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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 JUNE 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO                     
COMMISSION FILE NUMBER 001-33089
_________________________________________________________
EXLSERVICE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
_________________________________________________________
DELAWARE
 
82-0572194
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
280 PARK AVENUE, 38TH FLOOR,
NEW YORK, NEW YORK
 
10017
(Address of principal executive offices)
 
(Zip code)
(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.   Yes  ý    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).   Yes  ý    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”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
 
Non-accelerated filer
 
¨
  
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
As of July 31, 2018, there were 34,312,699 shares of the registrant’s common stock outstanding, par value $0.001 per share.

 



Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
 
 
PAGE
ITEM
 
 
 
 
 
 
 
 
 
1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.
 
 
 
 
 
3.
 
 
 
 
 
4.
 
 
 
 
 
 
 
 
 
 
 
1.
 
 
 
 
 
1A.
 
 
 
 
 
2.
 
 
 
 
 
3.
 
 
 
 
 
4.
 
 
 
 
 
5.
 
 
 
 
 
6.
 
 
 

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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
 
June 30, 2018
 
December 31, 2017
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
84,091

 
$
86,795

Short-term investments
149,045

 
178,479

Restricted cash
2,256

 
3,674

Accounts receivable, net
147,099

 
135,705

Prepaid expenses
9,963

 
9,781

Advance income tax, net
11,278

 
8,801

Other current assets
23,002

 
29,582

Total current assets
426,734

 
452,817

Property and equipment, net
66,112

 
66,757

Restricted cash
3,645

 
3,808

Deferred taxes, net
12,702

 
8,585

Intangible assets, net
41,170

 
48,958

Goodwill
200,981

 
204,481

Other assets
36,033

 
36,369

Investment in equity affiliate
2,886

 
3,000

Total assets
$
790,263

 
$
824,775

Liabilities and equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
5,428

 
$
5,918

Current portion of long-term borrowings
10,318

 
10,318

Deferred revenue
10,448

 
10,716

Accrued employee costs
33,338

 
55,664

Accrued expenses and other current liabilities
59,882

 
61,366

Current portion of capital lease obligations
223

 
267

Total current liabilities
119,637

 
144,249

Long term borrowings
57,326

 
50,391

Capital lease obligations, less current portion
270

 
331

Income taxes payable
8,721

 
13,557

Other non-current liabilities
18,830

 
16,202

Total liabilities
204,784

 
224,730

Commitments and contingencies (Refer to Note 25)


 


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, 37,583,160 shares issued and 34,288,314 shares outstanding as of June 30, 2018 and 36,790,751 shares issued and 33,888,733 shares outstanding as of December 31, 2017
38

 
37

Additional paid-in capital
334,643

 
322,246

Retained earnings
465,138

 
427,064

Accumulated other comprehensive loss
(87,621
)
 
(45,710
)
Total including shares held in treasury
712,198

 
703,637

Less: 3,294,846 shares as of June 30, 2018 and 2,902,018 shares as of December 31, 2017, held in treasury, at cost
(126,952
)
 
(103,816
)
Stockholders’ equity
$
585,246

 
$
599,821

Non-controlling interest
233

 
224

Total equity
$
585,479

 
$
600,045

Total liabilities and equity
$
790,263

 
$
824,775

See accompanying notes to unaudited consolidated financial statements.

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Table of Contents

EXLSERVICE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except share and per share amounts)

 
Three months ended June 30,
 
Six months ended June 30,

2018
 
2017
 
2018
 
2017
Revenues, net
$
210,112

   
$
189,057

 
$
417,085

 
$
372,090

Cost of revenues(1)
139,649

   
123,734

 
277,750

 
242,806

Gross profit(1)
70,463

 
65,323

 
139,335

 
129,284

Operating expenses:

   

 
 
 
 
       General and administrative expenses
27,640

   
24,425

 
56,906

 
48,462

       Selling and marketing expenses
15,151

   
13,095

 
29,103

 
26,435

       Depreciation and amortization
10,582

   
9,535

 
21,086

 
18,907

Total operating expenses
53,373

 
47,055

 
107,095

 
93,804

Income from operations
17,090

   
18,268

 
32,240

 
35,480

Foreign exchange gain, net
1,414

   
886

 
2,029

 
1,268

Interest expense
(706
)
 
(465
)
 
(1,244
)
 
(897
)
Other income, net
2,232

   
2,512

 
5,766

 
5,698

Income before income tax expense
20,030

 
21,201

 
38,791

 
41,549

Income tax expense
5,510

 
823

 
1,057

 
4,383

Loss from equity-method investment
58

 

 
114

 

Net income attributable to ExlService Holdings, Inc. stockholders
$
14,462

 
$
20,378

 
$
37,620

 
$
37,166

Earnings per share attributable to ExlService Holdings, Inc. stockholders:
 
 
 
 
 
 
 
Basic
$
0.42

 
$
0.60

 
$
1.09

 
$
1.10

Diluted
$
0.41

 
$
0.58

 
$
1.07

 
$
1.06

Weighted-average number of shares used in computing earnings per share attributable to ExlService Holdings, Inc. stockholders:
 
   
 
 
 
 
 
Basic
34,511,777

   
33,819,320

 
34,479,202

 
33,833,153

Diluted
35,142,388

 
34,993,226

 
35,222,838

 
35,051,767


(1) Exclusive of depreciation and amortization.



