Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012

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  x    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  x    No  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

As of July 31, 2012, there were 31,974,871 shares of the registrant’s common stock outstanding (excluding 336,262 shares held in treasury and 9,907 shares of restricted stock), par value $0.001 per share.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          PAGE  

ITEM

  

PART I. FINANCIAL INFORMATION

     3   

  1.

  

FINANCIAL STATEMENTS

  
  

Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011

     3   
  

Consolidated Statements of Income (Unaudited) for the Three Months Ended and Six Months Ended June  30, 2012 and 2011

     4   
  

Consolidated Statements of Comprehensive Income/(Loss) (Unaudited) for the Three Months Ended and Six Months Ended June 30, 2012 and 2011

     5   
  

Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2012 and  2011

     6   
  

Notes to Consolidated Financial Statements (Unaudited)

     7   

  2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     24   

  3.

  

Quantitative and Qualitative Disclosures About Market Risk

     35   

  4.

  

Controls and Procedures

     35   
  

PART II. OTHER INFORMATION

     36   

  1.

  

Legal Proceedings

     36   

1A.

  

Risk Factors

     36   

  2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     36   

  3.

  

Defaults Upon Senior Securities

     36   

  4.

  

Mine Safety Disclosures

     36   

  5.

  

Other Information

     36   

  6.

  

Exhibits

     37   

Signatures

     38   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

EXLSERVICE HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

     June 30,     December 31,  
   2012     2011  
     (Unaudited)        

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 94,520      $ 82,393   

Short-term investments

     6,502        7,869   

Restricted cash

     807        934   

Accounts receivable, net

     61,673        55,672   

Prepaid expenses

     3,516        4,269   

Deferred tax assets, net

     8,120        6,228   

Advance income tax, net

     —          3,379   

Other current assets

     8,875        6,097   
  

 

 

   

 

 

 

Total current assets

     184,013        166,841   
  

 

 

   

 

 

 

Fixed assets, net

     41,252        42,320   

Restricted cash

     3,569        3,387   

Deferred tax assets, net

     14,831        16,495   

Intangible assets, net

     33,405        36,313   

Goodwill

     91,339        92,287   

Other assets

     19,842        19,768   
  

 

 

   

 

 

 

Total assets

   $ 388,251      $ 377,411   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 2,429      $ 4,333   

Deferred revenue

     6,384        7,772   

Accrued employee cost

     21,013        27,700   

Accrued expenses and other current liabilities

     29,409        30,700   

Income taxes payable

     160        —     

Current portion of capital lease obligations

     1,670        1,729   
  

 

 

   

 

 

 

Total current liabilities

     61,065        72,234   
  

 

 

   

 

 

 

Capital lease obligations, less current portion

     3,318        4,244   

Non-current liabilities

     21,187        22,458   
  

 

 

   

 

 

 

Total liabilities

     85,570        98,936   
  

 

 

   

 

 

 

Commitments and contingencies

    

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, 32,309,413 shares issued and 31,973,151 shares outstanding as of June 30, 2012 and 31,496,461 shares issued and 31,173,064 shares outstanding as of December 31, 2011

     32        31   

Additional paid-in-capital

     186,696        173,926   

Retained earnings

     165,016        147,046   

Accumulated other comprehensive loss

     (46,063     (39,858
  

 

 

   

 

 

 

Total stockholders’ equity including shares held in treasury

     305,681        281,145   
  

 

 

   

 

 

 

Less: 336,262 shares as of June 30, 2012 and 323,397 shares as of December 31, 2011, held in treasury, at cost

     (3,024     (2,693
  

 

 

   

 

 

 

ExlService Holdings, Inc. stockholders’ equity

     302,657        278,452   

Non-controlling interest

     24        23   
  

 

 

   

 

 

 

Total stockholders’ equity

     302,681        278,475   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 388,251      $ 377,411   
  

 

 

   

 

 

 

See accompanying notes.

 

3


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,  
     2012     2011      2012     2011  

Revenues

   $ 108,030      $ 85,028       $ 212,638      $ 157,935   

Cost of revenues (exclusive of depreciation and amortization)

     66,045        51,998         132,717        96,217   
  

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     41,985        33,030         79,921        61,718   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating expenses:

         

General and administrative expenses

     13,858        12,391         27,205        22,862   

Selling and marketing expenses

     7,694        6,121         15,493        11,978   

Depreciation and amortization

     6,040        5,110         12,399        9,962   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total operating expenses

     27,592        23,622         55,097        44,802   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income from operations

     14,393        9,408         24,824        16,916   

Other income, net:

         

Foreign exchange (loss)/gain

     (2,080     1,803         (1,022     3,451   

Interest and other income, net

     367        645         814        970   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     12,680        11,856         24,616        21,337   

Income tax provision

     3,626        3,381         6,646        4,501   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 9,054      $ 8,475       $ 17,970      $ 16,836   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings per share:

         

Basic

   $ 0.28      $ 0.28       $ 0.57      $ 0.57   

Diluted

   $ 0.27      $ 0.27       $ 0.55      $ 0.54   

Weighted-average number of shares used in computing earnings per share:

         

Basic

     31,970,881        29,859,811         31,708,237        29,740,676   

Diluted

     33,096,607        31,043,426         32,940,231        30,912,021   

See accompanying notes.

 

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Table of Contents

EXLSERVICE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(Unaudited)

(In thousands)

 

     Three months ended June 30,      Six months ended June 30,  
     2012     2011      2012     2011  

Net income

   $ 9,054      $ 8,475       $ 17,970      $ 16,836   

Other comprehensive income:

         

Unrealized (loss)/gain on effective cash flow hedges, net of taxes

     (6,286     554         200        240   

Foreign currency translation adjustment

     (12,686     82         (6,463     984   

Retirement benefits, net of taxes

     109        19         58        39   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total other comprehensive (loss)/income

     (18,863     655         (6,205     1,263   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total comprehensive (loss)/income

   $ (9,809   $ 9,130       $ 11,765      $ 18,099   
  

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying notes.

 

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EXLSERVICE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

(In thousands)

 

     Six months ended June 30,  
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 17,970      $ 16,836   

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

    

Depreciation and amortization

     12,399        9,962   

Stock-based compensation expense

     5,458        5,127   

Amortization of debt issuance cost

     76        —     

Non-employee stock options

     32        1   

Unrealized foreign exchange (gain)/loss

     (1,793     657   

Deferred income taxes

     (1,271     (1,228

Change in operating assets and liabilities:

    

Restricted cash

     (125     (25

Accounts receivable

     (5,948     (5,258

Prepaid expenses and other current assets

     (3,875     1,065   

Accounts payable

     (689     185   

Deferred revenue

     (1,393     (16

Accrued employee cost

     (7,282     (4,784

Accrued expenses and other liabilities

     1,118        3,441   

Advance income tax, net

     3,188        882   

Other assets

     1,588        (69
  

 

 

   

 

 

 

Net cash provided by operating activities

     19,453        26,776   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of fixed assets

     (13,199     (8,604

Business acquisition (net of cash acquired)

     —          (80,090

Purchase of short-term investments

     (3,292     (1,888

Proceeds from redemption of short-term investments

     4,321        413   
  

 

 

   

 

 

 

Net cash used for investing activities

     (12,170     (90,169
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Principal payments on capital lease obligations

     (872     (301

Proceeds from short-term borrowings

     —          30,000   

Repayments of short-term borrowings

     —          (14

Payment of debt issuance costs

     —          (446

Acquisition of treasury stock

     (331     (1,643

Proceeds from exercise of stock options

     7,280        3,578   
  

 

 

   

 

 

 

Net cash provided by financing activities

     6,077        31,174   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (1,233     392   
  

 

 

   

 

 

 

Net increase/(decrease) in cash and cash equivalents

     12,127        (31,827

Cash and cash equivalents, beginning of period

     82,393        111,182   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 94,520      $ 79,355   
  

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(Unaudited)

(In thousands, except share and per share amounts)

1. Organization and Basis of Presentation

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”), is a leading provider of outsourcing services and transformation services. The Company’s clients are located principally in the United States and the United Kingdom.

Basis of Presentation

The unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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, 2011.

The unaudited interim consolidated financial statements reflect all adjustments (of a normal and recurring nature) which 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.

2. Summary of Significant Accounting Policies

Principles of Consolidation

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.

The non-controlling interest represents the minority partner’s interest in the operation of exl Service.com (India) Private Limited (“Exl India”) and the profits associated with the minority partner’s interest in those operations, in the unaudited consolidated balance sheet and unaudited consolidated statement of income, respectively. This non-controlling interest in these operations for the three and six months ended June 30, 2012 and 2011 was insignificant and is included under general and administrative expenses in the unaudited consolidated statements of income.

Use of Estimates

The preparation of the unaudited consolidated financial statements in conformity with U.S. generally accepted accounting principles (“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. Estimates are based upon management’s best assessment of the current business environment. Actual results could differ from those estimates. The significant estimates and assumptions that affect the financial statements include, but are not limited to, allowance for doubtful receivables, 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, stock-based compensation expense, depreciation and amortization periods, recoverability of long-term assets including goodwill and intangibles and estimates to complete fixed price contracts.

 

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Table of Contents

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2012

(Unaudited)

(In thousands, except share and per share amounts)

 

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued update No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS” (ASU No. 2011-04). ASU No. 2011-04 was intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and International Financial Reporting Standards (“IFRS”). The amendments in this update result in common fair value measurement and disclosure requirements in GAAP and IFRS. The update explains how to measure fair value and does not require additional measurements. The adoption of this accounting pronouncement from January 1, 2012 did not have any impact on the Company’s unaudited consolidated financial statements.

In June 2011, the FASB issued update No. 2011-05, “Presentation of Comprehensive Income” (ASU No. 2011-05). ASU No. 2011-05, effective retrospectively for the interim and annual periods beginning on or after December 15, 2011 (early adoption is permitted), requires presentation of total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued update No. 2011-12, which deferred the requirement to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for annual and interim financial statements. The adoption of this accounting pronouncement from January 1, 2012 did not have any impact on the Company’s unaudited consolidated financial statements. The Company adopted the option of presentation in two separate but consecutive statements. Refer to the Company’s unaudited consolidated statements of comprehensive income/(loss) for further details.

