ExlService Holdings, Inc.
ExlService Holdings, Inc. (Form: 10-Q, Received: 07/27/2017 16:41:56)

Table of Contents

 
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, 2017
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, 38 TH 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
 
¨   (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
As of July 25, 2017 , there were 33,742,121 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.
 
 
 

2


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, 2017
 
December 31, 2016
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
89,414

 
$
213,155

Short-term investments
147,915

 
13,491

Restricted cash
1,898

 
3,846

Accounts receivable, net
123,798

 
113,067

Prepaid expenses
9,454

 
7,855

Advance income tax, net
7,337

 
6,242

Other current assets
18,784

 
21,168

Total current assets
398,600

 
378,824

Property, plant and equipment, net
63,978

 
49,029

Restricted cash
3,692

 
3,393

Deferred taxes, net
13,959

 
14,799

Intangible assets, net
46,973

 
53,770

Goodwill
188,154

 
186,770

Other assets
32,075

 
19,943

Total assets
$
747,431

 
$
706,528

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
11,661

 
$
3,288

Short-term borrowings
10,000

 
10,000

Deferred revenue
14,189

 
16,615

Accrued employee cost
39,135

 
50,832

Accrued expenses and other current liabilities
40,845

 
43,264

Current portion of capital lease obligations
203

 
232

Total current liabilities
116,033

 
124,231

Long term borrowings
35,000

 
35,000

Capital lease obligations, less current portion
310

 
300

Non-current liabilities
16,166

 
14,819

Total liabilities
167,509

 
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, 36,252,428 shares issued and 33,691,731 shares outstanding as of June 30, 2017 and 35,699,819 shares issued and 33,628,109 shares outstanding as of December 31, 2016
36

 
36

Additional paid-in capital
303,486

 
284,646

Retained earnings
415,342

 
382,722

Accumulated other comprehensive loss
(55,451
)
 
(75,057
)
Total including shares held in treasury
663,413

 
592,347

Less: 2,560,697 shares as of June 30, 2017 and 2,071,710 shares as of December 31, 2016, held in treasury, at cost
(83,694
)
 
(60,362
)
Stockholders' equity
$
579,719

 
$
531,985

Non-controlling interest
203

 
193

Total equity
$
579,922

 
$
532,178

Total liabilities and equity
$
747,431

 
$
706,528

See accompanying notes to unaudited consolidated financial statements.

3



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

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

2017
 
2016
 
2017
 
2016
Revenues, net
$
189,057

   
$
170,478

 
$
372,090

 
$
337,514

Cost of revenues (exclusive of depreciation and amortization)
125,449

   
112,026

 
245,568

 
220,405

Gross profit
63,608

 
58,452

 
126,522

 
117,109

Operating expenses:

   

 
 
 

General and administrative expenses
24,715

   
21,148

 
48,939

 
41,766

Selling and marketing expenses
13,127

   
12,798

 
26,489

 
26,252

Depreciation and amortization
9,637

   
8,270

 
19,063

 
16,403

Total operating expenses
47,479

 
42,216

 
94,491

 
84,421

Income from operations
16,129

   
16,236

 
32,031

 
32,688

Foreign exchange gain, net
2,898

   
1,363

 
4,466

 
1,832

Interest expense
(465
)
 
(343
)
 
(897
)
 
(728
)
Other income, net
2,639

   
6,127

 
5,949

 
9,306

Income before income tax expense
21,201

 
23,383

 
41,549

 
43,098

Income tax expense
823

   
7,008

 
4,383

 
12,903

Net income
$
20,378

 
$
16,375

 
$
37,166

 
$
30,195

Earnings per share:
 
   
 
 
 
 
 
Basic
$
0.60

   
$
0.49

 
$
1.10

 
$
0.90

Diluted
$
0.58

 
$
0.47

 
$
1.06

 
$
0.88

Weighted-average number of shares used in computing earnings per share:
 
 
 
 
 
 
 
Basic
33,819,320

   
33,621,444

 
33,833,153

 
33,500,736

Diluted
34,993,226

   
34,510,400

 
35,051,767

 
34,431,028

See accompanying notes to unaudited consolidated financial statements.