See accompanying notes to unaudited consolidated financial statements.

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EXLSERVICE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME (UNAUDITED)
(In thousands)
 
Three months ended June 30,
 
Six months ended June 30,
 
2018

2017
 
2018
 
2017
Net income
$
14,462

 
$
20,378

 
$
37,620

 
$
37,166

Other comprehensive (loss)/income:
 
 
 
 
 
 
 
Unrealized (loss)/gain on effective cash flow hedges, net of taxes ($3,573), $1,536, ($4,373) and $3,580, respectively
(8,656
)
 
707

 
(12,870
)
 
7,692

Foreign currency translation (loss)/gain
(18,219
)
 
2,200

 
(26,030
)
 
13,843

Reclassification adjustments
 
 
 
 

 

Gain on cash flow hedges, net of taxes ($426), ($607), ($1,202) and ($891), respectively(1)
(1,041
)
 
(1,376
)
 
(2,936
)
 
(2,022
)
Retirement benefits, net of taxes ($3), $40, ($2) and $47, respectively(2)
(35
)
 
31

 
(75
)
 
93

Total other comprehensive (loss)/income
$
(27,951
)
 
$
1,562

 
$
(41,911
)
 
$
19,606

Total comprehensive (loss)/income
$
(13,489
)
 
$
21,940

 
$
(4,291
)
 
$
56,772


(1)
These are reclassified to net income and are included either in cost of revenues, or operating expenses, as applicable in the unaudited consolidated statements of income. Refer to Note 17 to the unaudited consolidated financial statements.
(2)
These are reclassified to net income and are included in other income, net in the unaudited consolidated statements of income. Refer to Note 20 to the unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

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EXLSERVICE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(In thousands, except share and per share amounts)

 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss)
 
Treasury Stock
 
Non - Controlling Interest
 
Total Equity
 
 
 
 
 
 
 
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
 
Balance as of December 31, 2017
36,790,751

 
$
37

 
$
322,246

 
$
427,064

 
$
(45,710
)
 
(2,902,018
)
 
$
(103,816
)
 
$
224

 
$
600,045

Impact of adoption of Topic 606

 

 

 
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 on exercise/vesting of equity awards
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




 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss)
 
Treasury Stock
 
Non - Controlling Interest
 
Total Equity
 
 
 
 
 
 
 
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
 
Balance as of December 31, 2016
35,699,819

 
$
36

 
$
284,646

 
$
382,722

 
$
(75,057
)
 
(2,071,710
)
 
$
(60,362
)
 
$
193

 
$
532,178

Impact of adoption of ASU 2016-09

 

 
5,999

 
(4,546
)
 

 

 

 

 
1,453

Balance as of January 1, 2017
35,699,819

 
$
36

 
$
290,645

 
$
378,176

 
$
(75,057
)
 
(2,071,710
)
 
$
(60,362
)
 
$
193

 
$
533,631

Stock issued on exercise/vesting of equity awards
552,609

 

 
1,778

 

 

 

 

 

 
1,778

Stock-based compensation

 

 
11,063

 

 

 

 

 

 
11,063

Acquisition of treasury stock

 

 

 

 

 
(488,987
)
 
(23,332
)
 

 
(23,332
)
Non-controlling interest

 

 

 

 

 

 

 
10

 
10

Other comprehensive income

 

 

 

 
19,606

 

 

 

 
19,606

Net income

 

 

 
37,166

 

 

 

 

 
37,166

Balance as of June 30, 2017
36,252,428

 
$
36

 
$
303,486

 
$
415,342

 
$
(55,451
)
 
(2,560,697
)
 
$
(83,694
)
 
$
203

 
$
579,922



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,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
37,620

 
$
37,166

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
21,279

 
19,063

Stock-based compensation expense
11,967

 
11,063

Unrealized gain on short term investments
(3,940
)
 
(2,246
)
Unrealized foreign exchange (gain)/loss
(7,782
)
 
1,643

Deferred income tax expense/(benefit)
543

 
(3,118
)
Allowances for doubtful accounts receivable
(590
)
 

Loss from equity-method investment
114

 

Others, net
123

 
27

Change in operating assets and liabilities:
 
 
 
Accounts receivable
(11,719
)
 
(9,775
)
Prepaid expenses and other current assets
(2,430
)
 
7,161

Accounts payable
(1,343
)
 
