange rate exposure is with the Indian Rupee, the U.K. ~~Pound~~pound sterling and the Philippine peso. The Company also has exposure to Colombian pesos, Czech Koruna, the Euro, South African ~~Rand~~ZAR and other local currencies in which it operates. Outstanding foreign currency forward contracts amounted to ~~$91,523~~$107,814 and GBP ~~17,244~~14,688 as of ~~September~~June 30, ~~2017~~2019 and amounted to ~~$63,980~~$125,503, GBP 15,616 and ~~GBP 17,974~~EUR 512 as of December 31, ~~2016.~~2018.

The Company uses forward contracts designated as net investment hedges to hedge the foreign currency risks related to our investment in foreign subsidiaries. Gains and losses on these forward contracts are recognized in AOCI as part of the foreign currency translation adjustment.

The Company estimates that approximately ~~$6,839~~$4,600 of net derivative gains, excluding tax effects, included in accumulated other comprehensive loss ~~(“AOCL”)~~representing changes in the value of cash flow hedges, could be reclassified into earnings within the

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2019

(In thousands, except share and per share amounts)

next twelve months based on exchange rates prevailing as of ~~September~~June 30, ~~2017.~~2019. At ~~September~~June 30, ~~2017,~~2019, the maximum outstanding term of the cash flow hedges was ~~forty-five~~45 months.

The Company evaluates hedge effectiveness at the time a contract is entered into as well as on an ongoing basis. ~~If during this time, a contract is deemed ineffective, the change in the fair value is recorded in the unaudited consolidated statements of income and is included in foreign exchange gain/(loss).~~ 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 ~~derivative~~ amounts recorded in equity are reclassified to earnings. ~~There were no such significant amounts of gains or losses that were reclassified from AOCL into earnings during the three and nine months ended September 30, 2017 and 2016.~~

The following tables set forth the fair value of the foreign currency exchange contracts and their location on the unaudited consolidated financial statements:

~~Derivatives designated as hedging instruments:~~



Derivatives designated as hedging instruments:	As of
Foreign currency exchange contracts	June 30, 2019		December 31, 2018
Other current assets	$	5,367	$	4,022
Other assets	$	3,992	$	1,971
Accrued expenses and other current liabilities	$	767	$	3,137
Other non-current liabilities	$	1,140	$	3,075

Derivatives not designated as hedging instruments:	As of
Foreign currency exchange contracts	June 30, 2019		December 31, 2018
Other current assets	$	—	$	37
Accrued expenses and other current liabilities	$	161	$	67

As of
September 30, 2017 December 31, 2016
Other current assets:
Foreign currency exchange contracts $ 8,122
$ 3,211
Other assets:
Foreign currency exchange contracts $ 6,159
$ 2,994
Accrued expenses and other current liabilities:
Foreign currency exchange contracts $ 1,283
$ 1,430
Non-current liabilities:
Foreign currency exchange contracts $ 1,553
$ 828

~~EXLSERVICE HOLDINGS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)~~

~~September 30, 2017~~

~~(In thousands, except share and per share amounts)~~

~~Derivatives not designated as hedging instruments:~~

As of
September 30, 2017 December 31, 2016
Other current assets:
Foreign currency exchange contracts $ 114
$ 113
Accrued expenses and other current liabilities:
Foreign currency exchange contracts $ 47
$ —

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~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016:~~2018:

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Derivatives in Cash flow hedging relationship
Gain/(loss) recognized in AOCL on derivative - Effective portion $ (719 ) $ 3,607
$ 8,774
$ 4,160
Gain/(loss) reclassified from AOCL to foreign exchange gain/(loss) - Effective portion $ 423
$ 466
$ 1,557
$ 872
Gain/(loss) recognized in foreign exchange gain/(loss) - Ineffective portion $ —
$ —
$ —
$ —

Derivatives not designated as hedging instruments
Gain/(loss) recognized in foreign exchange gain/(loss) $ (678 ) $ 1,382
$ 2,095
$ 4,110



	Three months ended June 30,					Six months ended June 30,
Forward Exchange Contracts:	2019		2018			2019		2018
Gain/(Loss) recognized in AOCI
Derivatives in cash flow hedging relationships	$	3,288	$	(12,229	)	$	9,225	$	(17,243	)

Gain/(Loss) recognized in unaudited consolidated statements of income
Derivatives not designated as hedging instruments	$	2,923	$	(2,641	)	$	4,319	$	(5,569	)

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2019

(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 June 30,
	2019				2018
	As per unaudited consolidated statements of income		Gain 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 was reclassed from AOCI

Cost of revenues	$	162,446	$	719	$	139,649	$	1,191
General and administrative expenses	$	31,228	106		$	27,640	180
Selling & marketing expenses	$	17,647	12		$	15,151	17
Depreciation & amortization	$	12,752	47		$	10,582	79
			$	884			$	1,467

Derivatives not designated as hedging instruments
Location in unaudited consolidated statements of income where gain/(loss) was recognized

Foreign exchange gain/(loss), net	$	1,202	$	2,923	$	1,414	$	(2,641	)
	$	1,202	$	2,923	$	1,414	$	(2,641	)

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2019

(In thousands, except share and per share amounts)



	Six months ended June 30,
	2019				2018
	As per unaudited consolidated statements of income		Gain 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 was reclassed from AOCI

Cost of revenues	$	319,686	$	1,250	$	277,750	$	3,336
General and administrative expenses	$	63,759	186		$	56,906	511
Selling & marketing expenses	$	35,694	19		$	29,103	50
Depreciation & amortization	$	26,419	100		$	21,086	241
			$	1,555			$	4,138

Derivatives not designated as hedging instruments
Location in unaudited consolidated statements of income where gain/(loss) was recognized

Foreign exchange gain/(loss), net	$	2,462	$	4,319	$	2,029	$	(5,569	)
	$	2,462	$	4,319	$	2,029	$	(5,569	)



Effect of net investment hedges on accumulated other comprehensive loss
	Three months ended June 30,					Six months ended June 30,
	Amount of (Loss) Recognized in AOCI					Amount of (Loss) Recognized in AOCI
Net investment hedging relationships	2019			2018		2019			2018
Foreign exchange contracts	$	(580	)	$	—	$	(580	)	$	—
	$	(580	)	$	—	$	(580	)	$	—

~~14.~~18. Borrowings

RevolverCredit Agreement

On November 21, 2017, the Company and each of the Company’s wholly owned material domestic subsidiaries entered into a Credit Agreement with certain lenders, and Citibank, N.A. as Administrative Agent (the “Credit Agreement”). The ~~Company has~~Credit Agreement provides for a $200,000 revolving credit facility (the “Credit Facility”)~~, including~~ with an option to increase the commitments by up to $100,000, subject to certain approvals and conditions as set forth in the Credit Agreement. The Credit Agreement also includes a letter of credit ~~sub-facility, in the amount of $100,000.~~sub facility. The Credit Facility has a maturity date of ~~October 24, 2019~~November 21, 2022 and is voluntarily pre-payable from time to time without premium or penalty.

Borrowings under the Credit ~~Facility~~Agreement may be used for working capital and general corporate purposes, including permitted acquisitions. On July 2, 2018, the Company exercised its option under the Credit Agreement to increase the commitments by $100,000 thereby utilizing the entire revolver under the Credit Facility of $300,000, to fund the SCIO acquisition. The incremental commitments were made pursuant to (and constitute part of) the existing commitments and shall be subject to the terms and conditions applicable to the existing commitments as set forth in the Credit Agreement.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2019

(In thousands, except share and per share amounts)

Depending on the type of borrowing, loans under the Credit Agreement bear interest at a rate equal to the specified prime rate (alternate base rate) or adjusted LIBO rate, plus, in each case, an applicable margin. The applicable margin is tied to the Company’s total net leverage ratio and ranges from 0% to 0.75% per annum with respect to loans pegged to the specified prime rate, and 1.00% to 1.75% per annum on loans pegged to the adjusted LIBO rate. The revolving credit commitments under the Credit Agreement are subject to a commitment fee, which is also tied to the Company’s total net leverage ratio, and ranges from 0.15% to 0.30% per annum on the average daily amount by which the aggregate revolving commitments exceed the sum of outstanding revolving loans and letter of credit obligations.The Credit Facility carried an effective interest rate of 4.2% and 4.0% per annum during the three and six months ended June 30, 2019, respectively, and 3.8% and 3.6% per annum during the three and six months ended June 30, 2018, respectively.

Obligations under the Credit Agreement are guaranteed by the Company’s material domestic subsidiaries and are secured by all or substantially all of the assets of the Company and our material domestic subsidiaries. The Credit Agreement contains customary affirmative and negative covenants, including, but not limited to, restrictions on the ability to incur indebtedness, create liens, make certain investments, make certain dividends and related distributions, enter into, or undertake, certain liquidations, mergers, consolidations or acquisitions and dispose of assets or subsidiaries. In addition, the Credit Agreement contains a covenant to not permit the interest coverage ratio (the ratio of EBITDA to cash interest expense) or the total net leverage ratio (total funded indebtedness, less unrestricted domestic cash and cash equivalents not to exceed $50,000 to EBITDA) for ~~acquisitions.~~ the four consecutive quarter period ending on the last day of each fiscal quarter, to be less than 3.5 to 1.0 or more than 3.0 to 1.0, respectively. As of June 30, 2019, the Company was in compliance with all financial and non-financial covenants listed under the Credit Agreement.

The ~~amount outstanding~~Company entered into a second amendment (the “Amendment”) to its Credit Agreement, as amended, among the Company, as borrower, with certain lenders, and Citibank, N.A. as Administrative Agent to, among other things, permit the issuance by the Company of the convertible notes, and settlement upon maturity or conversion thereof, in accordance with the Investment Agreement, the indenture dated as of ~~September~~October 4, 2018 and the other documents entered into in connection therewith.

As of June 30, ~~2017~~2019, the Company had outstanding indebtedness under the credit facility of $117,000, of which $20,000 is ~~$45,000~~expected to be repaid within the next twelve months and is included under “current portion of long-term borrowings” and of which $97,000 is included under “long-term borrowings” in the unaudited consolidated balance sheets. ~~The Credit Facility carried~~As of December 31, 2018, the Company had an ~~effective interest rate~~outstanding indebtedness under the credit facility of ~~2.9% per annum~~$150,000, of which $20,000 was included under “current portion of long-term borrowings,” and ~~2.2% per annum, during~~ the ~~three months ended September 30, 2017 and 2016, respectively, and for~~balance of $130,000 was included under “long-term borrowings” in the ~~nine months ended September 30, 2017 and 2016 it was 2.7% per annum and 2.0% per annum, respectively.~~consolidated balance sheets.

~~In connection with the financing, the~~The Company incurred certain debt issuance costs, which are deferred and amortized as an adjustment to interest expense over the term of the ~~Credit Facility.~~credit facility. The unamortized debt issuance costs as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 was ~~$200~~$877 and ~~$272,~~$1,006, respectively, and is included under ~~“other~~"other current ~~assets”~~assets" and “other assets” in the unaudited consolidated balance sheets.

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 ~~Credit Facility is guaranteed~~Orogen Group LLC, relating to the issuance to the Purchaser of $150,000 in an aggregate principal amount of 3.50% Convertible Senior Notes due October 1, 2024 (the “Notes”). The transactions contemplated by the ~~Company's domestic subsidiaries~~Investment Agreement, including the issuance of the Notes, closed on October 4, 2018. The Notes bear interest at a rate of 3.50% per annum, payable semi-annually in arrears in cash on April 1 and ~~material foreign subsidiaries~~October 1 of each year. During the three and ~~is secured by~~six months ended June 30, 2019, the Company recognized interest expense of $1,269 and $2,581, respectively. The Notes are convertible at an initial conversion rate of 13.3333 shares of the common stock per $1,000 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 that the Company repurchase all or ~~substantially all~~part of the ~~assets~~principal amount of the Notes at a purchase price equal to the principal amount plus accrued and unpaid interest. The Company may redeem the principal amount of the Notes, at its option, in whole but not in part, at a purchase price equal to the principal amount plus accrued and unpaid interest on or after October 1, 2021, if the closing sale price of the common stock exceeds 150% of the then-current conversion price for 20 or more trading days in the 30 consecutive trading day period preceding the Company’s exercise of this redemption right (including the trading day immediately prior to the date of the notice of redemption).The Company may elect to settle conversions of the Notes by paying or delivering, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock. The Company used the proceeds from the issuance of the Notes to repay $150,000 of its ~~material domestic subsidiaries. The Credit Agreement governing~~outstanding borrowings under the Credit Facility contains certain covenants including a restriction on our indebtedness, and a covenant to not permit the interest coverage ratio (the ratio of EBIT to cash interest expense) to be less than 3.5 to 1.0 or the leverage ratio (total funded indebtedness to EBITDA) to be greater than 2.5 to 1.0, for the four consecutive quarter period ending on the last day of each fiscal quarter. As of September 30, 2017, the Company was in compliance with the financial covenants listed above.Facility.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

~~September~~June 30, ~~2017~~2019

(In thousands, except share and per share amounts)

~~15.~~The net proceeds from the issuance of the Notes were approximately $149,000, after deducting debt issuance costs of $1,000 and offering expenses of approximately $442 paid by the Company. These transaction and debt issuance costs were allocated between the liability and equity components based on their relative values. The transaction costs and debt issuance costs allocated to the liability and equity components were $1,279 and $163, respectively. The debt issuance costs allocated to the liability component are deferred and amortized as an adjustment to interest expense over the term of the Notes. The unamortized debt issuance costs is presented as a direct reduction from the Notes in the unaudited consolidated balance sheets. The unamortized debt issuance costs as of June 30, 2019 and December 31, 2018 was $1,125 and $1,127, respectively.

The Company accounted for the liability and equity components of the Notes separately to reflect its non-convertible debt borrowing rate. The estimated fair value of the liability component at issuance of $133,077 was determined using a discounted cash flow technique, which considered debt issuances with similar features of the Company’s debt, excluding the conversion feature. The resulting effective interest rate for the Notes was 5.75% per annum. The excess of the gross proceeds received over the estimated fair value of the liability component totaling $16,923 was allocated to the conversion feature (equity component, recorded as additional paid-in capital) with a corresponding offset recognized as a discount to reduce the net carrying value of the Notes. The discount is being amortized to interest expense over a six-year period ending October 1, 2024 (the expected life of the liability component) using the effective interest method. During the three and six months ended June 30, 2019, the Company amortized $618 and $1,218, respectively, of the discount to interest expense. At the time of issuance, the Company evaluated the Notes in accordance with ASC 815-15 and determined that the Notes contain a single embedded derivative, being the call option having market interest rates as the underlying, which does not require bifurcation as the features clearly and closely related to the host instrument. The Company determined that the value of this embedded derivative was nominal as of the date of issuance.