4



EXLSERVICE HOLDINGS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 
Three months ended June 30,
 
Six months ended June 30,
 
2017

2016
 
2017
 
2016
Net income
$
20,378

 
$
16,375

 
$
37,166

 
$
30,195

   Other comprehensive income:

 

 

 

Unrealized (loss)/gain on effective cash flow hedges, net of taxes $1,085, ($376), $3,036 and $27, respectively
(315
)
 
(1,508
)
 
6,457

 
526

Foreign currency translation adjustment
2,200

 
(5,401
)
 
13,843

 
(4,368
)
Retirement benefits, net of taxes nil, $15, nil and $20, respectively

 
123

 

 
305

Reclassification adjustments

 

 

 

Realized gain on cash flow hedges, net of taxes ($156), ($156), ($347) and ($181), respectively (1)
(354
)
 
(193
)
 
(787
)
 
(225
)
Retirement benefits, net of taxes $40, $1, $47 and $2, respectively (2)
31

 
21

 
93

 
42

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

 
$
(6,958
)
 
$
19,606

 
$
(3,720
)
Total comprehensive income
$
21,940

 
$
9,417

 
$
56,772

 
$
26,475


(1)
These are reclassified to net income and are included in the foreign exchange gain in the unaudited consolidated statements of income. See Note 13 to the unaudited consolidated financial statements.
(2)
These are reclassified to net income and are included in the computation of net periodic pension costs in the unaudited consolidated statements of income. See Note 16 to the unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

5




EXLSERVICE HOLDINGS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

Six months ended June 30,

2017
 
2016
Cash flows from operating activities:

 

Net income
$
37,166

 
$
30,195

Adjustments to reconcile net income to net cash provided by operating activities:

 

Depreciation and amortization
19,063

 
16,403

Stock-based compensation expense
11,063

 
10,259

Unrealized gain on short term investments
(2,246
)
 
(2,984
)
Change in fair value of earn-out consideration

 
(4,060
)
Unrealized foreign exchange loss/(gain)
1,643

 
(42
)
Deferred income tax (benefit)/expense
(3,118
)
 
3,607

Others, net
27

 
(67
)
Change in operating assets and liabilities:

 

Restricted cash
1,828

 
314

Accounts receivable
(9,775
)
 
(19,621
)
Prepaid expenses and other current assets
7,161

 
(1,177
)
Accounts payable
5,295

 
(1,427
)
Deferred revenue
(2,367
)
 
4,996

Accrued employee costs
(11,612
)
 
(10,282
)
Accrued expenses and other liabilities
(6,074
)
 
4,413

Advance income tax, net
(1,117
)
 
(3,179
)
Other assets
(36
)
 
(433
)
Net cash provided by operating activities
46,901

 
26,915



 

Cash flows from investing activities:

 

Purchase of property, plant and equipment
(20,447
)
 
(14,872
)
Purchase of investments
(169,422
)
 
(132,275
)
Proceeds from redemption of investments
39,475

 
41,179

Net cash used for investing activities
(150,394
)
 
(105,968
)



 


Cash flows from financing activities:


 


Principal payments on capital lease obligations
(94
)
 
(240
)
Repayments of borrowings

 
(25,000
)
Acquisition of treasury stock
(23,332
)
 
(9,704
)
Proceeds from exercise of stock options
1,778

 
4,195

Net cash used for financing activities
(21,648
)
 
(30,749
)
Effect of exchange rate changes on cash and cash equivalents
1,400

 
(2,408
)
Net decrease in cash and cash equivalents
(123,741
)
 
(112,210
)
Cash and cash equivalents, beginning of period
213,155

 
205,323

Cash and cash equivalents, end of period
$
89,414

 
$
93,113



See accompanying notes to unaudited consolidated financial statements.

6



EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(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 (collectively, the “Company”), operates in the Business Process Management (“BPM”) industry providing operations management services and analytics services that help businesses enhance growth and profitability. Using its proprietary platforms, methodologies and tools, the Company looks deeper to help its clients improve global operations, enhance data-driven insights, increase customer satisfaction, and manage risk and compliance. The Company’s clients are located principally in the U.S. and the 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 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.
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 balances and transactions have been eliminated in consolidation.
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 the periods presented were insignificant and are 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 estimates 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:

7

EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2017
(In thousands, except share and per share amounts)

Income taxes  - Upon adoption 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 they occur. The Company also recognizes excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. As a result, the Company recognized discrete adjustments to income tax expense for the three months ended June 30, 2017 in the amount of  $1,624 and for the six months ended June 30, 2017 in the amount of $3,681 related to excess tax benefits. No adjustment is recorded for any windfall benefits previously recorded in APIC.