5,295

Deferred revenue
(199
)
 
(2,367
)
Accrued employee costs
(20,711
)
 
(11,612
)
Accrued expenses and other liabilities
2,753

 
(6,074
)
Advance income tax, net
(7,605
)
 
(1,117
)
Other assets
(4,287
)
 
(36
)
Net cash provided by operating activities
13,793

 
45,073

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(19,296
)
 
(20,447
)
Business acquisition (net of cash acquired)
(495
)
 

Purchase of investments
(40,663
)
 
(169,422
)
Proceeds from redemption of investments
60,811

 
39,475

Net cash provided by/(used for) investing activities
357

 
(150,394
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Principal payments on capital lease obligations
(83
)
 
(94
)
Proceeds from borrowings
12,000

 

Repayments of borrowings
(5,065
)
 

Acquisition of treasury stock
(23,136
)
 
(23,332
)
Proceeds from exercise of stock options
431

 
1,778

Net cash used for financing activities
(15,853
)
 
(21,648
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(2,582
)
 
1,579

Net decrease in cash, cash equivalents, and restricted cash
(4,285
)
 
(125,390
)
Cash, cash equivalents, and restricted cash at beginning of period
94,277

 
220,394

Cash, cash equivalents, and restricted cash at end of period
$
89,992

 
$
95,004



See accompanying notes to unaudited consolidated financial statements.

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Table of Contents

EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(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 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 United Kingdom (“U.K”)
2. Summary of Significant Accounting Policies
(a) Basis of Preparation and Principles of Consolidation
The unaudited consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles (“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, 2017.
The unaudited consolidated financial statements reflect all adjustments (of a normal and recurring nature) that management considers necessary for a fair presentation of such statements for the interim periods presented. The unaudited consolidated statements of income for the interim periods presented are not necessarily indicative of the results for the full year or for any subsequent period.
The accompanying unaudited consolidated financial statements include the financial statements of ExlService Holdings and all of its subsidiaries. The standalone financial statements of subsidiaries are fully consolidated on a line-by-line basis. Intra-group balances and transactions, and income and expenses arising from intra-group transactions, are eliminated while preparing those financial statements. The un-realized gains resulting from intra-group transactions are also eliminated. Similarly, the un-realized losses are eliminated, unless the transaction provides evidence as to impairment of the asset transferred.
Accounting policies of the respective individual subsidiary and associate are aligned, wherever necessary, so as to ensure consistency with the accounting policies that are adopted by the Company under US GAAP.
The Company’s investments in equity affiliates are initially recorded at cost and any excess cost over proportionate share of the fair value of the net assets of the investee at the acquisition date is recognized as goodwill. The proportionate share of net income or loss of the investee is recognized in the unaudited consolidated statements of income.
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 consists of the amount of such interest at the date of obtaining control over the subsidiary, and the non-controlling interest's share of changes in equity since that date. The non-controlling interest in the operations for all periods presented were insignificant and is included under general and administrative expenses 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, recoverability of service tax receivables, 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, depreciation and amortization periods, purchase price allocation, recoverability of long-term assets including goodwill and intangibles, and estimated costs to complete fixed price contracts.

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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2018
(In thousands, except share and per share amounts)


(c) Employee Benefits
Contributions to defined contribution plans are charged to the consolidated statements of income in the period in which services are rendered by the covered employees. Current service costs for defined benefit plans are accrued in the period to which they relate. 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 recognizes 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.
Effective January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2017-07, Compensation -Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post Retirement Benefit Cost. Pursuant to this, the Company retrospectively adopted the presentation of service cost separate from other components of net periodic costs for each period presented. The interest cost, expected return on plan assets and amortization of actuarial gains / loss, have been reclassified from “Cost of revenues”, “General and administrative expenses” and “Selling and marketing expenses” to “Other income, net”. Refer to 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 to Note 25 to the unaudited consolidated financial statements for details). These deposits with banks have maturity dates after June 30, 2019. Restricted cash presented under current assets represents funds held on behalf of clients in dedicated bank accounts.
Effective January 1, 2018, the Company adopted ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash. Pursuant to this adoption, for the purpose of unaudited statements of cash flows, the Company includes in its cash and cash-equivalent balances those amounts that have been classified as restricted cash and restricted cash equivalents for each period presented.
(e) Revenue Recognition
Revenue is recognized when services are provided to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for our services.
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, that are collected by the Company from a customer, are excluded from revenue.  
Adoption of ASU 2014-09 Topic 606, Revenue from Contracts with Customers (Topic 606)
On January 1, 2018, the date of initial application, the Company adopted Topic 606 using the modified retrospective method by recognizing the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of equity, resulting in an increase of $454, primarily due to new contract acquisition costs. The initial application scopes in those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with Company’s historical accounting under Topic 605. The key area impacted upon adoption of Topic 606 relates to the accounting for sales commissions costs. Specifically, under Topic 606 a portion of sales commissions costs have been recorded as an asset and recognized as an operating expense on a straight line basis over the life of the contract. Prior to adoption, the Company was expensing sales commission costs as incurred.