In September 2011, the FASB issued update No. 2011-08, “Testing Goodwill for Impairment” (ASU No. 2011-08), which allows entities to use a qualitative approach to test goodwill for impairment. ASU No. 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU No. 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this accounting pronouncement did not have a material impact on the Company’s unaudited consolidated financial statements and the Company does not expect this to have a material impact on its annual goodwill impairment assessment in the fourth quarter of fiscal 2012.

Accrued expenses and other current liabilities

 

                                             
     June 30,      December 31,  
   2012      2011  

Accrued expenses

   $ 15,807       $ 15,572   

Derivative instruments

     9,601         9,170   

Other current liabilities

     4,001         5,958   
  

 

 

    

 

 

 

Accrued expenses and other current liabilities

   $ 29,409       $ 30,700   
  

 

 

    

 

 

 

Non-current liabilities

 

                                 
     June 30,      December 31,  
   2012      2011  

Derivative instruments

   $ 8,640       $ 8,559   

Unrecognized tax benefits

     5,315         4,981   

Deferred rent

     3,816         3,319   

Retirement benefits

     2,196         3,068   

Other non-current liabilities

     1,220         2,531   
  

 

 

    

 

 

 

Non-current liabilities

   $ 21,187       $ 22,458   
  

 

 

    

 

 

 

 

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Table of Contents

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2012

(Unaudited)

(In thousands, except share and per share amounts)

 

3. 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,  
     2012      2011      2012      2011  

Numerators:

           

Net income

   $ 9,054       $ 8,475       $ 17,970       $ 16,836   

Denominators:

           

Basic weighted average common shares outstanding

     31,970,881         29,859,811         31,708,237         29,740,676   

Dilutive effect of share based awards

     1,125,726         1,183,615         1,231,994         1,171,345   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average common shares outstanding

     33,096,607         31,043,426         32,940,231         30,912,021   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ 0.28       $ 0.28       $ 0.57       $ 0.57   

Diluted

   $ 0.27       $ 0.27       $ 0.55       $ 0.54   

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

     539,818         446,595         439,028         528,832   

4. Segment Information

The Company is organized around its outsourcing services and transformation services segments.

The chief operating decision maker generally reviews financial information at the consolidated statement of income level but does not review any information except for revenues and cost of revenues of the individual segments. Therefore, the Company does not allocate depreciation, amortization, other income, capital expenditures and income taxes to its operating segments. Consequently, it is not practical to show assets, capital expenditures, depreciation or amortization by segment.

Revenues and cost of revenues for each of the three months ended June 30, 2012 and 2011 for the Company’s outsourcing services and transformation services segments, respectively, are as follows:

 

     Three months ended June 30, 2012     Three months ended June 30, 2011  
     Outsourcing      Transformation            Outsourcing      Transformation         
     Services      Services      Total     Services      Services      Total  

Revenues

   $ 88,922       $ 19,108       $ 108,030      $ 68,733       $ 16,295       $ 85,028   

Cost of revenues (exclusive of depreciation and amortization)

     54,501         11,544         66,045        41,338         10,660         51,998   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Gross profit

   $ 34,421       $ 7,564       $ 41,985      $ 27,395       $ 5,635       $ 33,030   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Operating expenses

           27,592              23,622   

Other income, net

           (1,713           2,448   

Income tax provision

           3,626              3,381   
        

 

 

         

 

 

 

Net income

         $ 9,054            $ 8,475   
        

 

 

         

 

 

 

 

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EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2012

(Unaudited)

(In thousands, except share and per share amounts)

 

Revenues and cost of revenues for each of the six months ended June 30, 2012 and 2011 for the Company’s outsourcing services and transformation services segments, respectively, are as follows:

 

     Six months ended June 30, 2012     Six months ended June 30, 2011  
     Outsourcing      Transformation            Outsourcing      Transformation         
   Services      Services      Total     Services      Services      Total  

Revenues

   $ 178,656       $ 33,982       $ 212,638      $ 125,574       $ 32,361       $ 157,935   

Cost of revenues (exclusive of depreciation and amortization)

     110,979         21,738         132,717        75,572         20,645         96,217   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Gross profit

   $ 67,677       $ 12,244       $ 79,921      $ 50,002       $ 11,716       $ 61,718   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Operating expenses

           55,097              44,802   

Other income, net

           (208           4,421   

Income tax provision

           6,646              4,501   
        

 

 

         

 

 

 

Net income

         $ 17,970            $ 16,836   
        

 

 

         

 

 

 

5. Business Combinations, Goodwill and Intangible Assets

On May 31, 2011, the Company completed its acquisition of Business Process Outsourcing Inc., a Delaware corporation formerly organized as a Cayman Islands exempted company (“OPI”), pursuant to a Merger Agreement, dated as of April 30, 2011 (the “OPI Acquisition”).

On October 1, 2011, the Company also acquired Trumbull Services, LLC. (“Trumbull”), a market leader in subrogation services for property and casualty insurance companies, from The Hartford Financial Services Group, Inc. (the “Trumbull Acquisition”).

Goodwill

The following table sets forth details of the Company’s goodwill balance as of June 30, 2012:

 

     Outsourcing     Transformation         
     Services     Services      Total  

Balance at January 1, 2011

   $ 26,585      $ 16,785       $ 43,370   

Goodwill arising from OPI acquisition

     54,604        —           54,604   

Currency translation adjustments

     (5,687     —           (5,687
  

 

 

   

 

 

    

 

 

 

Balance at December 31, 2011

   $ 75,502      $ 16,785       $ 92,287   

Purchase accounting adjustments (1)

     422        —           422   

Currency translation adjustments

     (1,370     —           (1,370
  

 

 

   

 

 

    

 

 

 

Balance at June 30, 2012

   $ 74,554      $ 16,785       $ 91,339   
  

 

 

   

 

 

    

 

 

 

 

(1) Relates to the OPI acquisition

 

10


Table of Contents

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2012

(Unaudited)

(In thousands, except share and per share amounts)

 

Intangible Assets

Information regarding the Company’s intangible assets is as follows:

 

     As of June 30, 2012  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
 

Customer relationships

   $ 33,052       $ (6,098   $ 26,954   

Leasehold benefits

     3,317         (919     2,398   

Developed technology

     2,133         (459     1,674   

Non-compete agreements

     1,316         (1,006     310   

Trade names and trademarks

     2,722         (653     2,069   
  

 

 

    

 

 

   

 

 

 
   $ 42,540       $ (9,135   $ 33,405   
  

 

 

    

 

 

   

 

 

 
     As of December 31, 2011  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
 

Customer relationships

   $ 33,100       $ (4,456   $ 28,644   

Leasehold benefits

     3,474         (668     2,806   

Developed technology

     2,133         (351     1,782   

Non-compete agreements

     1,316         (606     710   

Trade names and trademarks

     2,722         (351     2,371   
  

 

 

    

 

 

   

 

 

 
   $ 42,745       $ (6,432   $ 36,313   
  

 

 

    

 

 

   

 

 

 

Amortization expense for the three months ended June 30, 2012 and 2011 was $1,365 and $913, respectively. Amortization expense for the six months ended June 30, 2012 and 2011 was $2,759 and $1,548, respectively. The weighted average life of intangible assets was 10.1 years for customer relationships, 6.8 years for leasehold benefits, 10.0 years for developed technology, 1.5 years for non-compete agreements and 3.0 years for trade names and trademarks excluding indefinite life trade names and trademarks. The Company had $900 of indefinite life trade names and trademarks as of June 30, 2012 and December 31, 2011.

 

Estimated amortization of intangible assets during the year ending June 30,       

2013

   $ 4,826   

2014

   $ 4,239   

2015

   $ 3,689   

2016

   $ 3,689   

2017

   $ 3,683   

6. Fair Value Measurements

The following table sets forth the Company’s assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2012 and December 31, 2011. The table excludes short-term investments, accounts receivable, short-term borrowings, accounts payable and accrued expenses for which fair values approximate their carrying amounts.

 

11


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EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2012

(Unaudited)

(In thousands, except share and per share amounts)

 

Assets and Liabilities Measured at Fair Value

 

As of June 30, 2012    Level 1      Level 2      Level 3      Total  

Assets

           

Money market and mutual funds

   $ 62,669       $ —         $ —         $ 62,669   

Derivative financial instruments

     —           1,280         —           1,280   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 62,669       $ 1,280       $ —         $ 63,949   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivative financial instruments

   $ —         $ 18,241       $ —         $ 18,241   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 18,241       $ —         $ 18,241   
  

 

 

    

 

 

    

 

 

    

 

 

 
As of December 31, 2011    Level 1      Level 2      Level 3      Total  

Assets

           

Money market and mutual funds

   $ 42,067       $ —         $ —         $ 42,067   

Derivative financial instruments

     —           32         —           32   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 42,067       $ 32       $ —         $ 42,099   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivative financial instruments

   $ —         $ 17,729       $ —         $ 17,729   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 17,729       $ —         $ 17,729   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 broker quotations and are classified as Level 2. See Note 7 for further details.

7. Derivatives and Hedge Accounting

The Company actively looks to mitigate the exposure of foreign currency market risk by entering into various hedging transactions, authorized under Company policies, with counterparties that are highly rated financial institutions. The Company’s primary exchange rate exposure is with the U.K. pound sterling and the Indian rupee. The Company also has exposure in Philippine pesos, Czech koruna and other local currencies in which it operates. The Company uses derivative instruments for the purpose of mitigating the underlying exposure from 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, and not for speculative trading purposes. These derivative financial instruments are largely forward foreign exchange contracts that are designated effective and that qualify as cash flow hedges under ASC topic 815, “Derivatives and Hedging” (ASC 815). The Company also uses derivatives consisting of foreign currency exchange contracts not designated as hedging instruments under ASC 815 to hedge intercompany balances and other monetary assets or liabilities denominated in currencies other than the functional currency.