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.

Upon adoption, no other aspects of ASU 2016-09 had an effect on the Company's unaudited consolidated financial statements or related footnote disclosures.

(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”. The new standard is effective for reporting periods beginning after December 15, 2017 and early adoption is not permitted. The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services. Adoption of the new rules could affect the timing of revenue recognition for certain transactions of the Company. ASU 2014-09 is effective for the Company in the first quarter 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.

The Company is evaluating the impact of the new standard. 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 to, the terms of the contractual arrangements and the mix of business. Upon adoption, we expect there to be a change in the manner that variable consideration in certain revenue arrangements is recognized from the current practice of recognizing such revenue as the services are performed and the variable consideration is earned to estimating the achievability of the variable conditions when we begin delivering services and recognizing that amount over the contractual period. The Company also expects a change in the manner that it recognizes certain incremental and fulfillment costs from expensing them as incurred to deferring and recognizing them over the contractual period.

The Company continues to evaluate the available transition methods and its contractual arrangements. The Company's considerations include, but are not limited to, the comparability of its financial statements and the comparability within its industry from application of the new standard to its contractual arrangements. The Company plans to select a transition method by the second half of 2017. The Company has established an implementation team to implement the standard update related 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.

8

EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2017
(In thousands, except share and per share amounts)

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). ASU 2016-08 clarifies 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 service before it is transferred to the customers. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently evaluating the impact that the adoption 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 that should be accounted for as leases by lessees. In general, for lease arrangements exceeding a twelve month term, these arrangements must now be recognized as assets and liabilities on the balance sheet of the lessee. Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all leases, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. The balance sheet amount recorded for existing leases at 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. 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 2016-13, Financial Instruments - Credit Losses, which require 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) 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 adoption of ASU 2016-13 is not expected to have a material effect on the Company's consolidated financial statements.

In August 2016, FASB issued ASU 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 GAAP because they provide guidance for each of eight issues identified therein, 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 does not expect the adoption of this ASU to have a material effect on its financial position or results of operations.

In November 2016, FASB issued ASU 2016-18, Statement of Cash Flows - 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. Early adoption is permitted with an adjustment reflected as of the beginning of the fiscal year in which the amendment is adoption. The Company does not expect the adoption of this ASU to have a material effect on its financial position or results of operations.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), 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. ASU 2017-04 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 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

9

EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 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, 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. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

In May 2017, FASB issued ASU 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 is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

10

EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2017
(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, which the Company organizes 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 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 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, the Company presents 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 the banking and financial services, utilities and consulting operating segments have been included in a category called “All Other”. 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.

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.

11

EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2017
(In thousands, except share and per share amounts)

Revenues and cost of revenues for the three months ended June 30, 2017 and 2016, respectively, for each of the reportable segments, are as follows:
 
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 (exclusive of depreciation and amortization)
40,976

 
12,250

 
10,473

 
12,955

 
14,697

 
34,098

 
125,449

Gross profit
$
17,279

 
$
6,673

 
$
7,362

 
$
8,083

 
$
6,750

 
$
17,461

 
$
63,608

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
47,479

Foreign exchange gain, interest expense and other income, net
 
 
 
 
 
 
 
 
 
 
 
 
5,072

Income tax expense
 
 
 
 
 
 
 
 
 
 
 
 
823

Net income
 
 
 
 
 
 
 
 
 
 
 
 
$
20,378


 
 
Three months ended June 30, 2016
 
 
Insurance
 
Healthcare
 
TT&L
 
F&A
 
All Other
 
Analytics
 
Total
 
 
Revenues, net
$
50,597

 
$
17,442

 
$
17,545

 
$
19,284

 
$
26,001

 
$
39,609

 
$
170,478

 
Cost of revenues (exclusive of depreciation and amortization)
36,451

 
11,008

 
10,801

 
11,929

 
16,293

 
25,544

 
112,026

 
Gross profit
$
14,146

 
$
6,434

 
$
6,744

 
$
7,355

 
$
9,708

 
$
14,065

 
$
58,452

 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
42,216

 
Foreign exchange gain, interest expense and other income, net
 
 
 
 
 
 
 
 
 
 
 
 
7,147

 
Income tax expense
 
 
 
 
 
 
 
 
 
 
 