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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2018
(In thousands, except share and per share amounts)

Nature of services
The Company derives its revenues from operations management and analytics services. The Company operates in the business process management (“BPM”) industry providing operations management and analytics services helping businesses enhance revenue growth and improve profitability. The Company provides BPM or “operations management” services, which typically involve transfer to the Company of business operations of a client, after which it administers and manages those operations for its client on an ongoing basis. The Company also provides industry-specific digital transformational services related to operations management services, and analytics services that focus on driving improved business outcomes for clients by generating data-driven insights across all parts of their business.
Arrangements with 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 software and related services contracts, revenue is allocated to each performance obligation based on the relative standalone selling price.
A separate contract is generally drafted for each type of service sold, even if to the same customer. The typical length of a contract is 3 to 5 years.
Type of Contracts
i.
a) 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.
b) In respect of arrangements involving subcontracting, in part or whole of the assigned work, the Company evaluates revenues to be recognized under Accounting Standard Codification ("ASC") topic 606-10-55-36 and 37, “Principal versus agent considerations”.
ii.
Revenues for Company’s fixed-price contracts are recognized using the time-elapsed output method because the Company transfers control evenly during execution of its projects. Determining a measure of progress requires management to make judgments that affect the timing of revenue recognized. The Company regularly monitors its estimates for progress on completion of a project and records 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.
iii.
Revenues from the Company's software and related services contracts, which are not significant, are primarily related to 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 fees without any associated services are recognized upon delivery of the related incremental license.
The Company accrues revenues for services rendered between the last billing date and 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 client are presented as a part of contract assets as receivables.
The Company defers the revenues and related cost of revenue during the period while production set-ups are underway and recognize such revenues and costs ratably over the period during which the related services are expected to be performed. The deferred costs are limited to the amounts of the deferred revenues. Deferred revenue also includes the amount for which the services have been rendered but the other conditions of revenue recognition are not met, for example where the Company does not have the persuasive evidence of the arrangements.
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. Usual payment terms range between 30-60 days. The Company does not have any extended payment terms clauses in existing contracts. At times the Company does enter into fixed price contracts and software licenses involving significant implementation wherein the milestones are defined such that the

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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2018
(In thousands, except share and per share amounts)

Company can recover the costs with a reasonable margin. The payment terms do not have any linkage to segment or types of contracts, as they are defined for each contract separately.

Variable Consideration
Variability in the transaction price arises primarily due to service level agreements, cost of living adjustments, and pre-payment and volume discounts.
The Company considers its experience with similar transactions and expectations regarding the contract in estimating the amount of variable consideration that should be recognized during a period.
The Company believes that the expected value method is most appropriate for determining the variable consideration since the company has large number of contracts with similar nature of transactions/services.

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.

Practical expedients and exemptions
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

(f) Recent Accounting Pronouncements    
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, Leases (Topic 842), which requires the identification of arrangements that should be accounted for as leases. In general, 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 recording a right-of-use asset and lease obligation for all leases, whether operating or finance, while the income statement will reflect lease expense for operating leases and amortization and interest expense for finance leases. The balance sheet amount recorded for existing leases at the date of adoption of this ASU must be calculated using the applicable incremental borrowing rate. 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 its consolidated financial statements and the implementation approach to be used.
In June 2016, FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses, which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is to be deducted from the amortized cost of the financial asset(s) so as to present the net carrying value at the amount expected to be collected on the financial asset. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. 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 this guidance will have on its consolidated financial statements.
In June 2018, FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting. This ASU involves several aspects of the accounting for non-employee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services from non employees. The amendments in this ASU affect all entities that enter into share-based payment transactions for acquiring goods and services from non employees. This ASU is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year.  Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The adoption of this ASU is not expected to have any material effect on the Company’s consolidated financial statements.


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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2018
(In thousands, except share and per share amounts)