Borrowings also includes structured payables which are in the nature of debt, amounting to $1,524 and $2,114 as of June 30, 2019 and December 31, 2018, respectively, of which $885 and $1,423 is included under "current portion of long-term borrowings", and $639 and $691, respectively, included under "long-term borrowings" in the unaudited consolidated balance sheets.

Future principal payments/maturities for all of the Company's borrowings as of June 30, 2019 were as follows:



	Notes		Revolver Credit		Structured Payables		Total
2019 (July - December)	$	—	$	10,000	$	831	$	10,831
2020	—		24,000		693		24,693
2021	—		34,000		—		34,000
2022	—		49,000		—		49,000
2023	—		—		—		—
2024 and thereafter	150,000		—		—		150,000
Total	$	150,000	$	117,000	$	1,524	$	268,524

19. Capital Structure

Common Stock

The Company has one class of common stock outstanding.

During the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016, the Company did not acquire any shares of common stock from employees in connection with withholding tax payments related to the vesting of restricted stock.~~

~~During the nine months ended September 30, 2017 and 2016,~~2018, the Company acquired ~~65,003~~nil and ~~16,027~~3,835 shares of common stock, respectively, from employees in connection with withholding tax payments related to the vesting of restricted stock for a total consideration of ~~$3,016~~$nil and ~~$728,~~$226, respectively. The weighted average purchase price per share of ~~$46.40~~$nil and ~~$45.44,~~$58.82, respectively, was the average of the high and low price of the ~~Company’s~~Company's share of common stock on the Nasdaq Global Select Market on the trading day prior to the vesting date of the shares of restricted stock.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2019

(In thousands, except share and per share amounts)

During the six months ended June 30, 2019 and 2018, the Company acquired 22,666 and 45,646 shares of common stock, respectively, from employees in connection with withholding tax payments related to the vesting of restricted stock for a total consideration of $1,408 and $2,790, respectively. The weighted average purchase price per share of $62.11 and $61.12, respectively, was the average of the high and low price of the Company's share of common stock on the Nasdaq Global Select Market on the trading day prior to the vesting date of the shares of restricted stock.

On December 30, 2014, the Company’s Board of Directors authorized a common stock repurchase program (the “2014 Repurchase Program”), under which shares were authorized to be purchased by the Company from time to time from the open market and through private transactions during each of the fiscal years ~~2015~~2017 through ~~2017~~2019 up to an annual amount of $20,000.

On February 28, 2017, the Company’s Board of Directors authorized an additional common stock repurchase program (the “2017 Repurchase Program”), under which shares may be purchased by the Company from time to time from the open market and through private transactions during each of the fiscal years 2017 through 2019 up to an aggregate additional amount of $100,000. The approval ~~increases~~increased the 2017 authorization from $20,000 to $40,000 and authorizes stock repurchases of up to $40,000 in each of 2018 and 2019.

During the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, the Company purchased ~~160,033~~198,160 and ~~584,017~~438,025 shares of its common stock, respectively, for an aggregate purchase price of approximately ~~$9,004~~$12,130 and ~~$29,320,~~$26,130, respectively, including commissions, representing an average purchase price per share of ~~$56.26~~$61.21 and ~~$50.20,~~$59.65, respectively, under the ~~2014 and~~ 2017 Repurchase Program.

During the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018, the Company purchased ~~108,143~~165,000 and ~~302,953~~347,182 shares of its common stock, respectively, for an aggregate purchase price of approximately ~~$5,466~~$9,407 and ~~$14,441,~~$20,346, respectively, including commissions, representing an average purchase price per share of ~~$50.54~~$57.01 and ~~$47.67,~~$58.60, respectively, under the ~~2014~~2017 Repurchase Program.

Repurchased shares have been recorded as treasury shares and will be held until the Board of Directors designates that these shares be retired or used for other purposes.

~~16.~~20. Employee Benefit Plans

The Company’s Gratuity Plans in India ("Gratuity Plan") provide for lump sum payment to vested employees on retirement or upon termination of employment in an amount based on the respective employee’s salary and years of employment with the Company. Liabilities with regard to the Gratuity Plans are determined by actuarial valuation using the projected unit credit method. Current service costs for the Gratuity Plan are accrued in the year to which they relate. Actuarial gains or losses or prior service costs, if any, resulting from amendments to the plans are recognized and amortized over the remaining period of service of the employees.

In addition, the Company’s subsidiary operating in the Philippines conforms to the minimum regulatory benefit which provide for lump sum payment to vested employees on retirement from employment in an amount based on the respective employee’s salary and years of employment with the Company (the "Philippines Plan"). The benefit costs of the Philippines Plan for the year are calculated on an actuarial basis.

~~EXLSERVICE HOLDINGS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)~~

~~September 30, 2017~~

~~(In thousands, except share and per share amounts)~~

~~Net gratuity cost includes the following components:~~Components of net periodic benefit cost:



	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018
Service cost	$	493		$	423		$	980		$	862
Interest cost	221			173			440			353
Expected return on plan assets	(144		)	(118		)	(286		)	(242		)
Amortization of actuarial gain	(40		)	(38		)	(79		)	(77		)
Net periodic benefit cost	$	530		$	440		$	1,055		$	896

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Service cost $ 491
$ 402
$ 1,469
$ 1,203
Interest cost 166
150
494
449
Expected return on plan assets (112 ) (104 ) (330 ) (312 )
Amortization of actuarial loss 72
23
212
67
Net gratuity cost $ 617
$ 471
$ 1,845
$ 1,407

The Gratuity Plan in India is partially funded and the Philippines plan is unfunded. The Company makes annual contributions to the employees' gratuity fund established with Life Insurance Corporation of India and HDFC Standard Life Insurance Company.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2019

(In thousands, except share and per share amounts)

They calculate the annual contribution required to be made by the Company and manage the Gratuity Plans, including any required payouts. Fund managers manage these funds on a cash accumulation basis and declare interest retrospectively on March 31 of each year. The Company earned a return of approximately ~~8.0%~~7.8% per annum on these Gratuity Plans for the ~~period~~six months ended ~~September~~June 30, ~~2017.~~2019.



Change in Plan Assets
Plan assets at January 1, 2019	$	7,420
Actual return	268
Employer contribution	—
Benefits paid*	(416		)
Effect of exchange rate changes	79
Plan assets at June 30, 2019	$	7,351

Change in Plan Assets
Plan assets at January 1, 2017 $ 5,640
  Actual return 341
  Employer contribution 1,694
  Benefits paid (896 )
  Effect of exchange rate changes 227
Plan assets at September 30, 2017 $ 7,006
*Benefit payments were substantially made through the plan assets during the six months ended June 30, 2019.

The Company maintains several 401(k) plans (the "401(k) Plans") under Section 401(k) of the Internal Revenue Code of 1986 (the “Code”), covering all eligible employees, as defined in the Code as a defined contribution plan. The Company may make discretionary contributions of up to a maximum of 4% of employee compensation within certain limits. ~~Contributions~~The Company accrued for contributions to the 401(k) ~~plans amounting to $487~~Plans of $909 and ~~$554 were made during~~$755 for the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively, and ~~$2,051~~$2,122 and ~~$1,945 during~~$1,985 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively.

During the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, the Company contributed ~~$1,845~~$2,710 and ~~$1,608,~~$1,753, respectively, and during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, the Company contributed ~~$5,350~~$4,714 and ~~$4,619,~~$3,667, respectively, for various defined contribution plans on behalf of its employees in India, the Philippines, Bulgaria, Romania, the Czech Republic, South Africa, Colombia, and Singapore.

~~EXLSERVICE HOLDINGS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)~~

~~September 30, 2017~~

~~(In thousands, except share and per share amounts)~~

~~17.~~21. 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. ~~Future minimum lease payments under these capital leases as of September 30, 2017 are as follows:~~

During the next twelve months ending September 30,
2018 $ 227
2019 173
2020 128
2021 72
Total minimum lease payments 600
Less: amount representing interest 117
Present value of minimum lease payments 483
Less: current portion 168
Long term capital lease obligation $ 315

The Company ~~conducts~~has performed an evaluation of its ~~operations using~~contracts with suppliers in accordance with Topic 842 and has determined that, except for leases for office facilities, ~~leased under non-cancelable operating~~motor vehicles and other equipments as described above, none of the Company’s contracts contain a lease.

In assessment of the lease term, the Company considers the extension option as part of its lease term for those lease arrangements where the Company is reasonably certain of availing the extension option.

The lease agreements ~~that expire at various dates. Future minimum~~do not contain any covenant to impose any restrictions except for market-standard practice for similar lease ~~payments under non-cancelable agreements expiring after September 30, 2017 are set forth below:~~arrangements.

During the next twelve months ending September 30,
2018 $ 10,477
2019 8,470
2020 4,795
2021 3,189
2022 1,064
2023 and thereafter 933

$ 28,928

~~Rent expense~~

The operating leases are subject to renewal periodically and have scheduled rent increases. The Company recognizes rent on such leases on a straight-line basis over cancelable and non-cancelable lease period determined under ASC topic 840, "Leases":

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Rent expense $ 6,362
$ 5,445
$ 18,168
$ 15,871

~~Deferred rent~~

As of
September 30, 2017 December 31, 2016
Cancelable and non - cancelable operating leases

$ 8,763
$ 7,915

~~Deferred rent is included under “Accrued expenses and other current liabilities” and “Non-current liabilities” in the unaudited consolidated balance sheets.~~

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

~~September~~June 30, ~~2017~~2019

(In thousands, except share and per share amounts)

~~18.~~Supplemental balance sheet information



	As of
	June 30, 2019
Operating Lease
Operating lease right-of-use assets	$	93,162

Operating lease liabilities - Current	$	23,439
Operating lease liabilities - Non-current	80,531
Total operating lease liabilities	$	103,970

Finance Lease
Property and equipment, gross	$	1,888
Accumulated depreciation	(1,188		)
Property and equipment, net	$	700

Finance lease liabilities - Current	$	279
Finance lease liabilities - Non-current	474
Total finance lease liabilities	$	753

During the three months ended June 30, 2019, the Company performed an impairment test of its long-lived assets of its Health Integrated business. Based on the results, the operating lease right-of-use assets carrying value exceeded their fair value. The primary factor contributing to a reduction in the fair value is the commencement of the wind down of the Health Integrated business, and an anticipated reduction to the Company's estimated future cash flows. As a result of this analysis, the Company recognized an impairment charge of $989 during the three and six months ended June 30, 2019 to write down the carrying value of operating lease right-of-use to its fair value. This impairment charge was recorded in the unaudited consolidated statements of income under "Impairment and restructuring charges". Refer Note 24 to the unaudited consolidated financial statements for further details.

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 June 30, 2019			Six months ended June 30, 2019
Finance lease:
Amortization of right-of-use assets	$	92		$	187
Interest on lease liabilities	20			45
Operating lease^(a)	6,684			13,701
Sublease income	(105		)	(105		)
Total lease cost	$	6,691		$	13,828

Operating lease cost for leases classified as such under Topic 840 for the three and six months ended June 30, 2018 was $6,057 and $12,479, respectively.

(a) Includes short-term leases, which are immaterial.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2019

(In thousands, except share and per share amounts)

Supplemental cash flow and other information related to leases are as follows:



	Six months ended June 30, 2019
Cash payments for amounts included in the measurement of lease liabilities :
Operating cash outflows for operating leases	$	13,749
Operating cash outflows for finance leases	$	45
Financing cash outflows for finance leases	$	207
Right-of-use assets obtained in exchange for new operating lease liabilities	$	27,750
Right-of-use assets obtained in exchange for new finance lease liabilities	$	—
Weighted-average remaining lease term
Finance lease	2.4 years
Operating lease	6.5 years
Weighted-average discount rate
Finance lease	8.7		%
Operating lease	7.3		%

The Company determines the incremental borrowing rate by adjusting the benchmark reference rates, applicable to the respective geographies where the leases were entered, with appropriate financing spreads and lease specific adjustments for the effects of collateral.

Maturities of lease liabilities as of June 30, 2019 are as follows:



	Operating Leases		Finance Leases
2019 (July 1 - December 31)	$	12,524	$	206
2020	24,997		309
2021	22,221		215
2022	20,098		103
2023	18,000		79
2024	14,057		9
2025 and thereafter	23,223		—
Total lease payments	$	135,120	$	921
Less: Imputed interest	31,150		168
Present value of lease liabilities	$	103,970	$	753

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2019

(In thousands, except share and per share amounts)

Maturities of minimum lease payments as of December 31, 2018 are as follows:



During the next twelve months ending December 31,	Operating Leases		Capital Leases
2019	$	23,431	$	283
2020	20,039		163
2021	16,924		120
2022	14,804		58
2023	12,859		49
2024	11,114		—
2025 and thereafter	15,000		—
Total minimum lease payment	$	114,171	$	673
Less: Imputed interest	NA		135
Present value of minimum lease payments	NA		538
Less: Current portion	NA		223
Long term capital lease obligation	NA		$	315

22. Income Taxes

The Company determines the tax provision for interim periods using an estimate of its annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. 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 Company recorded income tax expense of ~~$2,819~~$2,670 and ~~$5,646~~$5,510 for the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively. The effective tax rate decreased from ~~26.0%~~27.5% during the three months ended ~~September~~June 30, ~~2016~~2018 to ~~11.8% as a result of (i) excess tax benefit related to stock awards of $3,488 pursuant to ASU No. 2016-09~~17.5% during the three months ended ~~September~~June 30, ~~2017, (ii) higher earnings from foreign subsidiaries and lower domestic profit~~2019, primarily due to impact of change in effective state tax rates during the ~~U.S., partially offset by higher tax expense on account of the expiration of a tax holiday for some of the operating centers in India.~~three months ended June 30, 2019.

The Company recorded income tax expense of ~~$7,202~~$6,870 and ~~$18,549~~$1,057 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively. The effective tax rate ~~decreased~~increased from ~~28.6%~~2.7% during the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 to ~~11.0%~~20.1% during the six months ended June 30, 2019, primarily as a result of (i) an adjustment of $4,836 reducing the provisional transition tax on the mandatory deemed repatriation of accumulated earnings and profits ("E&P") of foreign subsidiaries recognized during the six months ended June 30, 2018 and (ii) the recording of excess tax ~~benefit~~benefits related to stock awards of ~~$7,169~~$5,150 pursuant to ASU No. 2016-09 during the ~~nine~~six months ended ~~September~~June 30, ~~2017, (ii) conclusion of an uncertain tax position of $3,153 (including interest of $1,433), (iii) higher earnings from foreign subsidiaries and lower domestic profit in~~2018 compared to $1,072 during the ~~U.S., partially offset by higher tax expense on account of the expiration of a tax holiday for some of the operating centers in India.~~

~~The following table summarizes the activity related to the gross unrecognized tax benefits from January 1, 2017 through September 30, 2017:~~

Balance as of January 1, 2017 $ 3,087
Increases related to prior year tax positions —
Decreases related to prior year tax positions (1,720 )
Increases related to current year tax positions —
Decreases related to current year tax positions —
Effect of exchange rate changes 85
Balance as of September 30, 2017 $ 1,452

~~The unrecognized tax benefits as of September 30, 2017 of $1,452, if recognized, would impact the effective tax rate.~~

~~During the three~~six months ended ~~September~~June 30, 2017 and 2016, the Company has recognized interest of nil and $50, respectively, which are included in the income tax expense in the unaudited consolidated statements of income. As of September 30, 2017 and December 31, 2016, the Company has accrued interest and penalties of $240 and $1,553, relating to unrecognized tax benefits.2019.