 
7,008

 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
$
16,375


12

EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2017
(In thousands, except share and per share amounts)

Revenues and cost of revenues for the six months ended June 30, 2017 and 2016, respectively, for each of the reportable segments, are as follows:
 
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 (exclusive of depreciation and amortization)
79,305

 
24,436

 
20,697

 
25,853

 
29,141

 
66,136

 
245,568

Gross profit
$
34,871

 
$
13,419

 
$
14,181

 
$
16,199

 
$
13,422

 
$
34,430

 
$
126,522

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
94,491

Foreign exchange gain, interest expense and other income, net
 
 
 
 
 
 
 
 
 
 
 
 
9,518

Income tax expense
 
 
 
 
 
 
 
 
 
 
 
 
4,383

Net income
 
 
 
 
 
 
 
 
 
 
 
 
$
37,166


 
 
Six months ended June 30, 2016
 
 
Insurance
 
Healthcare
 
TT&L
 
F&A
 
All Other
 
Analytics

Total
 
 
Revenues, net
$
98,895

 
$
33,830

 
$
35,104

 
$
39,103

 
$
52,007

 
$
78,575

 
$
337,514

 
Cost of revenues (exclusive of depreciation and amortization)
70,719

 
21,553

 
21,264

 
23,373

 
33,181

 
50,315

 
220,405

 
Gross profit
$
28,176

 
$
12,277

 
$
13,840

 
$
15,730

 
$
18,826

 
$
28,260

 
$
117,109

 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
84,421

 
Foreign exchange gain, interest expense and other income, net
 
 
 
 
 
 
 
 
 
 
 
 
10,410

 
Income tax expense
 
 
 
 
 
 
 
 
 
 
 
 
12,903

 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
$
30,195

Net revenues of the Company by service type, were as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
BPM and related services (1)
$
137,498

 
$
130,869

 
$
271,524

 
$
258,939

Analytics services
51,559

 
39,609

 
100,566

 
78,575

Total
$
189,057

 
$
170,478

 
$
372,090

 
$
337,514


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


13

EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2017
(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,
 
2017
 
2016
 
2017
 
2016
Revenues, net
 
 
 
 
 
 
 
United States
$
153,894

 
$
136,151

 
$
304,175

 
$
270,225

Non-United States
 
 
 
 
 
 
 
United Kingdom
28,951

 
28,863

 
55,033

 
56,291

Rest of World
6,212

 
5,464

 
12,882

 
10,998

Total Non-United States
35,163

 
34,327

 
67,915

 
67,289

 
$
189,057

 
$
170,478

 
$
372,090

 
$
337,514


Property, plant and equipment by geographic area, were as follows:
 
As of
 
June 30, 2017
 
December 31, 2016
Property, plant and equipment, net
 
 
 
India
$
38,576

 
$
23,362

United States
12,890

 
10,809

Philippines
9,736

 
11,900

Rest of World
2,776

 
2,958

 
$
63,978

 
$
49,029

4. 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 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,
 
2017
 
2016
 
2017
 
2016
Numerators:
 
 
 
 
 
 
 
Net income
$
20,378

 
$
16,375

 
$
37,166

 
$
30,195

Denominators:
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
33,819,320

 
33,621,444

 
33,833,153

 
33,500,736

Dilutive effect of share based awards
1,173,906

 
888,956

 
1,218,614

 
930,292

Diluted weighted average common shares outstanding
34,993,226

 
34,510,400

 
35,051,767

 
34,431,028

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.60

 
$
0.49

 
$
1.10

 
$
0.90

Diluted
$
0.58

 
$
0.47

 
$
1.06

 
$
0.88

Weighted average common shares considered anti-dilutive in computing diluted earnings per share
2,893

 
59,455

 
227,941

 
130,103




14

EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2017
(In thousands, except share and per share amounts)

5. Other Income, net
Other income, net consists of the following:

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

2017
 
2016
 
2017
 
2016
Interest and dividend income
$
323

 
$
375

 
$
995

 
$
853

Gain on mutual fund investments
2,438

 
1,886

 
4,221

 
3,630

Change in fair value of earn-out consideration

 
3,810

 

 
4,060

Other, net
(122
)
 
56

 
733

 
763

Other income, net
$
2,639

 
$
6,127

 
$
5,949

 
$
9,306


6. Property, Plant and Equipment
Property, Plant and Equipment consist of the following:
 
Estimated useful lives
 
As of

(Years)
 