(g) Recently Adopted Accounting Pronouncements
In May 2014, FASB issued ASU No. 2014-09 (Topic 606) "Revenue from Contracts with Customers." Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605), and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method. Refer to Note 4 to the unaudited consolidated financial statements for details.
In August 2016, FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. The amendments apply to all entities that are required to present a statement of cash flows under Topic 230. The amendments are an improvement to US GAAP because they provide guidance for each of the eight issues, thereby reducing the current and potential future diversity in practice. The amendments are effective for fiscal years beginning after December 15, 2017 and interim periods within those annual periods and should be applied using a retrospective transition method to each period presented. The Company has adopted the guidance retrospectively to each period presented. The adoption does not have any material effect on the presentation of its unaudited consolidated statements of cash flows.
In November 2016, FASB issued ASU No. 2016-18, Statement of cash flows (Topic 230) - Restricted cash. The amendments apply 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 amendments in this update require that a statement of cash flows should explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The amendments are effective for fiscal years beginning after December 15, 2017 and interim periods within those annual periods and should be applied using a retrospective transition method to each period presented. Early adoption is permitted with an adjustment reflected as of the beginning of the fiscal year in which the amendment is adopted. The Company has adopted the guidance retrospectively to each period presented. The adoption does not have any material effect on the presentation of its unaudited consolidated statements of cash flows. Refer to Note 6 to the unaudited consolidated financial statements for details.
In January 2017, FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill 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. The ASU 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 has adopted the guidance effective January 1, 2018. The adoption does not have any material effect on its unaudited consolidated financial statements.
In March, 2017, FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost 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 other components of net benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, 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 and should be applied using a retrospective transition method to each period presented. The Company has adopted the guidance retrospectively to each period presented. Refer to Note 2(c) and Note 20 to the unaudited consolidated financial statements for details.
In May 2017, FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. 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 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 adoption date. The Company has adopted the guidance effective January 1, 2018. The adoption does not have any material effect on its unaudited consolidated financial statements.

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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2018
(In thousands, except share and per share amounts)

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 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 the business operations of a client, after which it administers and manages those operations for its client on an ongoing basis. The remaining two operating segments are Consulting, which provides industry-specific transformational services related to operations management services, and Analytics, which provides services that focus on driving improved business outcomes for clients by generating data-driven insights across all parts of their business.

The Company presents information for the following reportable segments:

Insurance
Healthcare
Travel, Transportation and Logistics (“TT&L”)
Finance and Accounting (“F&A”)
Analytics, and
All Other (consisting of the Company's remaining operating segments, which are the Banking and Financial Services, Utilities and Consulting operating segments).

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

The Company does not allocate and therefore the CODM does not evaluate 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 June 30, 2018 and 2017, respectively, for each of the reportable segments, are as follows:
 
 
Three months ended June 30, 2018
 
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.


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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2018
(In thousands, except share and per share amounts)

 
 
Three months ended June 30, 2017
 
Insurance
 
Healthcare
 
TT&L
 
F&A
 
All Other
 
Analytics
 
Total
 
 
Revenues, net
$
58,255

 
$
18,923

 
$
17,835

 
$
21,038

 
$
21,447

 
$
51,559

 
$
189,057

 
Cost of revenues(1)*
40,471

 
12,306

 
10,323

 
12,338

 
14,645

 
33,651

 
123,734

 
Gross profit(1)*
$
17,784

 
$
6,617

 
$
7,512

 
$
8,700

 
$
6,802

 
$
17,908

 
$
65,323

 
Operating expenses*
 
 
 
 
 
 
 
 
 
 
 
 
47,055

 
Foreign exchange gain, interest expense and other income, net*
 
 
 
 
 
 
 
 
 
 
 
 
2,933

 
Income tax expense
 
 
 
 
 
 
 
 
 
 
 
 
823

 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
$
20,378

(1) Exclusive of depreciation and amortization.

Revenues and cost of revenues for the six months ended June 30, 2018 and 2017, respectively, for each of the reportable segments, are as follows:
 
 
Six months ended June 30, 2018
 
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.

 
 
Six months ended June 30, 2017
 
Insurance
 
Healthcare
 
TT&L
 
F&A
 
All Other
 
Analytics
 
Total
 
 
Revenues, net
$
114,176

 
$
37,855

 
$
34,878

 
$
42,052

 
$
42,563

 
$
100,566

 
$
372,090

 
Cost of revenues(1)*
78,501

 
24,615

 
20,461

 
24,764

 
29,058

 
65,407

 
242,806

 
Gross profit(1)*
$
35,675

 
$
13,240

 
$
14,417

 
$
17,288

 
$
13,505

 
$
35,159

 
$
129,284

 
Operating expenses*
 
 
 
 
 
 
 
 
 
 
 
 
93,804

 
Foreign exchange gain, interest expense and other income, net*
 
 
 
 
 
 
 
 
 
 
 
 
6,069

 
Income tax expense
 
 
 
 
 
 
 
 
 
 
 
 
4,383

 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
$
37,166


(1) Exclusive of depreciation and amortization.


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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2018
(In thousands, except share and per share amounts)

*The Company early adopted ASU 2017-12, Derivative and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities. Pursuant to this adoption, effective January 1, 2017, the resultant foreign exchange gain/(loss) upon settlement of cash flow hedges are recorded along with the underlying hedged item in the same income statement line as either part of “Cost of revenues”, “General and administrative expenses”, “Selling and marketing expenses”, "Depreciation and Amortization”, as applicable. Refer to Note 17 to the unaudited consolidated financial statements for details.