The Company had outstanding foreign exchange contracts totaling $228,962 and GBP 10,196 as of June 30, 2012 and totaling $235,866 and GBP 10,368 as of December 31, 2011. The Company estimates that approximately $9,135 of net derivative losses included in accumulated other comprehensive income (“AOCI”) could be reclassified into earnings within the next twelve months based on exchange rates prevailing as of June 30, 2012. As of June 30, 2012, the maximum outstanding term of derivative instruments that hedge forecasted transactions was thirty-three months.

The Company evaluates hedge effectiveness at the time a contract is entered into as well as on an ongoing basis. If during this time a contract is deemed ineffective, the change in the fair value is recorded in the unaudited consolidated statements of income and is included in foreign exchange gain. For hedge relationships 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. No amounts of gains or losses were reclassified from AOCI into earnings as a result of forecasted transactions that failed to occur during the three and six months ended June 30, 2012 and 2011.

 

12


Table of Contents

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2012

(Unaudited)

(In thousands, except share and per share amounts)

 

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:              
     June 30,      December 31,  
   2012      2011  

Other current assets:

     

Foreign currency exchange contracts

   $ 466       $ —     

Other assets:

     

Foreign currency exchange contracts

   $ 188       $ —     

Accrued expenses and other current liabilities:

     

Foreign currency exchange contracts

   $ 9,601       $ 9,170   

Other non current liabilities:

     

Foreign currency exchange contracts

   $ 8,640       $ 8,559   
Derivatives not designated as hedging instruments:              
     June 30,      December 31,  
   2012      2011  

Other current assets:

     

Foreign currency exchange contracts

   $ 626       $ 32   

The following tables set forth the effect of foreign currency exchange contracts on the unaudited consolidated statements of income for the three months ended June 30, 2012 and 2011:

 

Derivatives in

Cash Flow

Hedging

Relationships

   Amount of  (Loss)/Gain
Recognized in AOCI on
Derivative
(Effective Portion)
    

Location of

(Loss)/Gain
Reclassified

from AOCI into

Income
(Effective
Portion)

   Amount of
(Loss)/Gain
Reclassified from
AOCI into Income
(Effective Portion)
    

Location of

Gain/(Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)

   Amount of  Gain/(Loss)
Recognized in
Income on Derivative
(Ineffective Portion

and Amount  Excluded
from
Effectiveness Testing)
 
     2012     2011           2012     2011           2012      2011  

Foreign exchange contracts

   $ (13,430   $ 2,081       Foreign exchange (loss)/gain    $ (4,882   $ 1,527       Foreign exchange (loss)/gain    $ —         $ —     

 

          Amount of (Loss)/Gain  
          Recognized in Income on  
Derivatives Not Designated    Location of (Loss)/Gain    Derivatives  

as Hedging

Instruments

  

Recognized in Income on
Derivatives

   2012     2011  

Foreign exchange contracts

   Foreign exchange (loss)/gain    $ (2,596   $ 405   

 

13


Table of Contents

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2012

(Unaudited)

(In thousands, except share and per share amounts)

 

The following tables set forth the effect of foreign currency exchange contracts on the unaudited consolidated statements of income for the six months ended June 30, 2012 and 2011:

 

Derivatives in

Cash Flow

Hedging

Relationships

   Amount of  (Loss)/Gain
Recognized in AOCI on
Derivative
(Effective Portion)
    

Location of

(Loss)/Gain
Reclassified

from AOCI into

Income
(Effective
Portion)

   Amount of
(Loss)/Gain
Reclassified from
AOCI into Income
(Effective Portion)
    

Location of

Gain/(Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)

   Amount  of
Gain/(Loss)
Recognized in
Income  on

Derivative
(Ineffective Portion

and
Amount Excluded

from Effectiveness
Testing)
 
     2012     2011           2012     2011           2012      2011  

Foreign exchange contracts

   $ (5,121   $ 2,970       Foreign exchange (loss)/gain    $ (5,263   $ 2,730       Foreign exchange (loss)/gain    $ —         $ —     

 

          Amount of Gain  
          Recognized in  
Derivatives Not Designated    Location of Gain    Income on Derivatives  

as Hedging

Instruments

  

Recognized in Income on
Derivatives

   2012      2011  

Foreign exchange contracts

   Foreign exchange (loss)/gain    $ 302       $ 776   

8. Fixed Assets

The components of fixed assets, net of accumulated depreciation, consisted of the following:

 

     June 30,     December 31,  
     2012     2011  

Owned Assets:

    

Network equipment, computers and software

   $ 58,548      $ 55,499   

Buildings

     1,430        1,498   

Land

     936        980   

Leasehold improvements

     23,080        21,733   

Office furniture and equipment

     9,852        9,011   

Motor vehicles

     718        828   

Capital work in progress

     1,654        2,737   
  

 

 

   

 

 

 
     96,218        92,286   

Less: Accumulated depreciation and amortization

     (58,723     (54,736
  

 

 

   

 

 

 
   $ 37,495      $ 37,550   
  

 

 

   

 

 

 

Assets Under Capital Leases:

    

Network equipment, computers and software

   $ 274      $ 474   

Leasehold improvements

     2,372        2,541   

Office furniture and equipment

     1,330        1,645   

Motor vehicles

     958        882   
  

 

 

   

 

 

 
     4,934        5,542   

Less: Accumulated depreciation and amortization

     (1,177     (772
  

 

 

   

 

 

 
   $ 3,757      $ 4,770   
  

 

 

   

 

 

 

Fixed assets, net

   $ 41,252      $ 42,320   
  

 

 

   

 

 

 

 

 

14


Table of Contents

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2012

(Unaudited)

(In thousands, except share and per share amounts)

 

Depreciation and amortization expense excluding amortization of acquisition-related intangibles for the three months ended June 30, 2012 and 2011 was $4,675 and $4,197, respectively, and $9,640 and $8,414 for the six months ended June 30, 2012 and 2011, respectively.

Capital work in progress represents advances paid toward acquisition of fixed assets and the cost of fixed assets not yet ready to be placed in service.

9. Capital Structure

The Company has one class of common stock.

During the three months ended June 30, 2012, the Company acquired 5,410 shares of common stock from employees in connection with withholding tax payments related to the vesting of restricted stock for a total consideration of $149. The purchase price of $27.62 per share was the average of the high and low price of the Company’s shares 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, 2012, the Company acquired 12,865 shares of common stock from employees in connection with withholding tax payments related to the vesting of restricted stock for a total consideration of $331.

During the three months ended June 30, 2011, the Company acquired 7,882 shares of common stock from employees in connection with withholding tax payments related to the vesting of restricted stock for a total consideration of $170. The purchase price of $19.16 per share was the average of the high and low price of the Company’s shares 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, 2011, the Company acquired 9,596 shares of common stock from employees in connection with withholding tax payments related to the vesting of restricted stock for a total consideration of $204.

During the three and six months ended June 30, 2011, the Company also acquired 61,299 shares of common stock for a total consideration of $1,439 pursuant to an option agreement between the Company and Prudential Financial, Inc. (“Prudential”) dated July 1, 2004. The purchase price of $23.47 per share was the average closing price for the 30-day period on the Nasdaq Global Select Market preceding the date of exercise of options by Prudential.

The shares acquired as mentioned above are held as treasury stock.

10. Employee Benefit Plans

The Company’s Gratuity Plans in India and the Philippines provide a lump-sum payment to vested employees on retirement or on 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 Plans are accrued in the year to which they relate. Actuarial gains or losses or prior service costs, if any, resulting from amendments to the plans are recognized and amortized over the remaining period of service of the employees.

Net gratuity cost includes the following components:

 

     Three months ended June 30,      Six months ended June 30,  
     2012     2011      2012     2011  

Service cost

   $ 292      $ 218       $ 563      $ 389   

Interest cost

     100        64         211        128   

Expected return on plan assets

     (42     —           (61     —     

Actuarial loss

     31        27         64        53   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net gratuity cost

   $ 381      $ 309       $ 777      $ 570   
  

 

 

   

 

 

    

 

 

   

 

 

 

The Gratuity Plans are funded plans that are managed and administered by 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 investment as well as payouts under the plans. The Company expects a return on the fund assets to be approximately 9% per annum for the year ended June 30, 2012. Fund managers manage these funds on a cash accumulation basis and declare interest retrospectively on March 31 of each year.

 

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Table of Contents

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2012

(Unaudited)

(In thousands, except share and per share amounts)

 

 

Change in Plan Assets

  

Plan assets at January 1, 2012

   $ 1,015   

Employer contribution

     1,143   

Expected return

     61   

Effect of exchange rate changes

     (146
  

 

 

 

Plan assets at June 30, 2012

   $ 2,073   
  

 

 

 

The Company maintains the Exl Service Inc. 401(k) Plan under Section 401(k) of the Internal Revenue Code of 1986, covering all eligible employees, as defined. The Company may make discretionary contributions of up to a maximum of 3% of employee compensation within certain limits. The Company has made a provision for contributions to the 401(k) Plans amounting to $303 and $175 during the three month periods ended June 30, 2012 and June 30, 2011, respectively, and $680 and $321 during the six month periods ended June 30, 2012 and June 30, 2011, respectively under the plans as applicable for these years.

During the three and six month periods ended June 30, 2012 and 2011, the Company contributed the following amounts to various defined contribution plans on behalf of its employees in India, the Philippines, Romania, Bulgaria, Malaysia and the Czech Republic:

 

Three months ended June 30, 2012

   $ 1,362   

Three months ended June 30, 2011

   $ 1,228   

Six months ended June 30, 2012

   $ 2,843   

Six months ended June 30, 2011

   $ 2,250   

11. Leases

The Company finances its use of certain facilities, computer hardware, leasehold improvements, furniture, fixtures, office equipment and motor vehicles under various lease arrangements provided by financial institutions. Future minimum lease payments under these capital leases as of June 30, 2012 are as follows:

 

Year ending June 30,

  

2013

   $ 2,079   

2014

     1,676   

2015

     1,243   

2016

     808   

2017

     19   
  

 

 

 

Total minimum lease payments

     5,825   

Less: amount representing interest

     837   
  

 

 

 

Present value of minimum lease payments

     4,988   

Less: current portion

     1,670   
  

 

 

 

Long term capital lease obligation

   $ 3,318   
  

 

 

 

 

16


Table of Contents

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2012

(Unaudited)

(In thousands, except share and per share amounts)

 

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 operating lease agreements expiring after more than twelve months are as follows:

 

Year ending June 30,

  

2013

   $ 9,017   

2014

     6,853   

2015

     6,045   

2016

     4,348   

2017

     938   

2018 and thereafter

     1,429   
  

 

 

 
   $ 28,630   
  

 

 

 

The operating leases are subject to renewal periodically and have scheduled rent increases. The Company accounts for scheduled rent on a straight-line basis over the lease period. Rent expense under both cancellable and non-cancellable operating leases was $4,302 and $3,345 for the three months ended June 30, 2012 and 2011, respectively, and $8,984 and $6,153 for the six months ended June 30, 2012 and 2011, respectively. Deferred rent as of June 30, 2012 and December 31, 2011 was $4,248 and $3,815, respectively, and is included in “Accrued expenses and other current liabilities” and “Non-current liabilities” in the unaudited consolidated balance sheets.