June 30, 2017
 
December 31, 2016
Owned Assets:

 

 

Network equipment and computers
3-5
 
$
73,158

 
$
65,381

Software
3-5
 
56,513

 
44,617

Leasehold improvements
3-8
 
36,176

 
31,192

Office furniture and equipment
3-8
 
17,241

 
15,426

Motor vehicles
2-5
 
695

 
580

Buildings
30
 
1,232

 
1,171

Land
 
806

 
766

Capital work in progress
 
9,141

 
4,964



 
194,962

 
164,097

Less: Accumulated depreciation and amortization

 
(131,519
)
 
(115,568
)


 
$
63,443

 
$
48,529

Assets under capital leases:

 

 

Leasehold improvements

 
$
898

 
$
854

Office furniture and equipment

 
140

 
133

Motor vehicles

 
775

 
810



 
1,813

 
1,797

Less: Accumulated depreciation and amortization

 
(1,278
)
 
(1,297
)


 
$
535

 
$
500

Property, Plant and Equipment, net

 
$
63,978

 
$
49,029

Depreciation and amortization expense excluding amortization of acquisition-related intangibles for the three months ended June 30, 2017 and 2016 was $6,130 , and $5,552 , respectively and for the six months ended June 30, 2017 and 2016 was $12,058 and $10,970 respectively. Internally generated software development costs, both as of June 30, 2017 and December 31, 2016, were $2,242 and is included under Software. Accumulated amortization expense for these capitalized software development costs as of June 30, 2017 and December 31, 2016 were $635 and $336 , respectively.

15

EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2017
(In thousands, except share and per share amounts)

Capital work in progress represents advances paid towards acquisition of property, plant and equipment and cost of property, plant and equipment and internally generated software costs not yet ready to be placed in service.
7. Goodwill and Intangible Assets
Goodwill
The following table sets forth details of the Company’s goodwill balance as of June 30, 2017 :
 
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

Acquisitions

 

 

 

 

 

 

Currency translation adjustments
130

 

 
570

 
684

 

 

 
1,384

Balance as at June 30, 2017
$
38,240

 
$
19,276

 
$
13,553

 
$
48,221

 
$
5,326

 
$
63,538

 
$
188,154


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

As of June 30, 2017

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


 


 


Customer relationships
$
75,324

 
$
(38,316
)
 
$
37,008

Leasehold benefits
2,857

 
(2,466
)
 
391

Developed technology
14,267

 
(7,605
)
 
6,662

Non-compete agreements
2,045

 
(1,693
)
 
352

Trade names and trademarks
5,372

 
(3,712
)
 
1,660

 
$
99,865

 
$
(53,792
)
 
$
46,073

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

 
$

 
$
900

Total intangible assets
$
100,765

 
$
(53,792
)
 
$
46,973


16

EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2017
(In thousands, except share and per share amounts)

 
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

Amortization expense for the three months ended June 30, 2017 and 2016 was $3,507 and $2,718 , respectively, and for the six months ended June 30, 2017 and 2016 was $7,005 and $5,433 , respectively. The remaining weighted average life of intangible assets was 5.5 years for customer relationships, 1.9 years for leasehold benefits, 4.5 years for developed technology, 2.0 years for non-compete agreements and 5.3 years for trade names and trademarks excluding indefinite life trade names and trademarks.
Estimated amortization of intangible assets during the next twelve months ending June 30,
2018
$
13,113

2019
12,050

2020
7,775

2021
3,288

2022 and thereafter
9,847

Total
$
46,073

8. Other current assets
Other current assets consists of the following:
 
As of
 
June 30, 2017
 
December 31, 2016
Derivative instruments
$
8,826

 
$
3,324

Advances to suppliers
1,601

 
1,091

Receivables from statutory authorities
4,787

 
11,870

Others
3,570

 
4,883

Other current assets
$
18,784

 
$
21,168






17

EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2017
(In thousands, except share and per share amounts)

9. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consists of the following:
 