Revenues, net of the Company by service type, were as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
BPM and related services(1)
$
150,494

 
$
137,498

 
$
300,365

 
$
271,524

Analytics services
59,618

 
51,559

 
116,720

 
100,566

Total
$
210,112

 
$
189,057

 
$
417,085

 
$
372,090


(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 segment disclosure above.

The Company attributes the revenues to regions based upon the location of its customers.
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenues, net
 
 
 
 
 
 
 
United States
$
174,087

 
$
153,894

 
$
345,285

 
$
304,175

Non-United States
 
 
 
 
 
 
 
          United Kingdom
27,480

 
28,951

 
55,496

 
55,033

          Rest of World
8,545

 
6,212

 
16,304

 
12,882

Total Non-United States
36,025

 
35,163

 
71,800

 
67,915

 
$
210,112

 
$
189,057

 
$
417,085

 
$
372,090


Property and equipment, net by geographic area, were as follows:
 
As of
 
June 30, 2018
 
December 31, 2017
Property and equipment, net
 
 
 
India
$
35,060

 
$
39,143

United States
21,182

 
16,371

Philippines
6,748

 
8,217

Rest of World
3,122

 
3,026

 
$
66,112

 
$
66,757


4. Revenues, net
Adoption of ASU 2014-09 Topic 606, Revenue from Contracts with Customers
On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method and applied its guidance to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under Topic 605.The Company recorded a net addition to opening equity of $454 as of January 1, 2018 due to the cumulative impact of adopting Topic 606, primarily due to contract acquisition costs.

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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2018
(In thousands, except share and per share amounts)

The adoption of Topic 606 did not have a significant impact on the measurement or recognition of revenues during the three and six months ended June 30, 2018.
Refer to 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 and contract liabilities from contracts with customers:
 
As of
June 30, 2018
 
December 31, 2017
Accounts receivable, net
$
147,099

 
$
135,705

Contract liabilities
 
 
 
     Deferred revenue (advance payments portion)
$
9,969

 
$
9,311


Accounts receivable includes $58,339 and $49,125 as of June 30, 2018 and December 31, 2017, 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 liabilities represents that portion of deferred revenue for which payments have been received in advance from customers and are included within current liabilities. Contract liabilities are recognized; as revenue as (or when) we perform under the contract.
Revenue recognized from the carrying value of contract liabilities as of December 31, 2017 during the three and six months ended June 30, 2018 was $2,671 and $6,381, respectively.
Contract acquisition costs
As of January 1, 2018, we capitalized $454 as contract acquisition costs related to contracts that were not completed. Further, we capitalized an additional nil and $672 during the three and six months ended June 30, 2018, 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 has deferred contract fulfillment costs relating to transition activities amounting to $3,058 and $2,769 as of June 30, 2018 and December 31, 2017, respectively. In addition, we capitalized an additional $65 and $685 during the three and six months ended June 30, 2018, respectively, and amortized $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 ratably over the period in which the related performance obligations are fulfilled.
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.

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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2018
(In thousands, except share and per share amounts)

The following table sets forth the computation of basic and diluted earnings per share:
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net income
$
14,462

 
$
20,378

 
$
37,620

 
$
37,166

Denominators:
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
34,511,777

 
33,819,320

 
34,479,202

 
33,833,153

Dilutive effect of share based awards
630,611

 
1,173,906

 
743,636

 
1,218,614

Diluted weighted average common shares outstanding
35,142,388

 
34,993,226

 
35,222,838

 
35,051,767

Earnings per share attributable to ExlService Holdings Inc. stockholders:
 
 
 
 
 
 
 
Basic
$
0.42

 
$
0.60

 
$
1.09

 
$
1.10

Diluted
$
0.41

 
$
0.58

 
$
1.07

 
$
1.06

Weighted average potentially dilutive shares considered anti-dilutive and not included in computing diluted earnings per share
336,599

 
2,893

 
242,561

 
227,941

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, 2018
 
June 30, 2017
Cash and cash equivalents
$
84,091

 
$
89,414

Restricted cash (current)
2,256

 
1,898

Restricted cash (non-current)
3,645

 
3,692

 
$
89,992

 
$
95,004

7. Other Income, net
Other income, net consists of the following:
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Interest and dividend income
$
329

 
$
323

 
$
637

 
$
995

Gain on sale of mutual funds
1,694

 
2,438

 
4,827

 
4,221

Others, net
209

 
(249
)
 
302

 
482

Other income, net
$
2,232

 
$
2,512

 
$
5,766

 
$
5,698


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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2018
(In thousands, except share and per share amounts)

8. Property and Equipment, net
Property and equipment, net consist of the following:

Estimated useful lives
 
As of
 
(Years)
 
June 30, 2018
 
December 31, 2017
Owned Assets:
 
 
 
 
 