~~19.~~23. Stock-Based Compensation

The following costs related to the Company’s stock-based compensation ~~plan~~plans are included in the unaudited consolidated statements of income:



	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
Cost of revenues	$	1,638	$	1,370	$	2,964	$	2,463
General and administrative expenses	2,781		3,099		5,756		5,349
Selling and marketing expenses	2,736		2,424		5,391		4,155
Total	$	7,155	$	6,893	$	14,111	$	11,967

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Cost of revenue $ 1,109
$ 795
$ 3,448
$ 2,848
General and administrative expenses 2,601
1,905
7,541
6,241
Selling and marketing expenses 1,998
1,784
5,782
5,654
Total $ 5,708
$ 4,484
$ 16,771
$ 14,743

As of ~~September~~June 30, ~~2017,~~2019, the Company had ~~1,492,097~~2,672,199 shares available for grant under the ~~2015 Amendment and Restatement of the 2006~~2018 Omnibus ~~Award~~Incentive Plan.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

~~September~~June 30, ~~2017~~2019

(In thousands, except share and per share amounts)

Stock Options

Stock option activity under the Company’s ~~stock~~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, 2018	162,475		$	20.21	$	5,267	2.24
Granted	—		—		—		—
Exercised	(35,500	)	9.53		1,811		—
Forfeited	—		—		—		—
Outstanding at June 30, 2019	126,975		$	23.20	$	5,453	2.26
Vested and exercisable at June 30, 2019	126,975		$	23.20	$	5,453	2.26

Number of
Options Weighted Avg
Exercise
Price Aggregate
Intrinsic
Value Weighted Avg
Remaining
Contractual
Life (Years)
Outstanding at December 31, 2016 811,902
$ 16.31
$ 27,718
2.96
  Granted —
—

  Exercised (349,880 ) 12.22

  Forfeited —
—

Outstanding at September 30, 2017 462,022
$ 19.40
$ 17,980
2.97
Vested and exercisable at September 30, 2017 462,022
$ 19.40
$ 17,980
2.97

The unrecognized compensation cost for ~~outstanding~~unvested options as of ~~September~~June 30, 2017 is nil. The Company did not grant any options during the three and nine months ended September 30, 2017 and 2016. There were no options that vested during the three months ended September 30, 2017 and 2016. The total grant date fair value of options vested during the nine months ended September 30, 2017 and 20162019 was ~~nil and $706, respectively.~~$nil.

Restricted Stock and Restricted Stock Units

Restricted stock and restricted stock unit activity under the Company’s ~~stock~~stock-based compensation plans is shown below:

Restricted Stock Restricted Stock Units
Number
Weighted Avg Grant Date
Fair Value
Number
Weighted Avg Grant Date
Fair Value
Outstanding at December 31, 2016* 246,940
$ 42.42
1,256,288
$ 37.38
Granted —
—
391,927
48.02
Vested (36,767 ) 38.74
(449,977 ) 34.69
Forfeited (4,505 ) 35.11
(96,140 ) 41.03
Outstanding at September 30, 2017* 205,668
$ 43.24
1,102,098
$ 41.94



	Restricted Stock				Restricted Stock Units
	Number		Weighted Average Fair Value		Number		Weighted Average Fair Value
Outstanding at December 31, 2018*	103,623		$	42.68	953,578		$	51.81
Granted	—		—		466,173		64.15
Vested	(48,854	)	35.91		(367,613	)	46.48
Forfeited	—		—		(38,512	)	56.35
Outstanding at June 30, 2019*	54,769		$	48.72	1,013,626		$	59.25

* As of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 restricted stock units vested for which the underlying common stock is yet to be issued are ~~146,112~~163,181 and ~~135,054,~~155,753, respectively.

As of ~~September~~June 30, ~~2017,~~2019, unrecognized compensation cost of ~~$39,553~~$53,355 is expected to be expensed over a weighted average period of ~~2.66~~2.89 years.

Performance Based Stock Awards

Performance based restricted stock unit (the “PRSUs”) activity under the Company’s stock-based compensation 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, 2018	100,353	$	54.07	100,336	$	62.43
Granted	54,062	64.33		54,053	92.13
Vested	—	—		—	—
Forfeited	—	—		—	—
Outstanding at June 30, 2019	154,415	$	57.66	154,389	$	72.83

As of June 30, 2019, unrecognized compensation cost of $12,424 is expected to be expensed over a weighted average period of 2.01 years.

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

~~September~~June 30, ~~2017~~2019

(In thousands, except share and per share amounts)

~~Performance Based Stock Awards~~24. Impairment and Restructuring Charges

~~Performance restricted stock unit (the “PRSUs”~~

On March 29, 2019, the Company commenced the process of substantially winding down of the operations of the Health Integrated business, which is reported within the Healthcare reportable segment. The Company had previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission (“SEC”) ~~activity under~~on February 28, 2019, the operating results of this business were significantly below the Company’s ~~stock plans is shown below:~~estimates and future estimated cash flows are impacted due to loss of customer contracts and cost pressures, and the Company continues to incur losses from this business. The Company expects the wind down process to be substantially completed by the end of 2019. In connection with the wind down process, the Company recorded pre-tax costs in the unaudited consolidated statements of income under “Impairment and restructuring charges”. The following table summarizes the activity related to the costs incurred and paid for the wind down during the three and six months ended June 30, 2019:



	Contract Termination Costs		Employee-Related Costs			Other Associated Costs			Total
Balance as of January 1, 2019	$	—	$	—		$	—		$	—
Costs incurred during the three and six months ended June 30, 2019	2,597		752			291			3,640
Cumulative costs incurred as of June 30, 2019	$	2,597	$	752		$	291		$	3,640
Costs paid during the three and six months ended June 30, 2019	—		(57		)	(204		)	(261		)
Balance as of June 30, 2019	$	2,597	$	695		$	87		$	3,379

Total expected costs	$	3,200	$	1,800		$	1,000		$	6,000

Revenue Based PRSUs Market Condition Based PRSUs
Number
Weighted Avg Grant Date
Fair Value
Number
Weighted Avg Grant Date
Fair Value
Outstanding at December 31, 2016 115,174
$ 41.70
215,171
$ 47.42
Granted 62,113
47.73
62,100
54.10
Vested —
—
—
—
Forfeited (8,595 ) 43.96
(8,595 ) 59.40
Outstanding at September 30, 2017 168,692
$ 43.81
268,676
$ 48.58

AsAdditionally, the Company recognized impairment on ROU assets and long-lived assets of ~~September~~$1,940 and $3,167 during the three and six months ended June 30, ~~2017, unrecognized compensation cost~~2019, respectively in the unaudited consolidated statements of ~~$7,095 is~~income under "Impairment and restructuring charges".

Costs and cash expenditures expected to be ~~expensed over~~incurred are subject to a ~~weighted average period~~number of ~~1.83 years.~~assumptions, and the Company may incur additional costs not currently contemplated due to events that may occur as a result of, or that are associated with the wind down process.

~~20.~~25. 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 had outstanding Notes with a principal amount of $150,000 as of June 30, 2019 and December 31, 2018 and interest accrued of $1,313 each as of June 30, 2019 and December 31, 2018, related to the Investment Agreement. Refer Note 18 to the unaudited consolidated financial statements for details.

The Company provides consulting services to PharmaCord, LLC. One of the Company’s directors, Nitin Sahney, is the member-manager and chief executive officer of PharmaCord, LLC. The Company recognized revenue of ~~approximately $701 and $1,506 in~~$nil each during the three ~~months~~ and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, and $16 and $215 during the three and six months ended June 30, 2018, respectively, for services provided.

~~At September~~As of June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, the Company had ~~an account~~accounts receivable of ~~$379~~$nil and ~~nil,~~$5, respectively, related to these services.

~~21.~~EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2019

(In thousands, except share and per share amounts)

26. Commitments and Contingencies

Fixed Asset Commitments

At ~~September~~June 30, ~~2017,~~2019, the Company has committed to spend approximately ~~$7,407~~$7,495 under agreements to purchase ~~fixed assets.~~property and equipment. This amount is net of capital advances paid in respect of these purchases.

Other Commitments

Certain units of the Company’s Indian subsidiaries were established as 100% Export-Oriented units or under the Software Technology Parks of India (“STPI”) 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’s management 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 (“PEZA”). The registration provides the Company with certain fiscal incentives on the import of capital goods and requires ExlService Philippines, Inc. to meet certain performance and investment criteria. The Company’s management believes that these centers have in the past satisfied and will continue to satisfy the required criteria.

In March 2017, the Company was named as a defendant in a putative class action lawsuit filed in California, which challenged the classification of independent contractors. The parties participated in a mediation in early 2018. As the result of the mediation, a settlement was reached pursuant to which the Company agreed, without admission of wrongdoing, to pay a total of $2,400, of which $1,200 was paid in 2018 and the remainder has been paid during the three months ended March 31, 2019.

Contingencies

U.S. and Indian transfer pricing regulations require that any international transaction involving associated enterprises be at an arm’s-length price. Accordingly, the Company determines the appropriate pricing for the international transactions among its associated enterprises on the basis of a detailed functional and economic analysis involving benchmarking against transactions among entities that are not under common control. The tax authorities have jurisdiction to review this arrangement and in the event that they determine that the transfer price applied was not appropriate, the Company may incur increased tax liability, including accrued interest and penalties. The Company is currently involved in disputes with the Indian tax authorities over the application

~~EXLSERVICE HOLDINGS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)~~

~~September 30, 2017~~

~~(In thousands, except share and per share amounts)~~

of some of its transfer pricing policies for some of its subsidiaries. Further, the Company and a U.S. subsidiary are engaged in tax litigation with the income-tax authorities in India on the issue of permanent establishment. The Company is subject to taxation in the United States and various states and foreign jurisdictions. For the U.S. and India, tax year 2015 and subsequent tax years remain open for examination by the tax authorities as of June 30, 2019.

The aggregate ~~disputed~~ amount demanded by ~~Indian~~Income tax authorities (net of advance payments, if any) from the Company primarily related to its transfer pricing issues for ~~years ranging from~~ tax years 2003 to 2014 and its permanent establishment issues ~~ranging from~~for tax years 2003 to 2007 as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 is ~~$16,075~~$17,924 and ~~$17,963,~~$18,177, respectively, of which the Company has made payments or provided bank ~~guarantee~~guarantees to the extent ~~$8,418~~of $8,262 and ~~$8,640,~~$8,171, respectively. Amounts paid as deposits in respect of such assessments aggregating to ~~$6,389~~$6,343 and ~~$6,690~~$6,272 as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively, are included in “Other assets” and amounts deposited for bank guarantees aggregating to ~~$2,029~~$1,919 and ~~$1,950~~$1,899 as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively, are included in “Restricted cash” in the non-current assets section of the Company’s unaudited consolidated balance ~~sheets as of September 30, 2017 and December 31, 2016.~~sheets.

Based on ~~advice from its Indian tax advisors,~~ 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 ~~probability that it will ultimately be found liable for these assessments is remote~~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.

EXLSERVICE HOLDINGS, INC.

~~22. Subsequent Event~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

~~On October 24, 2017,~~June 30, 2019

(In thousands, except share and per share amounts)

During the quarter ended March 31, 2019, there was a ~~wholly owned subsidiary~~judicial pronouncement in India with respect to defined contribution benefits payments interpreting certain statutory defined contribution obligations of employees and employers. It is unclear whether the interpretation set out in the pronouncement has retrospective application. If applied retrospectively, the interpretation would result in an increase in contributions payable by the Company for past and future 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 reliablyestimate the timing and amount of any payments the Company may be required to make. Accordingly, the Company will re-evaluate the amount of a potential provision, if any, upon further analysis.

From time to time, the Company and/or its present officers or directors, on individual basis, may be or have been, named as a defendant in litigation matters, including employment-related claims. The plaintiffs in those cases seek damages, including, where applicable, compensatory damages, punitive damages and attorneys’ 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, ~~entered into a definitive purchase agreement~~that these matters are without merit, and that the Company intends to ~~acquire substantially all the assets~~vigorously defend each of ~~Health Integrated, Inc. Based in Tampa, Florida, Health Integrated is a care management company that provides end-to-end technology~~them.

The outcomes of legal actions are unpredictable and analytics-enabled care management services including case management, utilization management, disease management, special needs programs, and multichronic care management on behalf of health plans. Health Integrated currently serves over five million lives in the Medicaid, Medicare, and dual eligible populations. It is known for its strong capabilities in improving member health status through behavioral change. The acquisition is expected to close in the first quarter of 2018, subject to significant uncertainties, and thus it is inherently difficult to determine the ~~fulfillment~~likelihood of ~~certain closing conditions,~~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 ~~regulatory~~the Company’s assessment of the facts underlying each matter and ~~other consents.~~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.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in connection with our unaudited consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~2018. Some of the statements in the following discussion are forward looking statements. Dollar amounts within Item 2 are presented as actual, ~~approximated,~~rounded, dollar amounts.

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. These factors include but are not limited to:

our dependence on a limited number of clients in a limited number of industries;

worldwide political, economic or business conditions;

negative public reaction in the U.S. or elsewhere to offshore outsourcing;

fluctuations in our earnings;

our ability to attract and retain clients including in a timely manner;

our ability to successfully consummate or integrate strategic acquisitions;

our ability to accurately estimate and/or manage the costs and/or timing of winding down businesses;

restrictions on immigration;

our ability to hire and retain enough sufficiently trained employees to support our operations;

our ability to grow our business or effectively manage growth and international operations;

any changes in the senior management team;

increasing competition in our industry;

telecommunications or technology disruptions;

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;

legal liability arising out of customer contracts;

technological innovation;

political or economic instability in the geographies in which we operate;

cyber security incidents, data breaches, or other unauthorized disclosure of sensitive or confidential client and customer data; and

adverse outcome of our disputes with the Indian tax authorities.

These and other factors are more fully discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~2018. 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

Table of Contents

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.