As of
 
June 30, 2017
 
December 31, 2016
Accrued expenses
$
30,560

 
$
30,690

Derivative instruments
1,315

 
1,430

Client liability account
2,031

 
4,005

Others
6,939

 
7,139

Accrued expenses and other current liabilities
$
40,845

 
$
43,264

10. Non-current liabilities
Non-current liabilities consists of the following:
 
As of
 
June 30, 2017
 
December 31, 2016
Derivative instruments
$
1,421

 
$
828

Unrecognized tax benefits
692

 
3,640

Deferred rent
7,855

 
7,237

Retirement benefits
2,779

 
1,977

Others
3,419

 
1,137

Non-current liabilities
$
16,166

 
$
14,819


11. 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 “Derivatives and Hedging” (“ASC No. 815”) . Changes in the fair values of contracts that are deemed effective are recorded as a component of accumulated other comprehensive loss until the settlement of those contracts. The balances as of June 30, 2017 and December 31, 2016 are as follows:

 
As of
 
June 30, 2017
 
December 31, 2016
Cumulative currency translation adjustments
$
(63,456
)
 
$
(77,299
)
Unrealized gain on cash flow hedges, net of taxes of $3,896 and $1,207
8,410

 
2,740

Retirement benefits, net of taxes of ($295) and ($342)
(405
)
 
(498
)
Accumulated other comprehensive loss
$
(55,451
)
 
$
(75,057
)
12. 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 June 30, 2017 and December 31, 2016 . The table excludes accounts receivable, accounts payable and accrued expenses for which fair values approximate their carrying amounts.

18

EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2017
(In thousands, except share and per share amounts)

As of June 30, 2017
Level 1
 
Level 2
 
Level 3
 
Total
Assets

 

 

 

Money market and mutual funds*
$
132,725

 
$

 
$

 
$
132,725

Derivative financial instruments

 
15,731

 

 
15,731

Total
$
132,725

 
$
15,731

 
$

 
$
148,456

Liabilities

 

 

 

Derivative financial instruments
$

 
$
2,736

 
$

 
$
2,736

Total
$

 
$
2,736

 
$

 
$
2,736



 

 

 

As of December 31, 2016
Level 1
 
Level 2
 
Level 3
 
Total
Assets

 

 

 

Money market and mutual funds
$

 
$

 
$

 
$

Derivative financial instruments

 
6,318

 

 
6,318

Total
$

 
$
6,318

 
$

 
$
6,318

Liabilities

 

 

 

Derivative financial instruments
$

 
$
2,258

 
$

 
$
2,258

Total
$

 
$
2,258

 
$

 
$
2,258

 
 
 
 
 
* Represents short-term investments carried on fair value option under ASC 825 "Financial Instruments" as of June 30, 2017.
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 Note 13 to our unaudited consolidated financial statements contained herein for further details on Derivatives and Hedge Accounting.
13. 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 foreign exchange forward contracts that are designated effective and that qualify as cash flow hedges under ASC 815. The Company had outstanding cash flow hedges totaling $308,046 as of June 30, 2017 and $218,545 as of December 31, 2016. The fair value of these cash flow hedges is included in the other comprehensive loss on the Company's unaudited consolidated balance sheet.
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. The Company’s primary exchange rate exposure is with the Indian Rupee, the U.K. pound sterling and the Philippine peso. The Company also has exposure to Colombian pesos, Czech Koruna, Euro, South African ZAR and other local currencies in which it operates. Outstanding foreign currency forward contracts amounted to $86,766 and GBP 17,125 as of June 30, 2017 and amounted to $64,497 and GBP 17,974 as of December 31, 2016.
The Company estimates that approximately $7,293 of net derivative gains included in accumulated other comprehensive loss (“AOCL”) could be reclassified into earnings within the next twelve months based on exchange rates prevailing as of June 30, 2017 . At June 30, 2017 , the maximum outstanding term of the cash flow hedges was 45 months.

19

EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2017
(In thousands, except share and per share amounts)

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 months ended June 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:
 
As of
 
June 30, 2017
 
December 31, 2016
Other current assets:
 
 
 
Foreign currency exchange contracts
$
8,608

 
$
3,211

Other assets:
 
 
 
Foreign currency exchange contracts
$
6,905

 
$
2,994

Accrued expenses and other current liabilities:
 
 
 
Foreign currency exchange contracts
$
1,315

 
$
1,430

Non-current liabilities:
 
 
 
Foreign currency exchange contracts
$
1,421

 
$
828

Derivatives not designated as hedging instruments:
 
As of
 
June 30, 2017
 
December 31, 2016
Other current assets:
 
 
 
Foreign currency exchange contracts
$
218

 
$
113

The following tables set forth the effect of foreign currency exchange contracts on the unaudited consolidated statements of income for the three and six months ended June 30, 2017 and 2016 :
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
  