12. Income Taxes

The Company recorded income tax expense of $3,626 and $3,381 for the three months ended June 30, 2012 and 2011, respectively, and $6,646 and $4,501 for the six months ended June 30, 2012 and 2011, respectively. The effective rate of taxes increased marginally from 28.5% during the three months ended June 30, 2011 to 28.6% during the three months ended June 30, 2012. The effective rate of taxes increased from 21.1% during the six months ended June 30, 2011 to 27.0% during the six months ended June 30, 2012. The increase in the effective tax rate is primarily due to the expiry of a tax holiday period for most of the Company’s operating units in India that ended on April 1, 2011, completion of the first five years of operations in certain operating units in special economic zones (“SEZs”) in India after which the company is entitled to a 50% exemption from profits and release of a valuation allowance on deferred tax assets of $1,961 during the three months ended March 31, 2011.

The fiscal year under the Indian Income Tax Act ends on March 31. Certain of the Company’s operations centers in India qualified for an exemption from corporate tax under Section 10A or 10B of the Indian Income Tax Act. This exemption was available for a period of ten consecutive years beginning with the financial year in which an operations center began to manufacture or produce eligible goods and services and expired on April 1, 2011. Thereafter, profits generated from the services provided from such operations centers have become fully taxable and, consequently, the Company’s tax expense increased significantly during the six months ended June 30, 2012 as compared to the six months ended June 30, 2011, respectively, and may continue to be higher in the future.

The Company currently benefits from a four-year income tax holiday for one of its operations centers in the Philippines that expired in the middle of 2012 but is extendable for an additional two years. The Company has applied to the Authority for an extension of the tax holiday which, if granted, would be effective retrospectively from the date of expiry. The Company’s new operations center in the Philippines, inaugurated in January 2012, will also benefit from a four-year income tax holiday that is extendable for an additional two years. While the Company is reasonably certain that the Philippines authority will extend such tax holidays, it is possible that such extensions could be denied, or that these holidays could be conditioned or removed entirely due to changes in applicable legislation by the government of the Philippines. Should any of these events occur, the Company’s tax liability in the Philippines could increase.

The Company’s operations centers in Jaipur and Noida, which were established in SEZs in 2010, are eligible for tax incentives until 2020. As part of the OPI Acquisition, the Company also acquired operations centers in Bengaluru and Kochi, India that are also established in SEZs. The operations center in Bengaluru completed its first five years of operations on March 31, 2012. Under the tax regulations, the Bengaluru operations center has been entitled to a 50% tax exemption on export profits for five years from April 1, 2012, after which there has been an increase in the tax expense for such center. The Company has also established a new operations center in Pune, India in June 2012 which is located in an SEZ. The Company anticipates establishing additional operations centers in SEZs in the future.

 

17


Table of Contents

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2012

(Unaudited)

(In thousands, except share and per share amounts)

 

Deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the financial statement carrying values of assets and liabilities and their respective tax bases and operating loss carry forwards. At June 30, 2012, the Company performed an analysis of the deferred tax asset valuation allowance for net operating loss carry forward for its domestic entities. Based on this analysis, the Company continues to carry a valuation allowance on the deferred tax assets on net operating loss carry forwards. The valuation allowance was approximately $919 as of both June 30, 2012 and December 31, 2011.

As a result of the OPI Acquisition, the Company also acquired OPI’s federal and state net operating losses in the United States. Thus, as of June 30, 2012, the Company has federal net operating loss carry forwards of approximately $20,260, which expire in 2027. The Company’s federal net operating loss carry forwards are subject to certain annual utilization limitations under Section 382 of the United States Internal Revenue Code. The Company also has state and local net operating loss carry forwards of varying amounts, which also are subject to limitations under the applicable rules and regulations of those taxing jurisdictions. The Company estimates that it will be able to utilize all of the losses before their expiry.

During 2007, the Indian government passed tax legislation that, among other items, subjects Indian taxpayers to a Minimum Alternative Tax (“MAT”). As of June 30, 2012 and December 31, 2011, deferred income taxes related to the MAT were approximately $2,519 and $2,793, respectively.

The Company’s provision for income taxes also includes the impact of provisions established for uncertain income tax positions determined in accordance with ASC No. 740, “ Income Taxes ,” as well as the related net interest. Tax exposures can involve complex issues and may require an extended resolution period. Although the Company believes that it has adequately reserved for its uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. The Company adjusts these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters differs from the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made.

The following table summarizes the activity related to the gross unrecognized tax benefits from January 1, 2012 through June 30, 2012:

 

Balance as of January 1, 2012

   $ 5,324   

Increases related to prior year tax positions

     —     

Decreases related to prior year tax positions

     —     

Increases related to current year tax positions

     340   

Decreases related to current year tax positions

     —     

Effect of exchange rate changes

     (212
  

 

 

 

Balance as of June 30, 2012

   $ 5,452   
  

 

 

 

The unrecognized tax benefits as of June 30, 2012 of $5,452, if recognized, would impact the effective tax rate.

The Company has recognized interest and penalties of $129 and $246 during the three and six months ended June 30, 2012, respectively. The unrecognized tax benefits may increase or decrease in the next twelve months depending on the Company’s tax positions.

 

18


Table of Contents

EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2012

(Unaudited)

(In thousands, except share and per share amounts)

 

13. 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,  
     2012      2011      2012      2011  

Cost of revenue

   $ 586       $ 582       $ 1,241       $ 977   

General and administrative expenses

     1,279         1,372         2,605         2,354   

Selling and marketing expenses

     850         925         1,612         1,796   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,715       $ 2,879       $ 5,458       $ 5,127   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of each stock option granted to employees is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

     Three months ended June 30,     Six months ended June 30,  
     2012     2011     2012     2011  

Dividend yield

     0     0     0     0

Expected life (years)

     4.50        —          5.38        5.76   

Risk free interest rate

     0.74     0.00     0.97     2.32

Volatility

     40     0     40     40

The estimated expected term of options granted has been based on historical experience since October 2006, which is representative of the expected term of the options. Volatility has been calculated based on the volatility of the Company’s common stock and the volatility of stock of comparative companies. The risk-free interest rate that the Company uses in the option valuation model is based on U.S. treasury zero-coupon bonds with a remaining term similar to the expected term of the options.

The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

Stock option activity under the Company’s stock plans is shown below:

 

     Number
of
Options
    Weighted-
Average
Exercise
Price
     Aggregate
Intrinsic
Value
     Weighted-
Average
Remaining
Contractual
Life (Years)
 

Outstanding at December 31, 2011

     3,030,128      $ 13.22       $ 28,318         6.79   

Granted

     416,129        25.36         

Exercised

     (590,724     12.32         

Forfeited

     (81,020     12.37         
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding at June 30, 2012

     2,774,513        15.25       $ 26,397         6.86   
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested and exercisable at June 30, 2012

     1,392,968        12.90       $ 16,355         5.76   
  

 

 

         

Available for grant at June 30, 2012

     2,101,132           
  

 

 

         

 

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EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2012

(Unaudited)

(In thousands, except share and per share amounts)

 

The unrecognized compensation cost for unvested options as of June 30, 2012 was $7,394, which is expected to be expensed over a weighted average period of 2.78 years. The weighted-average fair value of options granted during the three months ended June 30, 2012 was $9.41. No options were granted during the three months ended June 30, 2011. The weighted-average fair value of options granted during the six months ended June 30, 2012 and 2011 was $9.43 and $8.21, respectively. The total fair value of shares vested during the three months ended June 30, 2012 and 2011 was $311 and $628, respectively. The total fair value of shares vested during the six months ended June 30, 2012 and 2011 was $2,348 and $2,136, respectively.

Restricted Stock and Restricted Stock Units

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

 

     Restricted Stock      Restricted Stock Units  
     Number     Weighted-
Average
Intrinsic
Value
     Number     Weighted-
Average
Intrinsic
Value
 

Outstanding at December 31, 2011

     63,834      $ 18.41         939,659      $ 19.40   

Granted

     —          —           345,050        24.77   

Vested

     (51,026     18.56         (179,202     18.94   

Forfeited

     (2,901     23.82         (49,020     20.60   
  

 

 

   

 

 

    

 

 

   

 

 

 

Outstanding at June 30, 2012

     9,907      $ 16.32         1,056,487      $ 21.19   
  

 

 

   

 

 

    

 

 

   

 

 

 

As of June 30, 2012, unrecognized compensation cost of $18,657 is expected to be expensed over a weighted average period of 2.69 years.

14. Related Party Transactions

The Company provides services to Oak Hill Capital Partners, an affiliate of the Oak Hill Capital Partners, L.P., one of the Company’s significant stockholders. The Company recognized revenues of approximately $23 and $20 during the three months ended June 30, 2012 and 2011, respectively, and $38 and $35 during the six months ended June 30, 2012 and 2011, respectively. As of June 30, 2012 and December 31, 2011, the Company had an account receivable of $30 and $3, respectively, related to these services.