~~Table of Contents~~

Executive Overview

We are an operations management and analytics company that helps businesses enhance revenue growth and improve profitability. Using proprietary platforms, methodologies, and our full range of digital capabilities, we look deeper to help companies transform their businesses, functions and operations, to help them deliver better customer experience and business outcomes, while managing risk and compliance. We serve our customers in the insurance, healthcare, travel, transportation and logistics, banking and financial services and utilities industries, among others.

We operate in the business process management (“BPM”) industry and we provide operations management and analytics services that help the business enhance growth and profitability. Using our proprietary platforms, methodologies and tools we look deeper to help our clients improve global operations, enhance data-driven insights, increase customer satisfaction, and manage risk and compliance.services. Our eight operating segments are strategic business units that align our products and services with how we manage our business, approach our key markets and interact with our clients. Six of those operating segments provide BPM or “operations management” services, which we organize into industry-focused operating segments (Insurance, Healthcare, Travel, Transportation and Logistics, Banking and Financial Services, and Utilities) and one “capability” operating segment (Finance and Accounting) that provides services to clients in our industry-focused segments as well as clients across other industries. In each of these six operating segments we provide operations management services, which typically involve transfer to the Company of ~~select~~ business operations of a client, after which we administer and manage those operations for our client on an ongoing basis. Our remaining two operating segments are Consulting, which provides industry-specific digital transformational services related to operations management services, and our Analytics operating segment, which provides services that focus on driving improved business outcomes for clients by generating data-driven insights across all parts of their business.

~~In prior periods we presented two~~We present information for the following reportable segments: ~~Operations Management (which included our~~

Insurance,

Healthcare,

Travel, Transportation and Logistics,

Finance and Accounting,

Analytics, and

All Other (consisting of our remaining operating segments, including our Banking and Financial services, Utilities and Consulting operating segments) ~~and Analytics. Effective for the quarter and year ended December 31, 2016, we present information for the following reportable segments:~~

~~Insurance~~

~~Healthcare~~

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

~~Finance and Accounting (“F&A”), and~~

~~Analytics~~

~~The remaining operating segments, which includes our Banking and Financial Services, Utilities and Consulting operating segments have been included in a category called “All Other”~~. This change in segment presentation does not affect our consolidated statements of income, balance sheets or statements of cash flows. For further descriptions of our operating segments, see Note 3 to the unaudited consolidated financial statements contained herein.

Our global delivery network, which include highly trained industry and process specialists across the United States, Latin America, South Africa, Europe and Asia (primarily India and the Philippines), is a key asset. We have operations centers in India, the U.S., the Philippines, Bulgaria, Colombia, South Africa, Romania and the Czech Republic.

On July 1, 2018, we completed the acquisition of SCIO pursuant to the Merger Agreement. The acquisition of SCIO is included in the Analytics reportable segment. SCIO is a health analytics solution and services company serving over 100 healthcare organizations representing over 130 million covered lives across the continuum, including providers, health plans, pharmacy benefit managers, employers, health services and global life sciences companies.

Revenues

For the three months ended ~~September~~June 30, ~~2017,~~2019, we had revenues of ~~$192.3~~$243.5 million compared to revenues of ~~$171.2~~$210.1 million for the three months ended ~~September~~June 30, ~~2016,~~2018, an increase of ~~$21.1~~$33.4 million, or ~~12.4%~~15.9%. For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, we had revenues of ~~$564.4~~$483.1 million compared to revenues of ~~$508.7~~$417.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018, an increase of ~~$55.7~~$66.0 million, or ~~11.0%~~15.8%.

We serve clients mainly in the U.S. and the U.K., with these two regions generating ~~approximately 82.4%~~81.3% and ~~13.9%~~12.4%, respectively, of our total revenues for the three months ended ~~September~~June 30, ~~2017~~2019, and ~~approximately 80.1%~~82.9% and ~~16.4%~~13.1%, respectively, of our revenues for the three months ended ~~September~~June 30, ~~2016.~~2018. For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, these two regions generated ~~82.0%~~81.6% and ~~14.5%~~12.3%, respectively, of our total revenues and ~~80.1%~~82.8% and ~~16.6%~~13.3%, respectively, of our total revenues for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2018.

For the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, our total revenues from our top ten clients accounted for ~~38.3%~~36.5% and ~~41.0%~~39.0% of our total revenues, respectively. For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, our total revenues from our top ten clients accounted for ~~38.7%~~36.5% and ~~40.6%~~39.3% of our total revenues, respectively. ~~None~~Our revenue concentration with our top clients remains 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 ten largest clients ~~individually accounted for more than 10% of~~could have a material adverse effect on our total revenues during the three and nine months ended September 30, 2017 and 2016. Although we intend to continue increasing and diversifying our customer base, we expect in the near future that a significant portion of our revenue will continue to be contributed by a limited number of large clients.

financial performance.

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Our Business

We provide operations management and analytics services. We market our services to our existing and prospective clients through our sales and client management teams, which are aligned by key industry verticals and cross-industry domains such as finance and accounting. Our sales and client management teams operate from the U.S., Europe and Australia.

Operations Management Services: We provide our clients with a range of operations management services principally in the ~~Insurance, Healthcare, Travel, Transportation~~insurance, healthcare, travel, transportation and ~~Logistics, Banking~~logistics, banking and ~~Financial Services~~financial services and ~~Utilities~~utilities sectors, among others, as well as cross-industry operations management services, such as ~~Finance~~finance and ~~Accounting Services.~~accounting services. We also provide services related to operations management, through our Consulting services that ~~provide advice regarding~~provides industry-specific digital transformational ~~initiatives.~~services.

Our operations management solutions typically involve the transfer to the Company ~~of select~~ business operations of a client such as claims processing, clinical operations, or financial transaction processing, after which we administer and manage the 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 have been observing a shift in industry pricing models toward transaction-based pricing, outcome-based pricing and other pricing models. We believe this trend will continue and we have begun to 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 pricing model. These 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.~~management . We actively cross-sell and, where appropriate, integrate our Analytics services with other operations management services as part of a comprehensive offering set 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~~consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~

2018.

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Results of Operations

The following table summarizes our results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016:~~2018:


	Three months ended September 30,						Nine months ended September 30,						Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016			2019			2018			2019			2018
	(dollars in millions)						(dollars in millions)						(dollars in millions)						(dollars in millions)
Revenues, net	$	192.3		$	171.2		$	564.4		$	508.7		$	243.5		$	210.1		$	483.1		$	417.1
Cost of revenues (exclusive of depreciation and amortization)	124.9			111.8			370.5			332.2
Cost of revenues⁽¹⁾													162.4			139.6			319.7			277.8
Gross profit(1)	67.4			59.4			193.9			176.5			81.1			70.5			163.4			139.3
Operating expenses:
General and administrative expenses	26.9			21.9			75.8			63.6			31.2			27.6			63.8			56.9
Selling and marketing expenses	12.2			11.6			38.7			37.9			17.6			15.2			35.7			29.1
Depreciation and amortization	9.7			8.6			28.8			25.0			12.8			10.6			26.4			21.1
Impairment and restructuring charges													5.6			—			6.8			—
Total operating expenses	48.8			42.1			143.3			126.5			67.2			53.4			132.7			107.1
Income from operations	18.6			17.3			50.6			50.0			13.9			17.1			30.7			32.2
Foreign exchange gain, net	2.8			1.7			7.3			3.6			1.2			1.4			2.5			2.0
Interest expense	(0.4		)	(0.3		)	(1.4		)	(1.0		)	(3.9		)	(0.7		)	(7.4		)	(1.2		)
Other income, net	2.9			2.9			8.9			12.2			4.1			2.2			8.5			5.8
Income before income tax expense	23.9			21.6			65.4			64.8
Income before income tax expense and earnings from equity affiliates													15.3			20.0			34.3			38.8
Income tax expense	2.8			5.6			7.2			18.5			2.7			5.5			6.9			1.1
Net income	$	21.1		$	16.0		$	58.2		$	46.3
Income before earnings from equity affiliates													12.6			14.5			27.4			37.7
Loss from equity-method investment													0.1			0.1			0.1			0.1
Net income attributable to ExlService Holdings, Inc. stockholders													$	12.5		$	14.4		$	27.3		$	37.6

(1) Exclusive of depreciation and amortization.

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Three Months Ended ~~September~~June 30, ~~2017~~2019 Compared to Three Months Ended ~~September~~June 30, ~~2016~~2018

Revenues.

The following table summarizes our revenues by reportable ~~segment~~segments for the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016:~~2018:


	Three months ended September 30,							Percentage change		Three months ended June 30,							Percentage change
	2017		2016		Change			Percentage change		2019		2018		Change			Percentage change
	(dollars in millions)									(dollars in millions)
Insurance	$	59.6	$	52.8	$	6.8		12.9	%	$	72.2	$	64.8	$	7.4		11.5	%
Healthcare	18.9		16.0		2.9			18.2	%	20.0		19.8		0.2			1.0	%
Travel, Transportation and Logistics	18.5		17.5		1.0			5.6	%	17.5		18.6		(1.1		)	(5.4	)%
Finance and Accounting	21.6		19.9		1.7			9.0	%	26.4		24.2		2.2			9.1	%
All Other	20.0		23.4		(3.4		)	(14.7	)%	19.5		23.1		(3.6		)	(15.9	)%

Analytics	53.7		41.6		12.1			29.1	%	87.9		59.6		28.3			47.4	%
Total revenues, net	$	192.3	$	171.2	$	21.1		12.4	%	$	243.5	$	210.1	$	33.4		15.9	%

Revenues for the three months ended ~~September~~June 30, ~~2017~~2019 were ~~$192.3~~$243.5 million, up ~~$21.1~~$33.4 million, or ~~12.4%~~15.9%, compared to the three months ended ~~September~~June 30, ~~2016.~~2018.

Revenue growth in Insurance of ~~$6.8~~$7.4 million was primarily driven by expansion of business from our new and existing clients of $8.2 million. This was partially offset by $0.8 million mainly attributable to the depreciation of the Australian dollar, Indian rupee and U.K. pound sterling against the U.S. dollar during the three months ended June 30, 2019 compared to the three months ended June 30, 2018. Insurance revenues were 29.7% and 30.8% of our total revenues in the three months ended June 30, 2019 and June 30, 2018, respectively.

Revenue growth in Healthcare of $0.2 million was primarily driven by expansion of business from our new and existing clients of $0.8 million. This was partially offset by lower revenues from our Health Integrated business of $0.6 million. Healthcare revenues were 8.2% and 9.4% of our total revenues in the three months ended June 30, 2019 and June 30, 2018, respectively.

Revenue decline in Travel, Transportation and Logistics ("TT&L") of $1.1 million was primarily driven by impact of discounts in our existing clients of $1.0 million and the remaining $0.1 million attributable to the depreciation of the Indian rupee against the U.S. dollar during the three months ended June 30, 2019 compared to the three months ended June 30, 2018. TT&L revenues were 7.2% and 8.8% of our total revenues in the three months ended June 30, 2019 and June 30, 2018, respectively.

Revenue growth in Finance and Accounting ("F&A") of $2.2 million was driven by expansion of business from our new and existing clients of $6.4 million. The remaining increase of $0.4 million is attributable to a net impact of appreciation of the South African Rand and Indian rupee during the three months ended September 30, 2017 compared to the three months ended September 30, 2016. Insurance revenues were 31.0% and 30.9% of our total revenues in the three months ended September 30, 2017 and September 30, 2016, respectively.

Revenue growth in Healthcare of $2.9 million was driven by expansion of business from our new and existing clients. Healthcare revenues were 9.8% and 9.3% of our total revenues in the three months ended September 30, 2017 and September 30, 2016, respectively.

Revenue growth in Travel, Transportation and Logistics ("TT&L") of $1.0 million was primarily driven by net volume increase from our new and existing clients of $1.2 million, partially offset by $0.2 million impact due to depreciation of the Philippine Peso against the U.S. dollar during the three months ended September 30, 2017 compared to the three months ended September 30, 2016. TT&L revenues were 9.6% and 10.2% of our total revenues in the three months ended September 30, 2017 and September 30, 2016, respectively.

Revenue growth in Finance and Accounting ("F&A") of $1.7 million was driven by expansion of business from our new and existing clients. F&A revenues were 11.3% and 11.6% of our total revenues in the three months ended September 30, 2017 and September 30, 2016, respectively.

~~Revenue decline in All Other of $3.4 million was driven primarily by lower revenue in our Consulting and Utilities operating segments, aggregating to $3.7~~$2.5 million. This was partially offset by ~~a net increase of~~ $0.3 million ~~due~~mainly attributable to the ~~appreciation~~depreciation of the Indian rupee against the U.S. dollar during the three months ended ~~September~~June 30, ~~2017~~2019 compared to the three months ended ~~September~~June 30, ~~2016. All Other~~2018. F&A revenues were ~~10.4%~~10.9% and ~~13.7%~~11.5% of our total revenues in the three months ended ~~September~~June 30, ~~2017~~2019 and ~~September~~June 30, ~~2016,~~2018, respectively.

Revenue ~~growth~~decline in ~~Analytics~~All Other of ~~$12.1~~$3.6 million was primarily driven by lower revenue of $2.4 million in our ~~recurring~~Consulting operating segment, $0.5 million in our Utilities operating segment and ~~project based engagements from~~$0.4 million in our ~~new~~Banking and ~~existing clients~~Financial Services operating segment. Further decline of ~~$11.9~~$0.3 million ~~including $6.5 million from our IQR Consulting Inc. ("IQR") and Datasource Consulting, LLC ("Datasource") acquisitions in 2016. The increase of $0.2 million is attributable~~was due to the ~~appreciation~~depreciation of the Indian rupee and U.K. pound sterling against the U.S. dollar during the three months ended ~~September~~June 30, ~~2017~~2019 compared to the three months ended ~~September~~June 30, ~~2016. Analytics~~2018. All Other revenues were ~~27.9%~~8.0% and ~~24.3%~~11.0% of our total revenues in the three months ended ~~September~~June 30, ~~2017~~2019 and ~~September~~June 30, ~~2016,~~2018, respectively.