Network equipment and computers
3-5
 
$
77,183

 
$
77,587

Software
3-5
 
63,827

 
59,325

Leasehold improvements
3-8
 
37,506

 
38,857

Office furniture and equipment
3-8
 
19,823

 
19,667

Motor vehicles
2-5
 
597

 
638

Buildings
30
 
1,162

 
1,245

Land
 
760

 
815

Capital work in progress
 
8,402

 
9,184

 
 
 
209,260

 
207,318

Less: Accumulated depreciation and amortization
 
 
(143,553
)
 
(141,059
)
 
 
 
$
65,707

 
$
66,259

Assets under capital leases:
 
 
 
 
 
Leasehold improvements
 
 
$
812

 
$
941

Office furniture and equipment
 
 
77

 
167

Motor vehicles
 
 
612

 
710

 
 
 
1,501

 
1,818

Less: Accumulated depreciation and amortization
 
 
(1,096
)
 
(1,320
)
 
 
 
$
405

 
$
498

Property and equipment, net
 
 
$
66,112

 
$
66,757

Capital work in progress represents advances paid towards acquisition of property and equipment and cost incurred to develop software not yet ready to be placed in service.
The depreciation and amortization expense excluding amortization of acquisition-related intangibles recognized in the unaudited consolidated statements of income was as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Depreciation and amortization expense
$
6,821

 
$
6,028

 
$
13,378

 
$
11,902

Effective January 1, 2017, the depreciation and amortization expenses set forth above includes the effect of foreign exchange gain upon settlement of cash flow hedges, amounting to $42 and $102 for the three months ended and $193 and $156 for the six months ended June 30, 2018 and 2017, respectively. Refer to Note 17 to the unaudited consolidated financial statements for further details.




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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2018
(In thousands, except share and per share amounts)

Internally developed software costs, included under Software, was as follows:
 
As of
 
June 30, 2018
 
December 31, 2017
Cost
$
7,625

 
$
2,571

Less : Accumulated amortization
1,448

 
976

 
$
6,177

 
$
1,595


9. Business Combinations, Goodwill and Intangible Assets
Health Integrated, Inc.
On December 22, 2017, a wholly owned subsidiary of the Company entered into an Asset Purchase Agreement to acquire substantially all the assets and assumed certain liabilities of Health Integrated, Inc. (“Health Integrated”), a company based in Tampa, Florida. The initial purchase price consisted of $22,577 in cash including working capital adjustment. The purchase agreement allows sellers the ability to earn up to $5,000 as earn-out, based on the achievement of certain performance goals by the acquired Health Integrated business during the 2018 calendar year. The earn-out was fair valued at $920 as of December 31, 2017. As of June 30, 2018 fair value of earn-out is Nil.
A portion of the purchase price otherwise payable was placed into escrow as security for the post-closing working capital adjustments and the indemnification obligations under the Asset Purchase Agreement.
Health Integrated provides dedicated care management services on behalf of health plans. Its services include case management, utilization management, disease management, special needs programs and multichronic care management. Health Integrated serves millions of lives in the Medicaid, Medicare, and dual eligible populations. It is known for its strong capabilities in improving member health status through behavioral change. Accordingly, the Company paid a premium for the acquisition, which is reflected in the goodwill recognized from the purchase price allocation. The acquisition of Health Integrated is included in the Healthcare reportable segment.
The Company finalized its purchase price allocation for the acquisition based on their fair values as set forth below:
 
 
Amount
Tangible Assets
 
$
5,475

Liabilities
 
(5,733
)
Identifiable Intangible Assets:
 
 
        Customer relationships
 
6,760

        Developed technology
 
1,510

        Trade names and trademarks
 
570

Goodwill
 
14,229

Total purchase price
 
$
22,811


The amount of goodwill recognized from the Health Integrated acquisition is deductible for tax purposes.

The customer relationships from the Health Integrated acquisition are being amortized over the weighted average useful life of 7.0 years and developed technology and trademarks are being amortized over the useful life of 1.0 year and 2.0 years, respectively.

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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2018
(In thousands, except share and per share amounts)

Goodwill
The following table sets forth details of the Company’s goodwill balance as of June 30, 2018:
 
Insurance
 
Healthcare
 
TT&L
 
F&A
 
All Other
 
Analytics
 
Total
Balance as at January 1, 2017
$
38,110

 
$
19,276

 
$
12,983

 
$
47,537

 
$
5,326

 
$
63,538

 
$
186,770

Acquisitions

 
15,957

 

 

 

 

 
15,957

Currency translation adjustments
223

 

 
696

 
835

 

 

 
1,754

Balance as at December 31, 2017
$
38,333

 
$
35,233

 
$
13,679

 
$
48,372

 
$
5,326

 
$
63,538

 
$
204,481

Measurement period adjustments*

 
(1,728
)
 

 

 

 

 
(1,728
)
Currency translation adjustments
(56
)
 

 
(780
)
 
(936
)
 

 

 
(1,772
)
Balance as at June 30, 2018
$
38,277

 
$
33,505

 
$
12,899

 
$
47,436

 
$
5,326

 
$
63,538

 
$
200,981


* Subsequent to December 31, 2017, adjustments of $1,728 have been made to the amounts of net tangible assets acquired and the earn-out with the corresponding offsets to goodwill. These adjustments are within the measurement period and have been accounted for prospectively. These adjustments did not have a significant impact on the Company’s unaudited consolidated statements of income, balance sheets or cash flows.