 

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EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2012

(Unaudited)

(In thousands, except share and per share amounts)

 

15. Geographical Information

 

     Three months ended June 30,      Six months ended June 30,  
     2012      2011      2012      2011  

Revenues

           

United States

   $ 77,617       $ 61,060       $ 153,565       $ 113,478   

United Kingdom

     22,071         19,673         42,985         38,114   

Rest of World

     8,342         4,295         16,088         6,343   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 108,030       $ 85,028       $ 212,638       $ 157,935   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30,      December 31,  
     2012      2011  

Fixed assets, net

     

India

   $ 32,918       $ 35,787   

United States

     2,261         1,408   

Philippines

     4,957         3,946   

Rest of World

     1,116         1,179   
  

 

 

    

 

 

 
   $ 41,252       $ 42,320   
  

 

 

    

 

 

 

16. Commitments and Contingencies

Fixed Asset Commitments

As of June 30, 2012, the Company had committed to spend approximately $2,327 under agreements to purchase fixed assets. This amount is net of advances paid in respect of these purchases.

Other Commitments

Certain units of the Company’s Indian subsidiaries had been established as 100% Export-Oriented units under the Export Import Policy or Software Technology Parks of India units (“STPI”) under the STPI guidelines issued by the Government of India which had provided the Company with certain incentives on imported and indigenous capital goods on fulfillment of certain conditions. Although the corporate tax incentives are no longer available, the units are required to fulfill such conditions for a limited time. In the event that these units are unable to meet those conditions over the specified period, the Company may be required to refund those incentives along with penalties and fines. However, management believes that these units have in the past satisfied and will continue to satisfy those conditions.

ExlService Philippines, Inc. (“Exl Philippines”) is registered as an Ecozone IT Enterprise with the Philippines Economic Zone Authority. The registration provides the Company with certain incentives on the import of capital goods and requires Exl Philippines to meet certain export obligations. The Company currently benefits from a four-year income tax holiday for one of its operations centers in the Philippines that expired in the middle of 2012 but is extendable for an additional two years. The Company has applied to the Authority for an extension of the tax holiday, if granted, which would be effective retrospectively from the date of expiry. The Company’s new operations center in the Philippines, inaugurated in January 2012, will also benefit from a four-year income tax holiday that is extendable for an additional two years.

Contingencies

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

 

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EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2012

(Unaudited)

(In thousands, except share and per share amounts)

 

tax authorities over the application of some of its transfer pricing policies. The Company has received a number of assessment orders from the Indian tax authorities with respect to their audit of certain of the Company’s subsidiaries. The Indian tax authorities are examining income tax returns for other tax years.

The details of the assessment orders, as well as amounts deposited or bank guarantees provided by the company as of June 30, 2012 are set forth below:

 

Entity

   Tax Year     

Issue

   Amount
Demanded
(Including
Interest)
     Amount
Deposited
(Including
additional
Interest)
     Bank
Guarantee
Issued
(Including
additional
Interest)
 

Exl India

     2003-04      

The assessment order alleges that the transfer price we applied to transactions between EXL India and EXL Inc. in the 2003-04 tax year was not appropriate and also disallows certain expenses claimed as tax deductible by EXL India.

   $ 1,748       $ 1,748       $ —     

Exl India

     2004-05      

The assessment order alleges that the transfer price we applied to transactions between EXL India and EXL Inc. for the 2004-05 tax year was not appropriate and also disallows certain expenses claimed as tax deductible by EXL India.

     1,695         1,695         —     

Exl India

     2005-06      

The assessment order alleges that the transfer price we applied to transactions between EXL India and EXL Inc. for the 2005-06 tax year was not appropriate and also disallows certain expenses claimed as tax deductible by EXL India.

     3,269         3,269         —     

Exl India

     2006-07      

The assessment order alleges that the transfer price we applied to transactions between EXL India and EXL Inc. for the 2006-07 tax year was not appropriate and also disallows certain expenses claimed as tax deductible by EXL India.

     3,253         2,680         —     

Exl India

     2007-08      

The assessment order alleges that the transfer price we applied to transactions between EXL India and EXL Inc. for the 2007-08 tax year was not appropriate and also disallows certain expenses claimed as tax deductible by EXL India.

     3,767         899         —     

Exl Inc.

     2003-04      

The assessment order alleges that EXL Inc. has a permanent establishment in India.

     2,637         1,259         1,968   

Exl Inc.

     2004-05      

The assessment order alleges that EXL Inc. has a permanent establishment in India.

     85         36         47   

Exl Inc.

     2005-06      

The assessment order alleges that EXL Inc. has a permanent establishment in India.

     626         324         367   

Exl Inc.

     2006-07      

The assessment order alleges that EXL Inc. has a permanent establishment in India.

     1,074         —           —     

BPO India

     2004-05      

The assessment order alleges the transfer price we applied to transactions between OPI India and OPI Inc., for the 2004-05 tax year was not appropriate and proposes certain adjustments to the methodology for computing the amount of the tax exemption.

     129         129         —     

BPO India

     2008-09      

The assessment order proposes certain adjustments to the methodology for computing the amount of the tax exemption.

     66         66         —     

OPI India

     2008-09      

The assessment order proposes certain adjustments to the methodology for computing the amount of the tax exemption.

     69         67         —     
        

 

 

    

 

 

    

 

 

 
         $ 18,418       $ 12,172       $ 2,382   
        

 

 

    

 

 

    

 

 

 

Based on advice from its Indian tax advisors, the facts underlying its position and its experience with these types of assessments, the Company believes that the probability of loss is remote and accordingly has not accrued any amount with respect to these matters in its unaudited consolidated financial statements. The Company does not expect any impact from these assessments on its future income tax expense. There is a likelihood that the Company might receive similar orders for subsequent years until the above disputes are resolved.

 

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EXLSERVICE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2012

(Unaudited)

(In thousands, except share and per share amounts)

 

Amounts paid as deposits in respect of the assessments described above aggregating to $12,172 and $11,662 as of June 30, 2012 and December 31, 2011, respectively, are included in “Other assets” and amounts deposited for bank guarantees aggregating to $2,382 as of June 30, 2012 and $2,494 as of December 31, 2011, respectively, are included in “Restricted cash non-current” in the Company’s unaudited consolidated balance sheet as of June 30, 2012 and the audited consolidated balance sheet as of December 31, 2011.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in connection with our unaudited consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Some of the statements in the following discussion are forward looking statements. See “Forward Looking Statements.” Dollar amounts within Item 2 are presented as actual dollar amounts.

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward looking statements. You should not place undue reliance on these statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Forward looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy. These statements often include words such as “may,” “will,” “should,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or similar expressions. These statements are based on assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this Quarterly Report on Form 10-Q, you should understand that these statements are not guarantees of performance or results. They involve known and unknown risks, uncertainties and assumptions. Although we believe that these forward looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward looking statements. These factors include but are not limited to:

 

   

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

 

   

worldwide political, economic or business conditions;

 

   

negative public reaction in the United States or elsewhere to offshore outsourcing;

 

   

fluctuations in exchange rates between the currencies in which we receive our revenues and the currencies in which we incur our costs;

 

   

fluctuations in our earnings;

 

   

our ability to attract and retain clients;

 

   

our ability to successfully consummate or integrate acquisitions, including the OPI Acquisition;

 

   

restrictions on immigration;

 

   

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

 

   

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

 

   

increasing competition in our industry;

 

   

telecommunications or technology disruptions;

 

   

regulatory, legislative and judicial developments, including changes to or the withdrawal of governmental fiscal incentives;

 

   

technological innovation;

 

   

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

 

   

unauthorized disclosure of sensitive or confidential client and customer data; and

 

   

adverse outcome of our disputes with the Indian tax authorities.

These and other factors are more fully discussed elsewhere in this Quarterly Report on Form 10-Q. These and other risks could cause actual results to differ materially from those implied by forward looking statements in this Quarterly Report on Form 10-Q.

 

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Table of Contents

You should keep in mind that any forward looking statement made by us in this Quarterly Report on Form 10-Q, or elsewhere, speaks only as of the date on which we make it. New risks and uncertainties come up from time to time, and it is impossible for us to predict those events or how they may affect us. We have no obligation to update any forward looking statements in this Quarterly Report on Form 10-Q after the date of this Quarterly Report on Form 10-Q, except as required by federal securities laws.

Overview

We are a leading provider of outsourcing and transformation services and focus on providing our clients with a positive business impact and enhancing their long term financial value. We customize our services to improve the economics of business performance and transform organizations to be leaner and more flexible. Our outsourcing services provide front-, middle- and back-office processing services for our primarily U.S.-based and U.K.-based clients. Outsourcing services involve the transfer to us of select business operations of a client, such as claims processing, finance and accounting and customer service, after which we administer and manage the operations for our client on an ongoing basis. We also offer a number of transformation services that include decision analytics, finance transformation and operations and process excellence services. These transformation services help our clients improve their operating environments through cost reduction, enhanced efficiency and productivity initiatives, and improve the risk and control environments within our clients’ operations whether or not they are outsourced to us. We serve primarily the needs of Global 1000 companies in the insurance and healthcare, utilities, banking and financial services, transportation and logistics and travel sectors.

On May 31, 2011, we completed the acquisition of Business Process Outsourcing Inc. (“OPI”), pursuant to a Merger Agreement, dated as of April 30, 2011 (the “OPI Acquisition”). We acquired OPI to strengthen our position as a provider of finance and accounting outsourcing services. By combining our existing finance and accounting outsourcing and transformation capabilities with OPI’s finance and accounting outsourcing capabilities and proprietary technology tools, we intend to provide a comprehensive set of finance and accounting services to our clients. The OPI Acquisition also furthers a strategic objective of leveraging technology and proprietary intellectual property in our service delivery.

On October 1, 2011, we acquired Trumbull Services, LLC (“Trumbull”), a market leader in subrogation services for property and casualty insurance companies, from the Hartford Financial Services Group, Inc. (the “Trumbull Acquisition”). With the Trumbull Acquisition, we have strengthened our leadership position in the insurance industry with a highly skilled and experienced employee base and access to an advanced software platform, and have become a leading provider of complex insurance subrogation outsourcing services.