Revenue growth in Analytics of $28.3 million was primarily driven by our acquisition of SCIO in July 2018 contributing $18.8 million. The remaining increase of $9.8 million was attributable to our recurring- and project-based engagements from our new and existing clients. This was partially offset by $0.3 million attributable to the depreciation of the U.K. pound sterling against the U.S. dollar during the three months ended June 30, 2019 compared to the three months ended June 30, 2018. Analytics revenues were 36.1% and 28.4% of our total revenues in the three months ended June 30, 2019 and June 30, 2018, 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								Cost of Revenues												Gross Margin
	Three months ended September 30,							Percentage change			Three months ended September 30,						Change		Three months ended June 30,						Change			Percentage change			Three months ended June 30,						Change
	2017		2016		Change					2017			2016			2019				2018				2019				Percentage change		2018							Change
	(dollars in millions)							Percentage change									Change				(dollars in millions)
Insurance	$	39.7	$	37.8	$	1.9		5.0	%		33.4	%		28.4	%		5.0	%	$	49.9		$	44.0		Change	$	5.9		13.3	%		30.9	%		32.1	%		(1.2	)%
Healthcare	12.0		10.9		1.1			9.9	%		36.6	%		31.8	%		4.8	%	16.9			16.7			0.2			0.9	%		15.7	%		15.7	%		—	%
TT&L	10.1		10.6		(0.5		)	(4.7	)%		45.2	%		39.3	%		5.9	%	10.0			10.6			(0.6		)	(6.0	)%		43.1	%		42.7	%		0.4	%
F & A	13.3		12.0		1.3			10.8	%		38.5	%		39.5	%		(1.0	)%
F&A																			16.0			14.5			1.5			10.0	%		39.5	%		40.0	%		(0.5	)%
All Other	13.6		14.7		(1.1		)	(7.0	)%		31.8	%		37.4	%		(5.6	)%	12.2			15.1			(2.9		)	(18.7	)%		36.9	%		34.7	%		2.2	%

Analytics	36.2		25.8		10.4			40.2	%		32.7	%		38.1	%		(5.4	)%	57.4			38.7			18.7			48.6	%		34.6	%		35.2	%		(0.6	)%
Total	$	124.9	$	111.8	$	13.1		11.7	%		35.1	%		34.7	%		0.4	%	$	162.4		$	139.6		$	22.8		16.3	%		33.3	%		33.5	%		(0.2	)%

For the three months ended ~~September~~June 30, ~~2017,~~2019, cost of revenues was ~~$124.9~~$162.4 million compared to ~~$111.8~~$139.6 million for the three months ended ~~September~~June 30, ~~2016,~~2018, an increase of ~~$13.1~~$22.8 million, or ~~11.7%~~16.3%. Our gross margin for the three months ended ~~September~~June 30, ~~2017~~2019 was ~~35.1%~~33.3% compared to ~~34.7%~~33.5% for three months ended ~~September~~June 30, ~~2016, an increase~~2018, a decrease of 4020 basis points (“bps”).

The increase in cost of revenues in Insurance of ~~$1.9~~$5.9 million was primarily due to an increase in employee-related costs of ~~$1.6~~$6.0 million on account of higher headcount and wage inflation, higher technology, travel and ~~infrastructure costs of $0.6 million. This was partially offset by a decrease in~~ other operating costs of ~~$0.4~~$0.6 million, partially offset by currency movements, net of hedging of $0.7 million. ~~There was a net increase of $0.2 million due to the appreciation of the Indian rupee and depreciation of the Philippine peso against the U.S. dollar~~Gross margin in Insurance decreased by 120 bps during the three months ended ~~September~~June 30, ~~2017~~2019 compared to the three months ended ~~September~~June 30, ~~2016. Gross margin increased by 500 bps during the three months ended September 30, 2017 compared to the three months ended September 30, 2016,~~2018, primarily due to higher ~~revenues~~employee-related costs and ~~margin expansion in existing clients.~~other operating expenses.

The increase in cost of revenues in Healthcare of ~~$1.1~~$0.2 million was primarily due to an increase in employee-related costs of ~~$1.2~~$0.7 million on account of higher headcount and wage inflation, ~~technology~~partially offset by lower other operating costs of $0.2 million and ~~infrastructure costs~~currency movements, net of hedging of $0.3 million. ~~This was partially offset by $0.4 million due to the depreciation of the Philippine peso against the U.S. dollar~~Gross margin in Healthcare remains unchanged during the three months ended ~~September~~June 30, ~~2017~~2019 compared to the three months ended ~~September~~June 30, 2016. Gross margin increased by 480 bps during the three months ended September 30, 2017 compared to the three months ended September 30, 2016, primarily due to higher revenues and operational efficiencies.2018.

The decrease in cost of revenues in TT&L of $0.6 million was primarily due to a decrease in employee-related costs, infrastructure costs and other operating costs of $0.4 million and currency movements, net of hedging of $0.2 million. Gross margin in TT&L increased by 40 bps during the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to lower operating expenses.

The increase in cost of revenues in F&A of $1.5 million was primarily due to higher employee-related costs of $1.3 million and travel costs of $0.5 million, partially offset by lower infrastructure costs and other operating costs of $0.1 million and currency movements, net of hedging of $0.2 million. Gross margin in F&A decreased by 50 bps during the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to higher operating expenses.

The decrease in cost of revenues in All Other of $2.9 million was primarily due to a decrease in employee-related costs of ~~$0.2~~$2.2 million, ~~on account of lower headcount (partially offset by wage inflation), decrease in infrastructure costs of $0.1 million~~ and net decrease in other operating costs of ~~$0.1~~$0.5 million and currency movements, net of hedging of $0.2 million. ~~There was a decrease of $0.1 million due to the depreciation of the Philippine peso against the U.S. dollar~~Gross margin in All Other increased by 220 bps during the three months ended ~~September~~June 30, ~~2017~~2019 compared to the three months ended ~~September~~June 30, 2016. Gross margin increased by 590 bps during the three months ended September 30, 2017 as compared to the three months ended September 30, 2016 due to margin expansion in existing clients and lower operating costs.

The increase in cost of revenues in F&A of $1.3 million was primarily due to an increase in employee-related costs of $0.6 million on account of higher headcount and wage inflation, infrastructure costs of $0.1 million and travel costs of $0.4 million. There was an increase of $0.3 million due to the appreciation of the Indian rupee against the US dollar during the three months ended September 30, 2017 compared to the three months ended September 30, 2016. Gross margin decreased by 100 bps during the three months ended September 30, 2017 compared to the three months ended September 30, 2016 primarily due to migration costs associated with our new client wins and higher reimbursable travel related costs with lower gross margin.

The decline in cost of revenues in All Other of $1.1 million was primarily due to a decrease in employee-related costs of $0.6 million on account of lower headcount, partially offset by wage inflation. There was also a decrease in travel related costs of $0.3 million, infrastructure costs and other operating costs aggregating to $0.2 million during the three months ended September 30, 2017 compared to the three months ended September 30, 2016. Gross margin decreased by 560 bps during the three months ended September 30, 2017 compared to the three months ended September 30, 2016,2018, primarily due to lower ~~revenues~~operating expenses in ~~our Consulting~~Banking and Financial services and Utilities operating segments.

The increase in cost of revenues in Analytics of ~~$10.4~~$18.7 million was primarily due to an increase in employee-related costs of ~~$9.0~~$16.2 million ~~(including $5.4 million related to the IQR and Datasource acquisitions in 2016)~~ on account of higher

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headcount and wage inflation, including incremental cost related to our acquisition of SCIO in July 2018 of $9.9 million. The remaining increase was attributable to travel and ~~an increase in technology~~other operating costs of ~~$0.4~~$3.0 million, ~~infrastructure costs of $0.5 million and travel costs of $0.4 million. This was~~ partially offset by ~~a reduction~~currency movements, net of hedging of $0.5 million. Gross margin in ~~our other operating expenses of $0.4 million. There was an increase of $0.3 million due to the appreciation of the Indian rupee against the U.S. dollar~~Analytics decreased by 60 bps during the three months ended ~~September~~June 30, ~~2017~~2019 compared to the three months ended ~~September~~June 30, ~~2016. Gross margin decreased by 540 bps during the three months ended September 30, 2017 compared to the three months ended September 30, 2016,~~2018, primarily due to ~~higher operating costs and lower gross margin from our 2016 acquisitions.~~increase in employee-related costs.

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Selling, General and Administrative (“SG&A”) Expenses.


	Three months ended September 30,								Percentage change		Three months ended June 30,						Change		Percentage change
	2017			2016			Change		Percentage change		2019			2018					Percentage change
	(dollars in millions)										(dollars in millions)						Change
General and administrative expenses	$	26.9		$	21.9		$	5.0	23.0	%	$	31.2		$	27.6		$	3.6	13.0	%
Selling and marketing expenses	12.2			11.6			0.6		5.2	%	17.6			15.2			2.4		16.5	%
Selling, general and administrative expenses	$	39.1		$	33.5		$	5.6	16.8	%	$	48.8		$	42.8		$	6.0	14.2	%
As a percentage of revenues	20.3		%	19.6		%					20.1		%	20.4		%

The increase in SG&A expenses of $6.0 million was primarily due to an increase in employee-related costs of ~~$2.2~~$5.0 million, ~~(including $1.6 million of~~including incremental ~~employee-related~~ costs related to our ~~2016 acquisitions) as a result~~SCIO acquisition in July 2018 of ~~annual wage increments~~$3.6 million and an increase in our average headcount to support the increased business volumes. There was an increase of $1.8 million due to recognition of reserve for doubtful account receivables, $0.5 million of infrastructure costs related to our new operating centers and $0.5 million ofnet other operating ~~expenses. There~~costs of $1.5 million. This was apartially offset by currency movements, net ~~increase~~ of ~~$0.2 million due to the appreciation~~hedging of ~~the Indian rupee and depreciation of the Philippine peso against the U.S. dollar during the three months ended September 30, 2017 compared to the three months ended September 30, 2016.~~$0.5 million.

Depreciation and Amortization.


	Three months ended September 30,								Percentage change		Three months ended June 30,						Change		Percentage change
	2017			2016			Change		Percentage change		2019			2018					Percentage change
	(dollars in millions)										(dollars in millions)						Change
Depreciation expense	$	6.2		$	5.7		$	0.5	8.2	%	$	7.2		$	6.8		$	0.4	5.5	%
Intangible amortization expense	3.5			2.9			0.6		22.4	%	5.6			3.8			1.8		47.7	%
Depreciation and amortization expense	$	9.7		$	8.6		$	1.1	12.9	%	$	12.8		$	10.6		$	2.2	20.5	%
As a percentage of revenues	5.0		%	5.0		%					5.2		%	5.0		%

Depreciation and amortization expense increased by $1.1 million, or 12.9%, from $8.6 million for the three months ended September 30, 2016 to $9.7 million for the three months ended September 30, 2017. The increase in intangibles amortization expense of ~~$0.6~~$1.8 million was primarily due to the increase in amortization of intangibles associated with ~~IQR and Datasource acquisitions~~our SCIO acquisition in ~~2016. There was an~~July 2018. The increase in ~~our~~ depreciation expense of ~~$0.5~~$0.4 million was due to depreciation related to our new operating centers ~~in India and the Philippines~~commenced during 2018 to support our business growth and ~~impact~~depreciation associated with our SCIO acquisition.

Impairment and Restructuring Charges.



	Three months ended June 30,							Percentage change
	2019			2018		Change		Percentage change
	(dollars in millions)
Impairment and restructuring charges	$	5.6		$	—	$	5.6	N/A
As a percentage of revenues	2.3		%	—

On March 29, 2019, we commenced the process of substantially winding down of the operations of our ~~2016 acquisitions.~~Health Integrated business, which is reported within the Healthcare reportable segment. During the three months ended June 30, 2019, we recorded impairment charges of $1.9 million and restructuring charges of $3.7 million in connection with the wind down process. See Note 24 to our unaudited consolidated financial statements for details.

Income from Operations. Income from operations ~~increased $1.3~~decreased by $3.2 million, or ~~7.5%~~18.9%, from ~~$17.3~~$17.1 million for the three months ended ~~September~~June 30, ~~2016~~2018 to ~~$18.6~~$13.9 million for the three months ended ~~September~~June 30, ~~2017.~~2019. As a percentage of revenues, income from operations decreased from ~~10.1%~~8.1% for the three months ended ~~September~~June 30, ~~2016~~2018 to ~~9.7%~~5.7% for the three months ended ~~September~~June 30, ~~2017.~~2019.

Foreign Exchange Gain/(Loss). Net foreign exchange gains and losses are primarily attributable to movement of the U.S. dollar against the Indian rupee, the U.K. ~~Pound~~pound sterling and the Philippine peso during the three months ended ~~September~~June 30, ~~2017.~~2019. The average exchange rate of the U.S. dollar against the Indian rupee ~~decreased~~increased from ~~66.73~~67.51 during the three months ended ~~September~~June 30, ~~2016~~2018 to ~~64.45~~69.42 during the three months ended ~~September~~June 30, ~~2017.~~2019. The average exchange rate of the U.K. ~~Pound~~pound sterling against the U.S. dollar ~~remained flat at 1.31~~decreased from 1.34 during the three months ended ~~September~~June 30, ~~2016 and September~~2018 to 1.28 during the three months ended June 30, ~~2017.~~2019. The average exchange rate of the U.S. dollar against the Philippine peso ~~increased~~decreased from ~~47.40~~52.53 during the three months ended ~~September~~June 30, ~~2016~~2018 to ~~50.82~~51.84 during the three months ended ~~September~~June 30, ~~2017.~~2019.

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We recorded a net foreign exchange gain of ~~$2.8~~$1.2 million for the three months ended ~~September~~June 30, ~~2017~~2019 compared to ~~$1.7~~the net foreign exchange gain of $1.4 million for the three months ended ~~September~~June 30, ~~2016.~~2018.

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Interest expense. Interest expense increased ~~$0.1 million,~~ from ~~$0.3~~$0.7 million for the three months ended ~~September~~June 30, ~~2016~~2018 to ~~$0.4~~$3.9 million for the three months ended ~~September~~June 30, ~~2017.~~2019 primarily due to increase in borrowings under our Credit Facility, issuance of convertible notes and higher effective interest rates.

Other Income, net.



	Three months ended June 30,							Percentage change
	2019		2018		Change			Percentage change
	(dollars in millions)
Gain on sale and mark-to-market of mutual funds	$	3.3	$	1.7	$	1.6		95.9	%
Interest and dividend income	0.7		0.3		0.4			111.9	%
Other, net	0.1		0.2		(0.1		)	(58.4	)%
Other income, net	$	4.1	$	2.2	$	1.9		83.8	%

Other income, net ~~was flat at $2.9~~increased by $1.9 million, from $2.2 million for the three months ended June 30, 2018 to $4.1 million for the three months ended June 30, 2019, primarily due to a higher return on our mutual fund investments of $1.6 million and an increase in interest and dividend income of $0.4 million during the three months ended ~~September~~June 30, ~~2017.~~2019 compared to three months ended June 30, 2018.

Income Tax Expense. We recorded income tax expense of $2.7 million and $5.5 million for the three months ended June 30, 2019 and 2018, respectively. The effective tax rate decreased from ~~26.0%~~27.5% during the three months ended ~~September~~June 30, ~~2016~~2018 to ~~11.8% as a result of (i) excess tax benefit related to stock awards of $3.5 million pursuant to ASU No. 2016-09~~17.5% during the three months ended ~~September~~June 30, ~~2017, and (ii) higher earnings from foreign subsidiaries and lower domestic profit~~2019, primarily due to impact of change in effective state tax rates during the ~~U.S., partially offset by higher tax expense on account of the expiration of a tax holiday for some of the operating centers in India~~three months ended June 30, 2019.