20

Table of Contents
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2018
(In thousands, except share and per share amounts)

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

As of June 30, 2018

Gross
Carrying Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Finite-lived intangible assets:


 


 


Customer relationships
$
82,063

 
$
(48,842
)
 
$
33,221

Leasehold benefits
2,694

 
(2,518
)
 
176

Developed technology
15,800

 
(10,657
)
 
5,143

Non-compete agreements
2,045

 
(1,861
)
 
184

Trade names and trademarks
5,945

 
(4,399
)
 
1,546

 
$
108,547

 
$
(68,277
)
 
$
40,270

Indefinite-lived intangible assets:
 
 
 
 
 
Trade names and trademarks
$
900

 
$

 
$
900

Total intangible assets
$
109,447

 
$
(68,277
)
 
$
41,170

 
As of December 31, 2017
 
Gross
Carrying Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Finite-lived intangible assets:
 
 
 
 
 
Customer relationships
$
82,165

 
$
(43,667
)
 
$
38,498

Leasehold benefits
2,888

 
(2,596
)
 
292

Developed technology
15,835

 
(8,749
)
 
7,086

Non-compete agreements
2,045

 
(1,780
)
 
265

Trade names and trademarks
5,951

 
(4,034
)
 
1,917

 
$
108,884

 
$
(60,826
)
 
$
48,058

Indefinite-lived intangible assets:
 
 
 
 
 
Trade names and trademarks
$
900

 
$

 
$
900

Total intangible assets
$
109,784

 
$
(60,826
)
 
$
48,958

The amortization expense for the period is as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Amortization expense
$
3,761

 
$
3,507

 
$
7,708

 
$
7,005

The remaining weighted average life of intangible assets is as follows:
 
(in years)
Customer relationships
5.13
Leasehold benefits
0.92
Developed technology
3.00
Non-compete agreements
1.22
Trade names and trademarks (Finite lived)
4.20

21

Table of Contents
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2018
(In thousands, except share and per share amounts)

Estimated amortization of intangible assets during the next twelve months ending June 30,
2019
$
13,815

2020
9,001

2021
4,359

2022
3,583

2023
3,065

2024 and thereafter
6,447

Total
$
40,270


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 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 months 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, 2018
 
December 31, 2017
Derivative instruments
$
4,787

 
$
10,938

Advances to suppliers
2,710

 
2,451

Receivables from statutory authorities
9,670

 
7,598

Others
5,835

 
8,595

Other current assets
$
23,002

 
$
29,582

12. Other assets
Other assets consist of the following:
 
As of
 
June 30, 2018

 
December 31, 2017

Lease deposits
$
8,522

 
$
8,776

Derivative instruments
1,128

 
7,361

Deposits with statutory authorities
6,378

 
6,492

Term deposits
9,015

 
6,909

Others
10,990

 
6,831

Other assets
$
36,033

 
$
36,369




22

Table of Contents
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2018
(In thousands, except share and per share amounts)

13. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consist of the following:
 
As of
 
June 30, 2018
 
December 31, 2017
Accrued expenses
$
43,440

 
$
43,235

Derivative instruments
4,390

 
555

Client liabilities
5,107

 
8,982

Other current liabilities
6,945

 
8,594

Accrued expenses and other current liabilities
$
59,882

 
$
61,366

14. Other non-current liabilities
Other non-current liabilities consist of the following:
 
As of
 
June 30, 2018
 
December 31, 2017
Derivative instruments
$
5,788

 
$
322

Unrecognized tax benefits
892

 
892

Deferred rent
7,632

 
8,176

Retirement benefits
3,363

 
3,377

Other non-current liabilities
1,155

 
3,435

Non-current liabilities
$
18,830

 
$
16,202


15. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of amortization of actuarial 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. Changes in the fair values of contracts are recognized in accumulated other comprehensive loss on the Company's consolidated balance sheet until the settlement of those contracts. The balances as of June 30, 2018 and December 31, 2017 are as follows:

 
As of
 
June 30, 2018
 
December 31, 2017
Cumulative foreign currency translation (loss)
$
(84,435
)
 
$
(58,405
)
Unrealized (loss)/gain on cash flow hedges, net of taxes of ($657) and $4,918, respectively
(3,874
)
 
11,932

Retirement benefits, net of taxes of ($76) and ($74), respectively
688

 
763

Accumulated other comprehensive loss
$
(87,621