We market our services to our existing and prospective clients through our sales and client management teams, which are aligned by industry verticals and cross-industry domains such as finance and accounting. Our sales and client management teams operate from the U.S. and Europe and are supported by our business development team, which operates from the U.S. and India. We operate 13 operations centers in India including a new operations center in Pune, India inaugurated in June 2012 which is located in a special economic zone and is eligible for tax incentives, two operations centers in the U.S., two operations centers in the Philippines, and one operations center in each of Romania and the Czech Republic. In addition to these operations centers, we acquired three operations centers in India, two operations centers in Bulgaria, one operations center in Malaysia and two operations centers in the U.S. as part of the OPI Acquisition. We also acquired an operations center in the U.S. as part of the Trumbull Acquisition.

In February 2012, we inaugurated the EXL Center for Talent in Noida, India, our first facility dedicated exclusively to recruitment, capability enhancement and talent development. We are also in the process of expanding several of our other operations centers globally.

We generate revenues principally from contracts to provide outsourcing and transformation services. For the three and six months ended June 30, 2012, we had total revenues of $108.0 million and $212.6 million, respectively, compared to total revenues of $85.0 million and $157.9 million in the three and six months ended June 30, 2011, respectively, an increase of $23.0 million and $54.7 million, respectively, or 27.1% and 34.6%, respectively.

 

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Table of Contents

Revenues from outsourcing services increased from $68.7 million and $125.6 million for the three and six months ended June 30, 2011, respectively, to $88.9 million and $178.7 million for the three and six months ended June 30, 2012, respectively. The increase in revenues from outsourcing services of $20.2 million and $53.1 million for the three and six months ended June 30, 2012, respectively, was driven primarily by revenues of $17.1 million and $43.8 million from the OPI Acquisition and the Trumbull Acquisition and net volume increases from existing and new clients aggregating to $8.0 million and $16.4 million. These increases were offset partially by a net decrease in revenues of $4.8 million and $7.1 million, primarily due to the depreciation of each of the Indian rupee, U.K. pound sterling and Czech koruna against the U.S. dollar during the three and six months ended June 30, 2012 compared to the three and six months ended June 30, 2011.

Revenues from transformation services increased from $16.3 million and $32.4 million for the three and six months ended June 30, 2011, respectively to $19.1 million and $34.0 million for the three and six months ended June 30, 2012, respectively. The increase was primarily due to a combination of increased revenues in recurring or annuity decision analytics services and an increase in project-based engagements both in our decision analytics and operations and process excellence practices during the three and six months ended June 30, 2012 compared to the three and six months ended June 30, 2011. Revenues from new clients for transformation services were $1.4 million and $2.4 million during the three and six months ended June 30, 2012, respectively, and $0.2 million and $0.3 million during the three and six months ended June 30, 2011, respectively.

We anticipate that our revenues will grow as we expand our service offerings and client base, both organically and through acquisitions. We provide our clients with a range of outsourcing services principally in the insurance and healthcare, utilities, banking and financial services, transportation and logistics and travel sectors, as well as cross-industry outsourcing services, such as finance and accounting services. Our clients transfer the management and execution of their processes or business functions to us. As part of this transfer, we hire and train employees to work at our operations centers on the relevant outsourcing services, implement a process migration to these operations centers and then provide services either to the client or directly to the client’s customers. Each client contract has different terms based on the scope, deliverables and complexity of the engagement. The outsourcing services we provide to any of our clients (particularly under our general framework agreements), and the revenues and income that we derive from those services, may decline or vary as the type and quantity of services we provide under those contracts change over time, including as a result of a shift in the mix of products and services we provide.

For outsourcing services, we enter into long-term agreements with our clients with typical initial terms ranging from three to eight years. These contracts also usually contain provisions permitting termination of the contract after a short notice period. Although these agreements provide us with a relatively predictable revenue base for a substantial portion of our business, the long selling cycle for our outsourcing services and the budget and approval processes of prospective clients make it difficult to predict the timing of new client acquisitions. Revenues under new client contracts also vary depending on when we complete the selling cycle and the implementation phase.

Our transformation services can be significantly affected by variations in business cycles. In addition, our transformation services consist primarily of specific projects with contract terms generally not exceeding one year and may not produce ongoing or recurring business for us once the project is completed. These contracts also usually contain provisions permitting termination of the contract after a short notice period. The short-term nature and specificity of these projects could lead to further material fluctuations and uncertainties in the revenues generated from these businesses. We have experienced a significant increase in demand for our annuity-based transformation services, which are engagements that are contracted for one- to three-year terms.

We serve clients mainly in the U.S. and the U.K., with these two regions generating approximately 71.8% and 20.4%, respectively, of our total revenues for the three months ended June 30, 2012 and approximately 71.8% and 23.1%, respectively, of our total revenues for the three months ended June 30, 2011. For the six months ended June 30, 2012, these two regions generated approximately 72.2% and 20.2%, respectively, of our total revenues and approximately 71.9% and 24.1%, respectively, of our total revenues for the six months ended June 30, 2011.

 

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In the three months ended June 30, 2012 and 2011, our total revenues from our three largest clients were $28.2 million and $29.6 million, respectively, accounting for 26.1% and 34.8% of our total revenues, respectively, during these periods. In the six months ended June 30, 2012 and 2011, our total revenues from our three largest clients were $56.2 million and $57.5 million, respectively, accounting for 26.4% and 36.4% of our total revenues, respectively, during these periods. Although we are increasing and diversifying our customer base, we expect in the near future that a significant portion of our revenues will continue to be contributed by a limited number of large clients.

We provide services to The Travelers Companies (“Travelers”), which represented $11.1 million, or 10.3%, and $22.1 million, or 10.4%, respectively of our total revenues for the three and six months ended June 30, 2012 and $10.3 million, or 12.1%, and $20.4 million, or 12.9%, respectively of our total revenues for the three and six months ended June 30, 2011, under a services agreement. Travelers may terminate the services agreement, or any work assignment or work order thereunder, each of which expires in December 2013, without cause upon 60 days’ prior notice.

We derived revenues from nine and five new clients for our services in the three months ended June 30, 2012 and 2011, respectively, and twenty and eight new clients for our services in the six months ended June 30, 2012 and 2011, respectively.

Revenues also include amounts representing reimbursable expenses that are billed to and reimbursed by our clients and typically include telecommunication and travel-related costs. The amount of reimbursable expenses that we incur, and any resulting revenues, can vary significantly from period to period depending on each client’s situation and on the type of services provided. For the three months ended June 30, 2012 and 2011, 4.9% and 4.1%, respectively, of our revenues represent reimbursement of such expenses. For the six months ended June 30, 2012 and 2011, 4.4% and 4.2%, respectively, of our revenues represent reimbursement of such expenses.

To the extent our client contracts do not contain provisions to the contrary, we bear the risk of inflation and fluctuations in currency exchange rates with respect to our contracts. We hedge a substantial portion of our Indian rupee/U.S. dollar, Philippine peso/U.S. dollar and U.K. pound sterling/U.S. dollar exposure.

We have observed a shift in industry pricing models toward transaction-based pricing and other pricing models. We believe this trend will continue and we have begun to use transaction-based and other pricing models with some of our current clients and are seeking to move certain other clients from a billing rate model to a transaction-based or other pricing model. Such models place the focus on operating efficiency in order to maintain our operating margins. In addition, we have also observed that prospective larger clients are entering into multi-vendor relationships with regard to their outsourcing needs. We believe that the trend toward multi-vendor relationships will continue. A multi-vendor relationship allows a client to seek more favorable pricing and other contract terms from each vendor, which can result in significantly reduced operating margins from the provision of services to such client for each vendor. To the extent our large clients expand their use of multi-vendor relationships and are able to extract more favorable contract terms from other vendors, our operating margins and revenues may be reduced with regard to such clients if we are required to modify the terms of our relationships with such clients.

 

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Table of Contents

Critical Accounting Policies and Estimates

For a description of our critical accounting policies and estimates, refer to our Annual Report on Form 10-K for the year ended December 31, 2011.

Results of Operations

The following table summarizes our results of operations:

 

     Three months
ended June 30,
     Six months ended
June 30,
 
     2012     2011      2012     2011  
     (in million)      (in million)  

Revenues(1)

   $ 108.0      $ 85.0       $ 212.6      $ 157.9   

Cost of revenues (exclusive of depreciation and amortization)(2)

     66.0        52.0         132.7        96.2   
  

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     42.0        33.0         79.9        61.7   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating expenses:

         

General and administrative expenses(3)

     13.9        12.4         27.2        22.8   

Selling and marketing expenses(3)

     7.7        6.1         15.5        12.0   

Depreciation and amortization expenses(4)

     6.0        5.1         12.4        10.0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total operating expenses

     27.6        23.6         55.1        44.8   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income from operations

     14.4        9.4         24.8        16.9   

Other income/(expense):

         

Foreign exchange (loss)/gain

     (2.1     1.8         (1.0     3.4   

Interest and other income

     0.4        0.7         0.8        1.0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     12.7        11.9         24.6        21.3   

Income tax provision

     3.6        3.4         6.6        4.5   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 9.1      $ 8.5       $ 18.0      $ 16.8   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Revenues include reimbursable expenses of $5.3 million and $3.5 million for the three months ended June 30, 2012 and 2011, respectively, and $9.4 million and $6.7 million for the six months ended June 30, 2012 and 2011, respectively.
(2) Cost of revenues includes $0.6 million each during the three months ended June 30, 2012 and 2011, and $1.2 million and $1.0 million for the six months ended June 30, 2012 and 2011, respectively, of non-cash amortization of stock compensation expense relating to the issuance of equity awards to employees directly involved in providing services to our clients as described in Note 13 to our unaudited consolidated financial statements contained herein.
(3) General and administrative expenses and selling and marketing expenses include $2.1 million and $2.3 million for the three months ended June 30, 2012 and 2011, respectively, and $4.2 million each during the six months ended June 30, 2012 and 2011, of non-cash amortization of stock compensation expense relating to the issuance of equity awards to our non-operations staff as described in Note 13 to our unaudited consolidated financial statements contained herein.
(4) Depreciation and amortization includes $1.4 million and $0.9 million for the three months ended June 30, 2012 and 2011, respectively, and $2.8 million and $1.5 million for the six months ended June 30, 2012 and 2011, respectively, of amortization of intangibles as described in Note 5 to our unaudited consolidated financial statements contained herein.