Net Income. Net income ~~increased~~decreased from ~~$16.0~~$14.4 million for the three months ended ~~September~~June 30, ~~2016~~2018 to ~~$21.1~~$12.5 million for the three months ended ~~September~~June 30, ~~2017,~~2019, primarily due to higher interest expense of $3.2 million, decrease in income from operations of $3.2 million and lower foreign exchange gain of $0.2 million, partially offset by lower income tax expense of $2.8 million ~~higher~~and increase in other income, ~~from operations~~net of ~~$1.3 million, higher foreign exchange gain of $1.1 million, partially offset by higher interest expense of $0.1~~$1.9 million. As a percentage of revenues, net income ~~increased~~decreased from ~~9.4%~~6.9% for the three months ended ~~September~~June 30, ~~2016~~2018 to ~~11.0%~~5.2% for the three months ended ~~September~~June 30, ~~2017.~~2019.

~~Nine~~

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Six Months Ended ~~September~~June 30, ~~2017~~2019 Compared to ~~Nine~~Six Months Ended ~~September~~June 30, ~~2016~~2018

Revenues.

The following table summarizes our revenues by reportable ~~segment~~segments for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016:~~2018:


	Nine months ended September 30,							Percentage change		Six months ended June 30,							Percentage change
	2017		2016		Change			Percentage change		2019		2018		Change			Percentage change
	(dollars in millions)									(dollars in millions)
Insurance	$	173.8	$	151.7	$	22.1		14.6	%	$	141.3	$	128.7	$	12.6		9.8	%
Healthcare	56.7		49.8		6.9			13.9	%	40.6		42.6		(2.0		)	(4.8	)%
Travel, Transportation and Logistics	53.4		52.6		0.8			1.4	%	35.0		36.1		(1.1		)	(3.0	)%
Finance and Accounting	63.7		59.0		4.7			8.0	%	52.1		48.2		3.9			8.2	%
All Other	62.5		75.4		(12.9		)	(17.1	)%	39.3		44.8		(5.5		)	(12.3	)%

Analytics	154.3		120.2		34.1			28.4	%	174.8		116.7		58.1			49.8	%
Total revenues, net	$	564.4	$	508.7	$	55.7		11.0	%	$	483.1	$	417.1	$	66.0		15.8	%

Revenues for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 were ~~$564.4~~$483.1 million, up ~~$55.7~~$66.0 million, or ~~11.0%~~15.8%, compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2018.

Revenue growth in Insurance of ~~$22.1~~$12.6 million was primarily driven by expansion of business from our new and existing clients of ~~$21.1~~$14.6 million. This was partially offset by $2.0 million ~~including incremental $2.6 million related~~mainly attributable to the ~~July 2016 acquisition of Liss Systems Limited ("Liss"). The remaining increase of $1.0 million is attributable to a net impact of appreciation~~depreciation of the ~~South African Rand and~~Australian dollar, Indian rupee and ~~depreciation of the~~ U.K. ~~Pound~~pound sterling against the U.S. dollar during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2018. Insurance revenues were ~~30.8%~~29.2% and ~~29.8%~~30.9% of our total revenues in the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~September~~June 30, ~~2016,~~2018, respectively.

Revenue ~~growth~~decline in Healthcare of $6.9 million was driven by expansion of business from our existing and new clients. Healthcare revenues were 10.0% and 9.8% of our total revenues in the nine months ended September 30, 2017 and September 30, 2016, respectively.

~~Revenue growth in TT&L of $0.8~~$2.0 million was primarily driven by ~~net volume increases~~lower revenues from our ~~existing clients~~Health Integrated business of ~~$1.6 million,~~$3.1 million. This was partially offset by ~~an impact of $0.8~~$1.1 million ~~due~~mainly attributable to the depreciation of the Philippine Peso against the U.S. dollar during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. TT&L revenues were 9.5% and 10.4% of our total revenues in the nine months ended September 30, 2017 and September 30, 2016, respectively.

~~Revenue growth in F&A of $4.7 million was driven by~~ expansion of business from our new and existing ~~clients~~clients. Healthcare revenues were 8.4% and 10.2% of ~~$4.4 million. The remaining increase~~our total revenues in the six months ended June 30, 2019 and June 30, 2018, respectively.

Revenue decline in Travel, Transportation and Logistics ("TT&L") of ~~$0.3~~$1.1 million iswas primarily driven by $0.7 million attributable to net lower volumes and $0.4 million attributable to the ~~appreciation~~depreciation of the Indian rupee and Philippine peso against the U.S. dollar

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during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2018. TT&L revenues were 7.2% and 8.6% of our total revenues in the six months ended June 30, 2019 and June 30, 2018, respectively.

Revenue growth in Finance and Accounting ("F&A") of $3.9 million was driven by net volume increases from our new and existing clients of $4.9 million. This was partially offset by $1.0 million mainly attributable to the depreciation of the Indian rupee, U.K. pound sterling and Australian dollar against the U.S. dollar during the six months ended June 30, 2019 compared to the six months ended June 30, 2018. F&A revenues were ~~11.3%~~10.8% and 11.6% of our total revenues in the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~September~~June 30, ~~2016,~~2018, respectively.

Revenue decline in All Other of ~~$12.9~~$5.5 million was primarily driven ~~primarily~~ by lower ~~revenue~~revenues of $2.7 million in our Consulting ~~and Utilities~~ operating ~~segments, partially offset by higher revenue~~segment, $1.2 million in our Banking and Financial Services operating segment ~~aggregating to $13.1 million. This~~and $0.4 million in our Utilities operating segment. Further decline of $1.2 million was ~~partially offset by $0.2 million impact~~ due to the depreciation of the Indian rupee and U.K. ~~Pound~~pound sterling against the U.S. dollar during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016 in our Consulting operating segment.~~2018. All Other revenues were ~~11.1%~~8.1% and ~~14.8%~~10.7% of our total revenues in the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~September~~June 30, ~~2016,~~2018, respectively.

Revenue growth in Analytics of ~~$34.1~~$58.1 million was primarily driven by our ~~recurring~~acquisition of SCIO in July 2018 contributing $37.9 million. The remaining increase of $21.0 million was attributable to our recurring- and ~~project based~~project-based engagements from our new and existing ~~clients of $34.4 million, including incremental $18.6 million from IQR and Datasource acquisitions in 2016. The increase~~clients. This was partially offset by ~~a decrease of $0.3~~$0.8 million ~~due~~attributable to the depreciation of the U.K. ~~Pound~~pound sterling and Indian rupee against the U.S. dollar during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2018. Analytics revenues were ~~27.3%~~36.2% and ~~23.6%~~28.0% of our total revenues in the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~September~~June 30, ~~2016,~~2018, 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								Cost of Revenues												Gross Margin
	Nine months ended September 30,							Percentage change			Nine months ended September 30,						Change		Six months ended June 30,						Change			Percentage change			Six months ended June 30,						Change
	2017		2016		Change					2017			2016			2019				2018				2019				Percentage change		2018							Change
	(dollars in millions)							Percentage change									Change				(dollars in millions)
Insurance	$	119.0	$	108.5	$	10.5		9.7	%		31.5	%		28.5	%		3.0	%	$	96.6		$	86.5		Change	$	10.1		11.7	%		31.6	%		32.8	%		(1.2	)%
Healthcare	36.4		32.5		3.9			12.2	%		35.8	%		34.8	%		1.0	%	33.9			34.0			(0.1		)	(0.3	)%		16.6	%		20.3	%		(3.7	)%
TT&L	30.8		31.9		(1.1		)	(3.4	)%		42.2	%		39.4	%		2.8	%	19.8			21.1			(1.3		)	(6.1	)%		43.4	%		41.6	%		1.8	%
F & A	39.2		35.4		3.8			10.7	%		38.5	%		40.0	%		(1.5	)%
F&A																			30.3			29.3			1.0			3.4	%		42.0	%		39.3	%		2.7	%
All Other	42.8		47.8		(5.0		)	(10.6	)%		31.6	%		36.6	%		(5.0	)%	24.8			30.2			(5.4		)	(17.9	)%		36.8	%		32.4	%		4.4	%

Analytics	102.3		76.1		26.2			34.4	%		33.7	%		36.7	%		(3.0	)%	114.3			76.7			37.6			49.0	%		34.6	%		34.3	%		0.3	%
Total	$	370.5	$	332.2	$	38.3		11.5	%		34.4	%		34.7	%		(0.3	)%	$	319.7		$	277.8		$	41.9		15.1	%		33.8	%		33.4	%		0.4	%

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, cost of revenues was ~~$370.5~~$319.7 million compared to ~~$332.2~~$277.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018, an increase of ~~$38.3~~$41.9 million, or ~~11.5%~~15.1%. Our gross margin for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 was ~~34.4%~~33.8% compared to ~~34.7%~~33.4% for ~~the nine~~six months ended ~~September~~June 30, ~~2016, a decrease~~2018, an increase of 3040 basis points ~~(bps)~~(“bps”).

The increase in cost of revenues in Insurance of ~~$10.5~~$10.1 million was primarily due to an increase in employee-related costs of ~~$8.2~~$11.6 million ~~(including $1.3 million from our Liss acquisition)~~ on account of higher headcount and wage ~~inflation, and~~inflation. Further increase was due to higher technology, travel and infrastructure costs of ~~$2.8 million. This was~~$1.9 million, partially offset by alower other operating costs of $1.7 million and currency movements, net of hedging of $1.7 million. Gross margin in Insurance decreased by 120 bps during the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to higher operating expenses associated with the initiation of services for new clients.

The decrease in ~~travel related~~cost of revenues in Healthcare of $0.1 million was primarily due to currency movements, net of hedging of $0.6 million and decrease in infrastructure and other operating costs of ~~$0.6~~$0.5 million, partially offset by higher employee-related costs of $1.0 million. Gross margin in Healthcare decreased by 370 bps during the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to the impact of our Health Integrated business and higher employee-related costs.

The decrease in cost of revenues in TT&L of $1.3 million was primarily due to currency movements, net of hedging of $0.5 million and decrease in infrastructure costs of $0.4 million, employee-related costs of $0.2 million and other operating costs of ~~$0.7~~$0.2 million. ~~There was a net increase of $0.7 million due to the appreciation of the Indian rupee and depreciation of the Philippine peso against the U.S. dollar~~Gross margin in TT&L increased by 180 bps during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016. Gross margin increased by 300 bps during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016,~~2018, primarily due to ~~higher revenues and~~ lower operating ~~costs.~~expenses.

The increase in cost of revenues in ~~Healthcare~~F&A of ~~$3.9~~$1.0 million was primarily due to an increase in employee-related costs of ~~$3.9~~$1.8 million on account of higher headcount and wage inflation, ~~technology costs of $0.6 million and~~partially offset by lower infrastructure costs of $0.4 million and currency movements, net of hedging of $0.4 million. ~~This was partially offset~~Gross margin in F&A increased by ~~a decrease of $1.0 million due to the depreciation of the Philippine peso against the U.S. dollar~~270 bps during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016. Gross margin increased by 100 bps during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016,~~2018, primarily due to higher ~~revenues~~margin in existing clients and ~~operational efficiencies.~~lower operating expenses.

The decrease in cost of revenues in TT&L of $1.1 million was primarily due to decrease in infrastructure cost of $0.3 million, other operating costs of $0.2 million and employee-related costs of $0.1 million on account of lower headcount (partially offset by wage inflation).The cost of revenue also decreased due to depreciation of the Philippine peso against the U.S. dollar of $0.3 million during the nine months ended September 30, 2017 compared to the nine months ended September

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30, 2016. Gross margin increased by 280 bps during the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 primarily due to higher revenues and lower operating costs.

The increase in cost of revenues in F&A of $3.8 million was primarily due to an increase in employee-related costs of $2.3 million on account of higher headcount and wage inflation and infrastructure costs of $0.7 million. There was an increase of $0.7 million due to the appreciation of the Indian rupee against the U.S. dollar during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Gross margin decreased by 150 bps during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to migration costs associated with our new client wins and higher reimbursable travel related costs with lower gross margin.

~~The decline in cost of revenues in~~ All Other of ~~$5.0~~$5.4 million was primarily due to a decrease in employee-related costs of ~~$2.9~~$3.5 million, ~~on account of~~ lower ~~headcount, partially offset by wage inflation. There was also a decrease in~~ travel, ~~related costs of $1.6 million~~infrastructure and other operating ~~expenses~~costs of ~~$0.5~~$1.2 million and currency movements, net of hedging of $0.7 million. Gross margin ~~decreased~~in All Other increased by ~~500~~440 bps during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018, primarily due to ~~lower revenues~~better utilization in ~~our Consulting~~consulting and margin improvement in Utilities operating segments.

The increase in cost of revenues in Analytics of ~~$26.2~~$37.6 million was primarily due to an increase in employee-related costs of ~~$24.8~~$31.4 million ~~(including incremental $15.1 million related to our IQR and Datasource acquisitions in 2016)~~ on account of higher headcount and wage inflation, anincluding incremental cost related to our acquisition of SCIO in July 2018 of $20.0 million. The remaining increase ~~in technology costs of $0.9 million, infrastructure costs of $0.9 million and travel costs of $0.3 million. This~~ was ~~partially offset by reduction in our~~attributable to other operating costs of ~~$1.4~~$7.5 million, partially offset by currency movements, net of hedging of $1.3 million. ~~There was an increase of $0.6 million due to the appreciation of the Indian rupee against the U.S. dollar~~Gross margin in Analytics increased by 30 bps during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016. Gross margin decreased by 300 bps during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016,~~2018, primarily due to higher ~~employee costs and lower gross margin from our 2016 acquisitions.~~revenues.

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Selling, General and Administrative (“SG&A”) Expenses.


	Nine months ended September 30,								Percentage change		Six months ended June 30,						Change		Percentage change
	2017			2016			Change		Percentage change		2019			2018					Percentage change
	(dollars in millions)										(dollars in millions)						Change
General and administrative expenses	$	75.8		$	63.6		$	12.2	19.2	%	$	63.8		$	56.9		$	6.9	12.0	%
Selling and marketing expenses	38.7			37.9			0.8		2.2	%	35.7			29.1			6.6		22.6	%
Selling, general and administrative expenses	$	114.5		$	101.5		$	13.0	12.8	%	$	99.5		$	86.0		$	13.5	15.6	%
As a percentage of revenues	20.3		%	20.0		%					20.6		%	20.6		%

The increase in SG&A expenses of $13.5 million was primarily due to an increase in employee-related costs of ~~$8.2~~$12.6 million, ~~(including $4.1 million of~~including incremental ~~employee-related~~ costs related to our ~~2016 acquisitions) as a result~~SCIO acquisition in July 2018 of ~~annual wage increments~~$7.3 million and annet increase in ~~our average headcount to support the increased business volumes. There was an increase of $2.7 million due to recognition of reserve for doubtful account receivables and infrastructure~~other operating costs of ~~$1.5 million related to our new operating centers. There~~$2.1 million. This was apartially offset by currency movements, net ~~increase~~ of ~~$0.7 million due to the appreciation~~hedging of ~~the Indian rupee and depreciation of the Philippine peso against the U.S. dollar during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.~~$1.2 million.