2016
 
2017
  
2016
Derivatives in Cash flow hedging relationship
 
 
 
 
 
 
 
Gain/(loss) recognized in AOCL on derivative - Effective portion
$
770

 
$
(1,884
)
 
$
9,493

 
$
553

Gain/(loss) reclassified from AOCL to foreign exchange gain/(loss) - Effective portion
$
510

 
$
349

 
$
1,134

 
$
406

Gain/(loss) recognized in foreign exchange gain/(loss) - Ineffective portion
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
Gain/(loss) recognized in foreign exchange gain/(loss)
$
151

 
$
999

 
$
2,773

 
$
2,728



20

EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2017
(In thousands, except share and per share amounts)

14. Borrowings
The Company has a revolving credit facility (the “Credit Facility”), including a letter of credit sub-facility, in the amount of $100,000 . The Credit Facility has a maturity date of October 24, 2019 and is voluntarily pre-payable from time to time without premium or penalty.
Borrowings under the Credit Facility may be used for working capital, general corporate purposes and for acquisitions. The amount outstanding as of June 30, 2017 is $45,000 , of which $10,000 is expected to be repaid within the next twelve months and is included under “short-term borrowings” in the unaudited consolidated balance sheets. The Credit Facility carried an effective interest rate of 2.7% per annum and 2.0% per annum, during the three months ended June 30, 2017 and 2016, respectively, and for the six months ended June 30, 2017 and 2016 was 2.6% per annum and 2.1% per annum, respectively.
In connection with the financing, 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. The unamortized debt issuance costs as of June 30, 2017 and December 31, 2016 was $224 and $272 , respectively, and is included under "other current assets" and "other assets" in the unaudited consolidated balance sheets.
The Credit Facility is guaranteed by the Company's domestic subsidiaries and material foreign subsidiaries and is secured by all or substantially all of the assets of the Company and its material domestic subsidiaries. The Credit Agreement 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) or the leverage ratio (total funded indebtedness to EBITDA), for the four consecutive quarter period ending on the last day of each fiscal quarter, to be less than 3.5 to 1.0 or 2.5 to 1.0, respectively. As of June 30, 2017, the Company was in compliance with the financial covenants listed above.
15. Capital Structure
Common Stock
The Company has one class of common stock outstanding.
During the three months ended June 30, 2017 and 2016 , the Company acquired 2,219 and 1,479 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 $103 and $76 , respectively. The weighted average purchase price per share of $46.51 and $51.39 , 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.
During the six months ended June 30, 2017 and 2016, the Company acquired 65,003 and 16,027 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 and $728 , respectively. The weighted average purchase price per share of $46.40 and $45.44 , 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 through 2017 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 amount of $100,000 . The approval increases 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 six months ended June 30, 2017 , the Company purchased 230,022 and 423,984 shares of its common stock, respectively, for an aggregate purchase price of approximately $11,316 and $20,316 , respectively, including commissions, representing an average purchase price per share of $49.20 and $47.92 , respectively, under the 2014 and 2017 Repurchase Program.

21

EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2017
(In thousands, except share and per share amounts)

During the three and six months ended June 30, 2016, the Company purchased 56,172 and 194,810 shares of its common stock, respectively, for an aggregate purchase price of approximately $2,773 and $8,975 , respectively, including commissions, representing an average purchase price per share of $49.37 and $46.07 , respectively, under the 2014 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. 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.    
Net gratuity cost includes the following components:
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Service cost
$
494

 
$
401

 
$
978

 
$
801

Interest cost
166

 
150

 
328

 
299

Expected return on plan assets
(111
)
 
(104
)
 
(218
)
 
(208
)
Amortization of Actuarial loss
71

 
22

 
140

 
44

Net gratuity cost
$
620

 
$
469

 
$
1,228

 
$
936

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. 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% on these Gratuity Plans for the period ended June 30, 2017.
Change in Plan Assets
 
 
Plan assets at January 1, 2017
 
$
5,640

  Actual return
 
206

  Employer contribution
 
1,685

  Benefits paid
 
(604
)
  Effect of exchange rate changes
 
312

Plan assets at June 30, 2017
 
$
7,239

The Company maintains several 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 to the 401(k) plans amounting to $496 and $475 were made during the three months ended June 30, 2017 and 2016, respectively, and $1,564 and $1,391 during the six months ended June 30, 2017 and 2016, respectively.