 

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Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

Revenues. Revenues increased 27.1% from $85.0 million for the three months ended June 30, 2011 to $108.0 million for the three months ended June 30, 2012. Revenues from outsourcing services increased from $68.7 million during the three months ended June 30, 2011 to $88.9 million during the three months ended June 30, 2012. The increase in revenues from outsourcing services of $20.2 million was primarily driven by revenues of $17.1 million from the OPI Acquisition and the Trumbull Acquisition and net volume increases from existing and new clients aggregating to $8.0 million. These increases were partially offset by a net decrease in revenues of $4.8 million, primarily due to the depreciation of each of the Indian rupee, U.K. pound sterling and Czech koruna against the U.S. dollar during the three months ended June 30, 2012 compared to the three months ended June 30, 2011.

Revenues from transformation services increased from $16.3 million for the three months ended June 30, 2011 to $19.1 million for the three months ended June 30, 2012. The increase was primarily due to a combination of increased revenues in recurring or annuity decision analytics services and an increase in project-based engagements both in our decision analytics and operations and process excellence practices during the three months ended June 30, 2012 compared to the three months ended June 30, 2011. Revenues from new clients for transformation services were $1.4 million and $0.2 million during the three months ended June 30, 2012 and 2011, respectively.

Cost of Revenues. Cost of revenues increased 27.0% from $52.0 million for the three months ended June 30, 2011 to $66.0 million for the three months ended June 30, 2012. The increase in cost of revenues was primarily due to an increase in employee-related costs of $16.9 million as a result of an increase in the number of our personnel directly involved in providing services to our clients, including $8.9 million of employee-related costs related to the OPI Acquisition and the Trumbull Acquisition. We also experienced an increase in reimbursable expenses of $1.8 million (resulting in an increase in revenues) and an increase in facilities, technology and other operating expenses of $3.3 million (primarily due to our acquisitions and new operations centers to support business growth). These increases were partially offset by a decrease of $8.0 million due to the net effect of depreciation of the Indian rupee and Czech koruna and appreciation of the Philippines peso against the U.S. dollar during the three months ended June 30, 2012 compared to the three months ended June 30, 2011. Cost of revenues as a percentage of revenues decreased marginally from 61.2% for the three months ended June 30, 2011 to 61.1% for the three months ended June 30, 2012.

Gross Profit. Gross profit increased 27.1% from $33.0 million for the three months ended June 30, 2011 to $42.0 million for the three months ended June 30, 2012. The increase in gross profit was primarily due to an increase in revenues of $23.0 million, offset by an increase in cost of revenues of $14.0 million. Gross profit as a percentage of revenues increased marginally from 38.8% for the three months ended June 30, 2011 to 38.9% for the three months ended June 30, 2012, primarily due to the depreciation of the Indian rupee against the U.S. dollar, partially offset by the impact of acquisitions in 2011 and a one-time client payment of $2.2 million, with no associated costs, received during the three months ended June 30, 2011.

Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses increased 16.4% from $18.5 million for the three months ended June 30, 2011 to $21.6 million for the three months ended June 30, 2012. The increase in SG&A expenses was primarily due to an increase in employee-related costs of $3.0 million, including $1.6 million of employee-related costs related to the OPI Acquisition and the Trumbull Acquisitions, an increase in facilities costs of $0.4 million, primarily related to our acquisitions in 2011, and an increase in other SG&A costs of $1.2 million during the three months ended June 30, 2012 compared to the three months ended June 30, 2011. These increases were partially offset by a decrease of $1.6 million due to the net effect of depreciation of the Indian rupee and Czech koruna and appreciation of the Philippines peso against the U.S. dollar during the three months ended June 30, 2012 compared to the three months ended June 30, 2011. As a percentage of revenues, SG&A expenses decreased from 21.8% for the three months ended June 30, 2011 to 19.9% for the three months ended June 30, 2012.

Depreciation and Amortization. Depreciation and amortization increased 18.2% from $5.1 million for the three months ended June 30, 2011 to $6.0 million for the three months ended June 30, 2012. The increase was primarily due to an increase in amortization of acquisition-related intangibles of $0.5 million, an increase in depreciation of $1.2 million, primarily related to our new operations centers and the OPI Acquisition and the Trumbull Acquisition. As we add more operations centers, we expect that our depreciation expense will increase to reflect the additional investment in equipment and operations centers necessary to meet our service requirements. These increases were partially offset

 

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by a decrease of $0.8 million due to the net effect of depreciation of the Indian rupee and Czech koruna and appreciation of the Philippines peso against the U.S. dollar during the three months ended June 30, 2012 compared to the three months ended June 30, 2011. As a percentage of revenues, depreciation and amortization decreased from 6.0% for the three months ended June 30, 2011 to 5.6% for the three months ended June 30, 2012.

Income from Operations. Income from operations increased 53.0% from $9.4 million for the three months ended June 30, 2011 to $14.4 million for the three months ended June 30, 2012. As a percentage of revenues, income from operations increased from 11.1% for the three months ended June 30, 2011 to 13.3% for the three months ended June 30, 2012. The increase in income from operations as a percentage of revenues was primarily due to operating leverage and the OPI and the Trumbull Acquisitions, resulting in lower SG&A expenses as a percentage of revenues during the three months ended June 30, 2012.

Other Income/(Expense). Other income is comprised of foreign exchange gains and losses, interest income and expense and other items. Other income decreased from $2.4 million for the three months ended June 30, 2011 to ($1.7 million) for the three months ended June 30, 2012. This decrease is primarily as a result of net foreign exchange loss of $2.1 million during the three months ended June 30, 2012 compared to a net foreign exchange gain of $1.8 million during the three months ended June 30, 2011, primarily attributable to the movement of the U.S. dollar against the Indian rupee. Net interest income and other income decreased by $0.2 million during the three months ended June 30, 2012 compared to the three months ended June 30, 2011, primarily due to a one-time gain during the three months ended June 30, 2011. The average exchange rate of the Indian rupee against the U.S. dollar was 54.81 during the three months ended June 30, 2012 compared to 44.66 during the three months ended June 30, 2011.

Provision for Income Taxes. Provision for income taxes increased from $3.4 million for the three months ended June 30, 2011 to $3.6 million for the three months ended June 30, 2012. The effective rate of taxes increased marginally from 28.5% during the three months ended June 30, 2011 to 28.6% during the three months ended June 30, 2012. Refer to Note 12 to the unaudited consolidated financial statements for further details.

Net Income. Net income increased from $8.5 million for the three months ended June 30, 2011 to $9.1 million for the three months ended June 30, 2012, primarily due to an increase in operating income of $5.0 million, offset by a decrease in other income of $4.2 million and an increase in provision for income taxes of $0.2 million. As a percentage of revenues, net income decreased from 10.0% for the three months ended June 30, 2011 to 8.4% for the three months ended June 30, 2012.

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

Revenues. Revenues increased 34.6% from $157.9 million for the six months ended June 30, 2011 to $212.6 million for the six months ended June 30, 2012. Revenues from outsourcing services increased from $125.6 million during the six months ended June 30, 2011 to $178.7 million during the six months ended June 30, 2012. The increase in revenues from outsourcing services of $53.1 million was primarily driven by revenues of $43.8 million from the OPI Acquisition and the Trumbull Acquisition and net volume increases from existing and new clients aggregating to $16.4 million. These increases were partially offset by a net decrease in revenues of $7.1 million, primarily due to the depreciation of each of the Indian rupee, U.K. pound sterling and Czech koruna against the U.S. dollar during the six months ended June 30, 2012 compared to the six months ended June 30, 2011.

Revenues from transformation services increased from $32.4 million for the six months ended June 30, 2011 to $34.0 million for the six months ended June 30, 2012. The increase was primarily due to a combination of increased revenues in recurring or annuity decision analytics services and an increase in project-based engagements both in our decision analytics and operations and process excellence practices during the six months ended June 30, 2012 compared to the six months ended June 30, 2011. Revenues from new clients for transformation services were $2.4 million and $0.3 million during the six months ended June 30, 2012 and 2011, respectively.

Cost of Revenues. Cost of revenues increased 37.9% from $96.2 million for the six months ended June 30, 2011 to $132.7 million for the six months ended June 30, 2012. The increase in cost of revenues was primarily due to an increase in employee-related costs of $37.6 million as a result of an increase in the number of our personnel directly involved in providing services to our clients, including $23.6 million of employee-related costs related to the OPI Acquisition and the Trumbull Acquisition. We also experienced an increase in reimbursable expenses of $2.8 million (resulting in an increase in revenues) and an increase in facilities, technology and other operating expenses of $7.2

 

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million (primarily due to our acquisitions and new operations centers to support business growth). These increases were partially offset by a decrease of $11.1 million due to the net effect of depreciation of the Indian rupee and Czech koruna and appreciation of the Philippines peso against the U.S. dollar during the six months ended June 30, 2012 compared to the six months ended June 30, 2011. Cost of revenues as a percentage of revenues increased from 60.9% for the six months ended June 30, 2011 to 62.4% for the six months ended June 30, 2012.

Gross Profit. Gross profit increased 29.5% from $61.7 million for the six months ended June 30, 2011 to $79.9 million for the six months ended June 30, 2012. The increase in gross profit was primarily due to an increase in revenues of $54.7 million, offset by an increase in cost of revenues of $36.5 million. Gross profit as a percentage of revenues decreased from 39.1% for the six months ended June 30, 2011 to 37.6% for the six months ended June 30, 2012, primarily due to the impact of our acquisitions in 2011 and a one-time client payment of $2.2 million, with no associated costs, received during the six months ended June 30, 2011, partially offset by the depreciation of the Indian rupee against the U.S. dollar during the six months ended June 30, 2012 compared to the six months ended June 30, 2011.