Depreciation and Amortization.


	Nine months ended September 30,								Percentage change		Six months ended June 30,						Change		Percentage change
	2017			2016			Change		Percentage change		2019			2018					Percentage change
	(dollars in millions)										(dollars in millions)						Change
Depreciation expense	$	18.3		$	16.7		$	1.6	9.3	%	$	15.3		$	13.4		$	1.9	14.6	%
Intangible amortization expense	10.5			8.3			2.2		26.7	%	11.1			7.7			3.4		43.8	%
Depreciation and amortization expense	$	28.8		$	25.0		$	3.8	15.1	%	$	26.4		$	21.1		$	5.3	25.3	%
As a percentage of revenues	5.1		%	4.9		%					5.5		%	5.1		%

Depreciation and amortization expense increased by $3.8 million, or 15.1%, from $25.0 million for the nine months ended September 30, 2016 to $28.8 million for the nine months ended September 30, 2017. The increase in ~~intangible~~intangibles amortization expense of ~~$2.2~~$3.4 million was primarily due to an increase in amortization of intangibles associated with our ~~2016 acquisitions. Further, there was an~~SCIO acquisition in July 2018. The increase in ~~our~~ depreciation expense of ~~$1.6~~$1.9 million was due to depreciation related to our new operating centers ~~in India and the Philippines and~~commenced during 2018 to support our business growth and depreciation ~~expense~~ associated with our ~~2016 acquisitions.~~SCIO acquisition.

Impairment and Restructuring Charges.

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	Six months ended June 30,							Percentage change
	2019			2018		Change		Percentage change
	(dollars in millions)
Impairment and restructuring charges	$	6.8		$	—	$	6.8	N/A
As a percentage of revenues	1.4		%	—

On March 29, 2019, we commenced the process of substantially winding down of the operations of the Health Integrated business, which is reported within the Healthcare reportable segment. During the six months ended June 30, 2019, we recorded impairment charges of $3.2 million and restructuring charges of $3.6 million in connection with the wind down process. See Note 24 to our unaudited consolidated financial statements for details.

Income from Operations. Income from operations ~~increased~~decreased by ~~$0.6~~$1.5 million, or ~~1.3%~~4.7%, from ~~$50.0~~$32.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 to ~~$50.6~~$30.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2019. As a percentage of revenues, income from operations decreased from ~~9.8%~~7.7% for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 to ~~9.0%~~6.4% for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2019.

Foreign Exchange Gain/(Loss). Net foreign exchange gains and losses are primarily attributable to movement of the U.S. dollar against the Indian rupee, the U.K. ~~Pound~~pound sterling and the Philippine peso during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2019. The average exchange rate of the U.S. dollar against the Indian rupee ~~decreased~~increased from ~~67.10~~66.08 during the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 to ~~65.12~~69.87 during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2019. The average exchange rate of the U.K. ~~Pound~~pound sterling against the U.S. dollar decreased from ~~1.38~~1.37 during the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 to ~~1.28~~1.30 during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2019. The average exchange rate of the U.S. dollar against the Philippine peso ~~increased~~decreased from ~~47.13~~52.19 during the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 to ~~50.31~~51.97 during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2019.

We recorded a net foreign exchange gain of ~~$7.3~~$2.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 compared to ~~$3.6~~the net foreign exchange gain of $2.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2018.

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Interest expense. Interest expense increased ~~by $0.4 million~~ from ~~$1.0~~$1.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 to ~~$1.4~~$7.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019 primarily due to ~~financing cost associated with purchase~~increase in borrowings under our Credit Facility, issuance of ~~software.~~

convertible notes and higher effective interest rates.

Other Income, ~~net~~net.


	Nine months ended September 30,							Percentage change		Six months ended June 30,							Percentage change
	2017		2016		Change			Percentage change		2019		2018		Change			Percentage change
	(dollars in millions)									(dollars in millions)
Gain on sale and mark-to-market of mutual funds										$	6.8	$	4.8	$	2.0		41.8	%
Interest and dividend income	$	1.3	$	1.2	$	0.1		9.0	%	1.5		0.7		0.8			134.4	%
Gain on mutual fund investments	6.8		6.2		0.6			9.5	%
Change in fair value of earn-out consideration	—		4.1		(4.1		)	(100.0	)%
Other, net	0.8		0.7		0.1			5.3	%	0.2		0.3		(0.1		)	(37.7	)%
Other income, net	$	8.9	$	12.2	$	(3.3	)	(27.3	)%	$	8.5	$	5.8	$	2.7		47.8	%

~~Increase~~

Other income, net increased by $2.7 million, from $5.8 million for the six months ended June 30, 2018 to $8.5 million for the six months ended June 30, 2019, primarily due to a higher return on our mutual fund investments of $2.0 million and an increase in interest and dividend income of $0.1 million and increase in gain on mutual fund investments of $0.6 million was primarily due to higher cash balances in certain of our foreign subsidiaries and higher gain on sale of investment during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. We also recorded other income of $4.1$0.8 million during the ~~nine~~six months ended ~~September~~June 30, ~~2016 due~~2019 compared to ~~the reversal of earn-out liability related to our RPM acquisition in 2015.~~six months ended June 30, 2018.

Income Tax Expense. We recorded income tax expense of $6.9 million and $1.1 million for the six months ended June 30, 2019 and 2018, respectively. The effective tax rate ~~decreased~~increased from ~~28.6%~~2.7% during the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 to ~~11.0%~~20.1% during the six months ended June 30, 2019 primarily as a result of (i) an adjustment of $4.8 million reducing the provisional transition tax on the mandatory deemed repatriation of accumulated earnings and profits ("E&P") of foreign subsidiaries recognized during the six months ended June 30, 2018 and (ii) recording of excess tax ~~benefit~~benefits related to stock awards of ~~$7.2~~$1.1 million pursuant to ASU No. 2016-09 during the ~~nine~~six months ended ~~September~~June 30, ~~2017, (ii) conclusion of an uncertain tax position of $3.2~~2019 compared to $5.2 million ~~(including interest of $1.4 million), and (iii) higher earnings from foreign subsidiaries and lower domestic profit in~~during the ~~U.S., partially offset by higher tax expense on account of the expiration of a tax holiday for some of the operating centers in India.~~six months ended June 30, 2018. See Note 22 to our unaudited consolidated financial statements.

Net Income. Net income ~~increased~~decreased from ~~$46.3~~$37.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 to ~~$58.2~~$27.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, primarily due to ~~lower~~higher income tax expense of ~~$11.3~~$5.8 million, higher interest expense of $6.2 million, decrease in income from operations of $1.5 million, partially offset by increase in other income, net of $2.7 million and higher foreign exchange gain of ~~$3.7 million, higher income from operations of $0.6 million partially offset by lower other income of $3.3 million and higher interest expense of $0.4~~$0.5 million.

As a percentage of revenues, net income ~~increased~~decreased from ~~9.1%~~9.0% for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 to ~~10.3%~~5.6% for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2019.

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Liquidityand Capital Resources


	Nine months ended September 30,						Six months ended June 30,
	2017			2016			2019			2018
	(dollars in millions)						(dollars in millions)
Opening cash and cash equivalents	$	213.2		$	205.3
Opening cash, cash equivalents and restricted cash							$	104.1		$	94.3
Net cash provided by operating activities	72.2			56.0			47.7			13.8
Net cash used for investing activities	(171.2		)	(126.2		)
Net cash provided by investing activities							0.9			0.4
Net cash used for financing activities	(28.2		)	(34.2		)	(61.1		)	(15.9		)
Effect of exchange rate changes	1.7			(2.5		)	(0.2		)	(2.6		)
Closing cash and cash equivalents	$	87.7		$	98.4
Closing cash, cash equivalents and restricted cash							$	91.4		$	90.0

As of ~~September~~June 30, ~~2017~~2019 and ~~December 31, 2016,~~2018, we had ~~$249.4~~$253.0 million and ~~$226.6~~$233.1 million, respectively, in cash, cash equivalents and short-term investments, ~~(including $205.1~~of which $214.8 million and ~~$170.1~~$185.9 million, respectively, ~~held by our~~is located in foreign ~~subsidiaries). We~~jurisdictions that upon distribution may be subject to withholding and other tax and we do not currently intend to ~~repatriate funds held by~~distribute such amounts. If, in the future, we change our ~~foreign subsidiaries since our future growth partially depends upon continued infrastructure~~intention regarding distributions, additional taxes may be required and ~~technology investments, geographical expansions and acquisitions outside of~~would be recorded in the ~~U.S. Therefore, we anticipate that we will indefinitely reinvest~~period the ~~earnings generated outside of the U.S. If we were to repatriate our overseas funds, we would accrue and pay applicable taxes.~~intention changes.

Operating Activities: Cash flows ~~from~~provided by operating activities ~~increased by $16.2 million from $56.0~~were $47.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2019 as compared to ~~$72.2~~cash flows provided by operating activities of $13.8 million during the six months ended June 30, 2018. Generally, factors that affect our earnings—including pricing, volume of services, costs and productivity—affect our cash flows used or provided from operations in a similar manner. However, while management of working capital, including timing

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of collections and payments affects operating results only indirectly, the impact on the working capital and cash flows provided by operating activities can be significant

Cash flows provided by operating activities for the six months ended June 30, 2019 was $47.7 million. This comprised of net income plus the net effect of non-cash items, such as depreciation and amortization, stock-based compensation expense, amortization of operating lease right-of-use assets, deferred income taxes, impairment charges and others aggregating to $82.3 million. The primary working capital use of cash of $46.9 million during the six months ended June 30, 2019 was driven by an increase in accounts receivables, prepaid expenses and other current assets and decrease in operating lease liabilities, accrued employee costs and accounts payable. The primary working capital sources of cash of $12.3 million was driven by higher accrued expenses, deferred revenue, lower advance income tax and other assets.

Investing Activities: Cash flows provided by investing activities were $0.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2019 as compared to cash flows provided by investing activities of $0.4 million for the six months ended June 30, 2018. The increase ~~in cash flows~~is mainly due to higher net proceeds from ~~operations for~~redemption of investments of $23.5 million during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 as compared to net proceeds from redemption of investments of $20.1 million during the six months ended June 30, 2018, offset by higher capital expenditures for purchase of long-lived assets, including investments in technology applications, product developments, digital technology and advanced automation & robotics of $3.0 million during the six months ended June 30, 2018 compared to the ~~nine~~six months ended ~~September~~June 30, 2016 was due to an increase in net income by $12.0 million, increase in non-cash adjustment of $3.9 million and decrease in working capital of $0.3 million from $25.2 million during the nine months ended September 30, 2016 to $24.9 million during the nine months ended September 30, 2017.2018.

~~Investing Activities:~~ Cash flows used for investing activities increased by $45.0 million from $126.2 million for the nine months ended September 30, 2016 to $171.2 million for the nine months ended September 30, 2017. The increase was primarily due to an increase in short-term investments of $47.2 million (net of redemption) and due to an increase in capital expenditures of $6.4 million during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. This was partially offset by amount paid for business acquisition of $9.4 million during the nine months ended September 30, 2016 compared to $0.7 million paid for settlement of working capital and purchase consideration payable related to 2016 acquisitions during the nine months ended September 30, 2017.

Financing Activities: Cash flows used for financing activities ~~was $28.2~~were $61.1 million during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 as compared to ~~$34.2 million during the nine months ended September 30, 2016. The decrease in~~ cash ~~flow~~flows used for financing activities ~~between periods is~~of $15.9 million during the six months ended June 30, 2018. The increase in cash flows used by financing activities was primarily due to higher repayment of borrowings of ~~$25.0~~$40.5 million (net of proceeds) under ~~the~~our Credit ~~Agreement~~Facility (as described below in “Financing Arrangements”) during the ~~nine~~six months ended ~~September~~June 30, ~~2016. This was partially offset~~2019 and by higher purchases of treasury stock ~~of $17.2~~by $4.4 million ~~and lower proceeds from exercise of stock options of $2.0 million~~under our share repurchase program during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 as compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2018.

We expect to use cash from operating activities to maintain and expand our ~~business. As we have focused on expanding our cash flow from operating activities we continue to make capital~~business by making investments primarily related to new facilities and capital expenditures associated with leasehold improvements to build our facilities, and ~~the~~ purchase of telecommunications equipment and computer hardware and software in connection with managing client operations. We incurred ~~$26.8~~$22.3 million of capital expenditures in the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2019. We expect to incur capital expenditures of between ~~$30.0~~$35.0 million to ~~$35.0~~$40.0 million in ~~2017,~~2019, 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, but the actual amount may vary based on economic conditions or other factors.~~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 ~~(refer~~(see Note 26 to ~~Note 21 to the~~our unaudited consolidated financial statements ~~contained~~ 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.

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Financing Arrangements (Debt Facility)

~~Our~~Revolver Credit Agreement

On November 21, 2017, we and each of our wholly owned material domestic subsidiaries entered into a Credit Agreement with certain lenders, and Citibank, N.A. as Administrative Agent (the “Credit Agreement”). The Credit Agreement provides for a $200.0 million revolving credit facility (the “Credit Facility”)~~, including~~ 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, in the amount of $100.0 million.~~sub facility. The Credit Facility has a maturity date of ~~October 24, 2019~~November 21, 2022 and is voluntarily pre-payable from time to time without premium or penalty. ~~As of September 30, 2017, we had outstanding indebtedness of $45.0 million which is included under “long term borrowings” in the unaudited consolidated balance sheets.~~

Borrowings under the Credit ~~Facility~~Agreement may be used for working capital and general corporate purposes, ~~of the Company and its subsidiaries and for~~including permitted acquisitions.

~~Depending on the type of borrowing, loans~~ On July 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, to fund the SCIO acquisition. 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.

We entered into a second amendment (the “Amendment”) to our Credit Agreement, as amended, among the Company, as borrower, with certain lenders, and Citibank, N.A. as Administrative Agent to, among other things, permit the issuance by

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us of the convertible notes, and settlement upon maturity or conversion thereof, in accordance with the Investment Agreement, the indenture dated as of October 4, 2018 and the other documents entered into in connection therewith.

See Note 18 to our unaudited consolidated financial statements herein for further details on our debt facilities.