22

EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2017
(In thousands, except share and per share amounts)

During the three months ended June 30, 2017 and 2016 , the Company contributed $1,792 and $1,566 , respectively, and during the six months ended June 30, 2017 and 2016, the Company contributed $3,505 and $3,048 , 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.
17. Leases
The Company finances its use of certain motor vehicles under various lease arrangements provided by financial institutions. Future minimum lease payments under these capital leases as of June 30, 2017 are as follows:
During the next twelve months ending June 30,

2018
$
259

2019
180

2020
134

2021
49

Total minimum lease payments
622

Less: amount representing interest
109

Present value of minimum lease payments
513

Less: current portion
203

Long term capital lease obligation
$
310


The Company conducts its operations using facilities leased under non-cancelable operating lease agreements that expire at various dates. Future minimum lease payments under non-cancelable agreements expiring after June 30, 2017 are set forth below:
During the next twelve months ending June 30,

2018
$
10,834

2019
9,301

2020
5,055

2021
3,403

2022
1,119

2023 and thereafter
1,105


$
30,817

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 the non-cancelable lease period determined under ASC topic 840, “Leases”. Rent expense under both cancelable and non-cancelable operating leases was $6,139 and $5,278 for the three months ended June 30, 2017 and 2016 , respectively and $11,806 and $10,426 , respectively for the six months ended June 30, 2017 and 2016. Deferred rent as of June 30, 2017 and December 31, 2016 was $8,785 and $7,915 , respectively, and is included under “Accrued expenses and other current liabilities” and “Non-current liabilities” in the unaudited consolidated balance sheets.
18. 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.

23

EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
June 30, 2017
(In thousands, except share and per share amounts)

The Company recorded income tax expense of $823 and $7,008 for the three months ended June 30, 2017 and 2016, respectively. The effective tax rate decreased from 30.0% during the three months ended June 30, 2016 to 3.9% as a result of (i) excess tax benefit related to stock awards of $1,624 recognized on adoption of ASU No. 2016-09 during the three months ended June 30, 2017, (ii) conclusion of an uncertain tax position of $3,153 (including interest of $1,433 ), (iii) the impact of reversal of earn-out liability of $3,810 in other income during the three months ended June 30, 2016 related to the Company's acquisition of RPM Direct LLC and RPM Data Solutions LLC (collectively, "RPM") in 2015, and (iv) higher earnings from foreign subsidiaries and lower domestic profit in the U.S.
The Company recorded income tax expense of $4,383 and $12,903 for the six months ended June 30, 2017 and 2016, respectively. The effective tax rate decreased from 29.9% during the six months ended June 30, 2016 to 10.5% as a result of (i) excess tax benefit related to stock awards of $3,681 recognized on adoption of ASU No. 2016-09 during the six months ended June 30, 2017, (ii) conclusion of an uncertain tax position of $3,153 (including interest of $1,433 ), (iii) the impact of reversal of earn-out liability of $4,060 in other income during the six months ended June 30, 2016 related to the Company's RPM acquisition in 2015, and (iv) higher earnings from foreign subsidiaries and lower domestic profit in the U.S.
The following table summarizes the activity related to the gross unrecognized tax benefits from January 1, 2017 through June 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 June 30, 2017
$
1,452

The unrecognized tax benefits as of June 30, 2017 of $1,452 , if recognized, would impact the effective tax rate.
During the three months ended June 30, 2017 and 2016, the Company has recognized interest of nil and $49 , respectively, which are included in the income tax expense in the unaudited consolidated statements of income. As of June 30, 2017 and December 31, 2016, the Company has accrued interest and penalties of $240 and $1,553 , relating to unrecognized tax benefits.
19. Stock-Based Compensation
The following costs related to the Company’s stock-based compensation plan are included in the unaudited consolidated statements of income:
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Cost of revenue
$
1,129

 
$
788

 
$
2,339

 
$
2,053

General and administrative expenses
2,344

 
1,964

 
4,940

 
4,336

Selling and marketing expenses
1,634

 
1,698

 
3,784

 
3,870

Total
$
5,107

 
$
4,450

 
$
11,063

 
$
10,259

As of June 30, 2017 , the Company had 1,464,838 shares available for grant under the 2015 Amendment and Restatement of the 2006 Omnibus Award Plan.