As of June 30, 2019, we had outstanding indebtedness under the credit facility of $117.0 million, of which $20.0 million is expected to be repaid within the next twelve months and is included under “current portion of long-term borrowings” and of which $97.0 million is included under “long-term borrowings” in the unaudited consolidated balance sheets. As of December 31, 2018, we had outstanding indebtedness under the credit facility of $150.0 million, of which $20.0 million was presented under "current portion of long-term borrowings" and the balance of $130.0 million was included under "long-term borrowings" in the unaudited consolidated balance sheets.

Convertible Senior Notes

On October 1, 2018, we 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 $150.0 million in an aggregate principal amount of 3.50% Convertible Senior Notes due October 1, 2024 (the "Notes"). The transactions contemplated by the Investment Agreement, including the issuance of the Notes, closed on October 4, 2018. The Notes bear interest at a rate of 3.50% per annum, payable semi-annually in arrears in cash on April 1 and October 1 of each year. During the three and six months ended June 30, 2019, we recognized interest expense of $1.3 million and $2.6 million. The Notes are convertible at an initial conversion rate of 13.3333 shares of the common stock per $1,000 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 ~~specified prime rate (alternate base rate) or adjusted LIBO rate,~~principal amount plus accrued and unpaid interest. We may redeem the principal amount of the Notes, at our option, in ~~each case, an applicable margin. The applicable margin is tied~~whole but not in part, at a purchase price equal to the ~~Company’s leverage ratio~~principal amount plus accrued and ~~ranges from 0.3% to 0.8% per annum with respect to loans pegged~~unpaid interest on or after October 1, 2021, if the closing sale price of the common stock exceeds 150% of the then-current conversion price for 20 or more trading days in the 30 consecutive trading day period preceding our exercise of this redemption right (including the trading day immediately prior to the ~~specified prime rate,~~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 ~~1.3%~~shares of our common stock. We used the proceeds from the issuance of Notes to ~~1.8% per annum on loans pegged to the adjusted LIBO rate. The revolving credit commitments~~repay $150.0 million of our outstanding borrowings under the Credit ~~Agreement are subject~~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 ~~commitment fee.~~discounted cash flow technique, which considered debt issuances with similar features of our debt, excluding the conversion feature. The commitment fee is also tied to the Company’s leverage ratio, and ranges from 0.2% to 0.3% per annum on the average daily amount by which the aggregate revolving commitments exceed the sum of outstanding revolving loans and letter of credit obligations. The Credit Facility carried anresulting effective interest rate for the Notes was 5.75% per ~~annum~~annum. The excess of ~~2.9% and 2.7% during~~ the ~~three and nine months ended September 30, 2017, respectively.~~gross proceeds received over the estimated fair value of the liability component totaling $16.9 million, excluding tax effects, was allocated to the conversion feature (equity component, recorded as additional paid-in capital) with a corresponding offset recognized as a discount to reduce the net carrying value of the Notes. The discount is being amortized to interest expense over a six-year period ending October 1, 2024 (the expected life of the liability component) using the effective interest method.

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.

Off-Balance Sheet Arrangements

As of ~~September~~June 30, ~~2017 and December 31, 2016,~~2019, we had no off-balance sheet arrangements or obligations.

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Contractual Obligations

The following table sets forth our contractual obligations as of ~~September~~June 30, ~~2017:~~2019:


	Payment Due by Period										Payment Due by Period
	Less than		1-3		4-5		After				Less than		1-3		4-5		After
	1 year		years		years		5 years		Total		1 year		years		years		5 years		Total
	(dollars in millions)										(dollars in millions)
Capital leases	$	0.2	$	0.3	$	0.1	$	—	$	0.6
Finance leases											$	0.4	$	0.4	$	0.1	$	—	$	0.9
Operating leases(a)	10.5		13.3		4.3		0.9		29.0		25.2		44.6		35.8		29.5		135.1
Purchase obligations	7.2		0.2		—		—		7.4		7.5		—		—		—		7.5
Other obligations^(a)(b)	2.8		4.6		3.7		5.2		16.3		1.8		3.3		2.8		4.6		12.5
Borrowings
Borrowings:
Principal payments	—		45.0		—		—		45.0		20.9		68.6		29.0		150.0		268.5
Interest Payments^(b)	1.3		1.3		—		—		2.6
Interest payments^(c)											9.6		15.5		11.0		2.6		38.7
Total contractual cash obligations^(c)(d)	$	22.0	$	64.7	$	8.1	$	6.1	$	100.9	$	65.4	$	132.4	$	78.7	$	186.7	$	463.2


(a)	Represents lease liabilities payable for cancellable and non-cancellable lease period.


(b)	Represents estimated payments under the Gratuity Plan.


~~(b)~~(c)	Interest on borrowings is calculated based on the ~~effective~~ interest rate on the outstanding borrowings as of ~~September~~June 30, ~~2017.~~2019.


~~(c)~~(d)	Excludes ~~$1.5~~$0.8 million related to uncertain tax positions, since the extent of the amount and timing of payment is currently not reliably estimable or determinable.

Certain units of our Indian subsidiaries were established as 100% Export-Oriented units under the “STPI” 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.

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Our operations centers in the Philippines are registered with the “PEZA.” The registration provides us with certain fiscal incentives on the import of capital goods and requires that ExlService Philippines, Inc. 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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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

During the three months ended ~~September~~June 30, ~~2017,~~2019, there were no material changes in our market risk exposure. For a discussion of our market risk associated with exchange rate risk and interest rate risk, see Item 7A “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~2018.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), to allow timely decisions regarding required disclosure. In connection with the preparation of this Quarterly Report on Form 10-Q, our management carried out an evaluation, under the supervision and with the participation of the CEO and CFO, of the effectiveness and operation of our disclosure controls and procedures as of ~~September~~June 30, ~~2017.~~2019. Based upon that evaluation, the CEO and CFO have concluded that, as of ~~September~~June 30, ~~2017,~~2019, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

During the three months ended ~~September~~June 30, ~~2017,~~2019, there was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. Other Information

ITEM 1. Legal Proceedings

In the course of our normal business activities, various lawsuits, claims and proceedings may be instituted or asserted against us. We believe that the disposition of matters currently instituted or asserted will not have a material adverse effect on our unaudited consolidated financial position, results of operations or cash flows. ~~Please see~~See Note 2126 to the unaudited consolidated financial statements contained herein for details regarding ~~our tax proceedings.~~

certain contingent liabilities.

ITEM 1A. Risk Factors

We have disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016~~2018 a number of risks which may materially affect our business, financial condition or results of operations. You should carefully consider the “Risk Factors” set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016~~2018 and the other information set forth elsewhere in this Quarterly Report on Form 10-Q. You should be aware that these risk factors and other information may not describe every risk facing our Company. Additional risks and uncertainties not currently known to us may also materially adversely affect our business, financial condition and/or results of operations.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Use of Proceeds

None.

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Purchases of Equity Securities by the Issuer

During the three months ended ~~September~~June 30, ~~2017,~~2019, purchases of common stock were as follows:

Period Total Number of
Shares Purchased Average Price
Paid per share Total Number of Shares Purchased as Part of Publicly
Announced Plans or Programs
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs⁽¹⁾
July 1, 2017 through July 31, 2017 —
—
—
19,684,088
August 1, 2017 through August 31, 2017 107,633
56.12
107,633
13,643,362
September 1, 2017 through September 30, 2017 52,400
56.55
52,400
10,680,041
Total 160,033
56.26
160,033
—



Period	Total Number of Shares Purchased	Average Price Paid per share⁽¹⁾		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
April 1, 2019 through April 30, 2019	65,760	$	60.82	65,760	$	22,000,378
May 1, 2019 through May 31, 2019	67,500	$	60.04	67,500	$	17,948,014
June 1, 2019 through June 30, 2019	64,900	$	62.83	64,900	$	13,870,180
Total	198,160	$	61.21	198,160	$	—

(1) ~~On February 28, 2017, the Company’s Board~~Average of ~~Directors authorized an additional~~high and low price of common stock ~~repurchase program (the “2017 Repurchase Program”), under which shares may be purchased by~~on the ~~Company from time~~trading day prior to ~~time from~~ the ~~open market and through private transactions during each~~vesting date of the ~~fiscal years 2017 through 2019 up to an aggregate additional amount~~shares of ~~$100 million. The approval increases the 2017 authorization from $20 million to $40 million and authorizes stock repurchases of up to $40 million in each of 2018 and 2019.~~

restricted stock.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

None.

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ITEM 6.Exhibits

~~See Exhibit Index immediately following the signature page hereto, which Exhibit Index is incorporated herein by reference.~~

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~~SIGNATURES~~

~~Pursuant to the requirements of the Securities Exchange Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.~~



~~Date: October 26, 2017~~	~~EXLSERVICE HOLDINGS, INC.~~

	~~By:~~	/S~~/ VISHAL~~ C~~HHIBBAR~~
		~~Vishal Chhibbar~~ ~~Chief Financial Officer~~ ~~(Duly Authorized Signatory, Principal Financial and Accounting Officer)~~

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~~EXHIBIT INDEX~~

The following exhibits are being filed as part of this Quarterly Report on Form 10-Q:





3.1		Amended and Restated Certificate of Incorporation of the Company, as in effect on the date hereof (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K (File No. 1-33089) filed on October 25, 2006).

3.2		Amendment to the Company’s Fourth Amended and Restated ~~By-Laws of ExlService Holdings, Inc., as in effect on the date hereof~~By-laws effective June 17, 2019 (incorporated by reference to Exhibit ~~3.2 to~~3.1 of the Company’s Current Report on Form 8-K (File No. 1-33089) filed on ~~February 28, 2017).~~June 19, 2019)

~~10.1~~3.2		Fifth Amended and Restated ~~Employment and Non-Competition Agreement, dated September 19, 2017, by and between~~By-laws of ExlService Holdings, ~~and Rohit Kapoor.~~Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K (File No. 1-33089) filed on June 19, 2019)

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

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

32.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Scheme

101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.DEF		XBRL Taxonomy Extension Definition Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Extension Presentation Linkbase

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Date: July 30, 2019	EXLSERVICE HOLDINGS, INC.

	By:	/S/ VISHAL CHHIBBAR
		Vishal Chhibbar Chief Financial Officer (Duly Authorized Signatory, Principal Financial and Accounting Officer)



	Three months ended September 30, 2017
	Insurance		Healthcare		TT&L		F&A		All Other		Analytics		Total
	Insurance		Healthcare		TT&L		F&A		All Other		Analytics		Total
Revenues, net	$	59,608	$	18,871	$	18,496	$	21,642	$	19,984	$	53,744	$	192,345
Cost of revenues (exclusive of depreciation and amortization)	39,699		11,966		10,135		13,310		13,629		36,151		124,890
Gross profit	$	19,909	$	6,905	$	8,361	$	8,332	$	6,355	$	17,593	$	67,455
Operating expenses													48,800
Foreign exchange gain, interest expense and other income, net													5,241
Income tax expense													2,819
Net income													$	21,077



	Three months ended September 30, 2016
	Insurance		Healthcare		TT&L			F&A		All Other		Analytics		Total
	Insurance		Healthcare		TT&L			F&A		All Other		Analytics		Total
Revenues, net	$	52,801	$	15,959	$	17,519		$	19,858	$	23,426	$	41,637	$	171,200
Cost of revenues (exclusive of depreciation and amortization)	37,797		10,887		10,637			12,012		14,655		25,779		111,767
Gross profit	$	15,004	$	5,072	$	6,882		$	7,846	$	8,771	$	15,858	$	59,433
Operating expenses							��							42,074
Foreign exchange gain, interest expense and other income, net														4,337
Income tax expense														5,646
Net income														$	16,050



	Nine months ended September 30, 2017
	Insurance		Healthcare		TT&L		F&A		All Other		Analytics		Total
	Insurance		Healthcare		TT&L		F&A		All Other		Analytics		Total
Revenues, net	$	173,784	$	56,726	$	53,374	$	63,694	$	62,547	$	154,310	$	564,435
Cost of revenues (exclusive of depreciation and amortization)	119,004		36,402		30,832		39,163		42,770		102,287		370,458
Gross profit	$	54,780	$	20,324	$	22,542	$	24,531	$	19,777	$	52,023	$	193,977
Operating expenses													143,291
Foreign exchange gain, interest expense and other income, net													14,759
Income tax expense													7,202
Net income													$	58,243



	Nine months ended September 30, 2016
	Insurance		Healthcare		TT&L		F&A		All Other		Analytics		Total
	Insurance		Healthcare		TT&L		F&A		All Other		Analytics		Total
Revenues, net	$	151,696	$	49,788	$	52,623	$	58,961	$	75,434	$	120,212	$	508,714
Cost of revenues (exclusive of depreciation and amortization)	108,516		32,440		31,901		35,385		47,836		76,094		332,172
Gross profit	$	43,180	$	17,348	$	20,722	$	23,576	$	27,598	$	44,118	$	176,542
Operating expenses													126,495
Foreign exchange gain, interest expense and other income, net													14,747
Income tax expense													18,549
Net income													$	46,245



Software - Internally developed:
	As of
	September 30, 2017		December 31, 2016
Cost	$	2,364	$	2,242
Less : Accumulated amortization expense	791		336
	$	1,573	$	1,906



Estimated amortization of intangible assets during the next twelve months ending September 30,
2018	$	12,667
2019	11,947
2020	5,705
2021	3,207
2022	2,461
2023 and thereafter	6,681
Total	$	42,668



Change in Plan Assets
Plan assets at January 1, 2017	$	5,640
Actual return	341
Employer contribution	1,694
Benefits paid	(896		)
Effect of exchange rate changes	227
Plan assets at September 30, 2017	$	7,006



During the next twelve months ending September 30,
2018	$	10,477
2019	8,470
2020	4,795
2021	3,189
2022	1,064
2023 and thereafter	933
	$	28,928



Balance as of January 1, 2017	$	3,087
Increases related to prior year tax positions	—
Decreases related to prior year tax positions	(1,720		)
Increases related to current year tax positions	—
Decreases related to current year tax positions	—
Effect of exchange rate changes	85
Balance as of September 30, 2017	$	1,452



	Number of Options		Weighted Avg Exercise Price		Aggregate Intrinsic Value		Weighted Avg Remaining Contractual Life (Years)
Outstanding at December 31, 2016	811,902		$	16.31	$	27,718	2.96
Granted	—		—
Exercised	(349,880	)	12.22
Forfeited	—		—
Outstanding at September 30, 2017	462,022		$	19.40	$	17,980	2.97
Vested and exercisable at September 30, 2017	462,022		$	19.40	$	17,980	2.97



Period	Total Number of Shares Purchased	Average Price Paid per share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs⁽¹⁾
July 1, 2017 through July 31, 2017	—	—	—	19,684,088
August 1, 2017 through August 31, 2017	107,633	56.12	107,633	13,643,362
September 1, 2017 through September 30, 2017	52,400	56.55	52,400	10,680,041
Total	160,033	56.26	160,033	—