SG&A Expenses. SG&A expenses increased 22.6% from $34.8 million for the six months ended June 30, 2011 to $42.7 million for the six months ended June 30, 2012. The increase in SG&A expenses was primarily due to an increase in employee-related costs of $7.0 million, including $4.0 million of employee-related costs related to the OPI Acquisition and the Trumbull Acquisition, an increase in facilities costs of $0.7 million, primarily related to our acquisitions in 2011, and an increase in other SG&A costs of $2.3 million during the six months ended June 30, 2012 compared to the six months ended June 30, 2011. These increases were partially offset by a decrease of $2.1 million due to the net effect of depreciation of the Indian rupee and Czech koruna and appreciation of the Philippines peso against the U.S. dollar during the six months ended June 30, 2012 compared to the six months ended June 30, 2011. As a percentage of revenues, SG&A expenses decreased from 22.1% for the six months ended June 30, 2011 to 20.1% for the six months ended June 30, 2012.

Depreciation and Amortization. Depreciation and amortization increased 24.5% from $10.0 million for the six months ended June 30, 2011 to $12.4 million for the six months ended June 30, 2012. The increase was primarily due to an increase in amortization of acquisition-related intangibles of $1.2 million, an increase in depreciation of $2.3 million, primarily related to our new operations centers and the OPI Acquisition and the Trumbull Acquisition. As we add more operations centers, we expect that our depreciation expense will increase to reflect the additional investment in equipment and operations centers necessary to meet our service requirements. These increases were partially offset by a decrease of $1.1 million due to the net effect of depreciation of the Indian rupee and Czech koruna and appreciation of the Philippines peso against the U.S. dollar during the six months ended June 30, 2012 compared to the six months ended June 30, 2011. As a percentage of revenues, depreciation and amortization decreased from 6.3% for the six months ended June 30, 2011 to 5.8% for the six months ended June 30, 2012.

Income from Operations. Income from operations increased 46.7% from $16.9 million for the six months ended June 30, 2011 to $24.8 million for the six months ended June 30, 2012. As a percentage of revenues, income from operations increased from 10.7% for the six months ended June 30, 2011 to 11.7% for the six months ended June 30, 2012. The increase in income from operations as a percentage of revenues was primarily due to operating leverage and the OPI Acquisition, resulting in lower SG&A expenses as a percentage of revenues, partially offset by lower gross margins during the six months ended June 30, 2012.

Other Income/(Expense). Other income is comprised of foreign exchange gains and losses, interest income and expense and other items. Other income decreased from $4.4 million for the six months ended June 30, 2011 to ($0.2 million) for the six months ended June 30, 2012. This decrease is primarily as a result of net foreign exchange loss of $1.0 million during the six months ended June 30, 2012 compared to net foreign exchange gain of $3.5 million during the six months ended June 30, 2011, primarily attributable to the movement of the U.S. dollar against the Indian rupee. Net interest income and other income decreased by $0.2 million during the six months ended June 30, 2012 compared to the six months ended June 30, 2011, primarily due to a one-time gain during the six months ended June 30, 2011. The average exchange rate of the Indian rupee against the U.S. dollar was 52.30 during the six months ended June 30, 2012 compared to 44.96 during the six months ended June 30, 2011.

 

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Provision for Income Taxes. Provision for income taxes increased from $4.5 million for the six months ended June 30, 2011 to $6.6 million for the six months ended June 30, 2012. The effective rate of taxes increased from 21.1% during the six months ended June 30, 2011 to 27.0% during the six months ended June 30, 2012. The increase is primarily due to the release of a valuation allowance on deferred tax assets of $2.0 million during the six months ended June 30, 2011. Refer to Note 12 to the unaudited consolidated financial statements for further details.

Net Income. Net income increased from $16.8 million for the six months ended June 30, 2011 to $18.0 million for the six months ended June 30, 2012, primarily due to an increase in operating income of $7.9 million, offset by a decrease in other income of $4.6 million and an increase in provision for income taxes of $2.1 million. As a percentage of revenues, net income decreased from 10.7% for the six months ended June 30, 2011 to 8.5% for the six months ended June 30, 2012.

Liquidity and Capital Resources

As of June 30, 2012, we had $101.0 million in cash and cash equivalents and short-term investments.

Cash flows provided by operating activities decreased from $26.8 million in the six months ended June 30, 2011 to $19.5 million in the six months ended June 30, 2012. Cash flows from net income adjusted for non-cash items increased by $1.4 million during the six months ended June 30, 2012 compared to the six months ended June 30, 2011, primarily due to an increase in net income of $1.1 million, an increase in depreciation, amortization and stock-based compensation of $2.8 million and a decrease in unrealized foreign exchange gain of $2.5 million.

Cash flows used for working capital increased from $4.6 million in the six months ended June 30, 2011 to $13.4 million in the six months ended June 30, 2012, primarily due to decrease in accrued employee costs and increase in prepaid expenses and other current assets. Our days’ sales outstanding was 51 days as of June 30, 2012 compared to 49 days as of December 31, 2011.

Cash flows used for investing activities decreased from $90.2 million in the six months ended June 30, 2011 to $12.2 million in the six months ended June 30, 2012. The decrease is primarily due to payment of purchase consideration of $80.1 million for the OPI acquisition in the six months ended June 2011. This decrease was partially offset by increase in capital expenditure of $4.6 million during the six months ended June 30, 2012 compared to the six months ended June 30, 2011.

Cash flows provided by financing activities decreased from $31.2 million in the six months ended June 30, 2011 to $6.1 million in the six months ended June 30, 2012. The decrease is primarily due to short term borrowing of $30.0 million under the Credit Facility during the six months ended June 30, 2011. This decrease was partially offset by proceeds from the exercise of stock options of $7.3 million during the six months ended June 30, 2012 compared to $3.6 million during the six months ended June 30, 2011.

We expect to use cash from operating activities to maintain and expand our business. As we have focused on expanding our cash flow from operating activities, we continue to make capital investments, primarily related to new facilities and capital expenditures associated with leasehold improvements to build out our facilities and the purchase of telecommunications equipment and computer hardware and software in connection with managing client operations. We incurred approximately $13.2 million of capital expenditures in the six months ended June 30, 2012. We expect to incur capital expenditures of approximately $10.0 million to $15.0 million in the remainder of 2012 primarily to meet the growth requirements of our clients, including adding to our existing facilities and expanding our operations centers in India as well as to improve our internal technology. The timing and volume of such capital expenditures in the future will be affected by new client contracts we may enter into or the expansion of business under our existing client contracts.

In connection with the tax assessment orders issued against Exl India and Exl Inc., we may be required to deposit additional amounts with respect to the assessment orders received by us and for similar orders for subsequent years that may be received by us. Refer to Note 16 to our unaudited consolidated financial statements for further details.

 

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On May 26, 2011, the Company entered into a three-year credit agreement (the “Credit Facility”) with certain lenders and JPMorgan Chase Bank, N.A., as Administrative Agent. Borrowings under the Credit Facility may be used for working capital and general corporate purposes. Originally a $50.0 million revolving facility, including a letter of credit sub-facility, the availability under the Credit Facility was reduced to $15.0 million in June 2012 and may be increased up to the original availability upon fulfillment of certain conditions. As of June 30, 2012, we did not have any borrowings under the Credit Facility.

We anticipate that we will continue to rely upon cash from operating activities and the Credit Facility to finance our acquisitions, capital expenditures and working capital needs. If we have significant growth through acquisitions or otherwise, we may need to obtain additional financing.

Off-Balance Sheet Arrangements

As of June 30, 2012 and December 31, 2011, we had no off-balance sheet arrangements or obligations.

Contractual Obligations

The following table sets forth our contractual obligations as of June 30, 2012:

 

            Payment Due by Period                
     Less
than
     1-3      4-5      After         
     1 year      years      years      5 years      Total  
     (in millions)  

Capital leases

     2.1         2.9         0.8         —           5.8   

Operating leases

     9.0         12.9         5.3         1.4         28.6   

Purchase obligations

     2.3         —           —           —           2.3   

Other obligations(a)

     1.3         2.2         1.9         2.5         7.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations(b)

   $ 14.7       $ 18.0       $ 8.0       $ 3.9       $ 44.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Represents estimated payments under the Company’s Gratuity Plan.
(b) Excludes $5.5 million related to uncertain tax positions, since the extent of the amount and timing of payment is currently not reliably estimable or determinable.

Certain units of our Indian subsidiaries had been established as 100% Export-Oriented units under the Export Import Policy or Software Technology Parks of India units (“STPI”) under the STPI guidelines issued by the Government of India which had provided us with certain incentives on imported and indigenous capital goods on fulfillment of certain conditions. Although the corporate tax incentives are no longer available, the units are required to fulfill such conditions for a limited time. In the event that these units are unable to meet those conditions over the specified period, we may be required to refund those incentives along with penalties and fines. However, we believe that these units have in the past satisfied and will continue to satisfy those conditions.

ExlService Philippines, Inc. (“Exl Philippines”) is registered as an Ecozone IT Enterprise with the Philippines Economic Zone Authority. The registration provides us with certain incentives on the import of capital goods and requires Exl Philippines to meet certain export obligations. We currently benefits from a four-year income tax holiday for one of its operations centers in the Philippines that expired in the middle of 2012 but is extendable for an additional two years. We have applied to the Authority for an extension of the tax holiday which, if granted, would be effective retrospectively from the date of expiry. Our new operations center in the Philippines, inaugurated in January 2012, will also benefit from a four-year income tax holiday that is extendable for an additional two years.

 

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Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued update No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS ” (ASU No. 2011-04). ASU No. 2011-04 was intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards (“IFRS”). The amendments in this update result in common fair value measurement and disclosure requirements in GAAP and IFRS. The update explains how to measure fair value and does not require additional measurements. The adoption of this accounting pronouncement from January 1, 2012 did not have any impact on our unaudited consolidated financial statements.

In June 2011, the FASB issued update No. 2011-05, “Presentation of Comprehensive Income” (ASU No. 2011-05). ASU No. 2011-05, effective retrospectively for the interim and annual periods beginning on or after December 15, 2011 (early adoption is permitted), requires presentation of total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued update No. 2011-12, which deferred the requirement to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for annual and interim financial statements. The adoption of this accounting pronouncement from January 1, 2012 did not have any impact on our unaudited consolidated financial statements. We adopted the option of presentation in two separate but consecutive statements. Refer to our unaudited consolidated statements of comprehensive income/(loss) for further details.

In September 2011, the FASB issued update No. 2011-08, “Testing Goodwill for Impairment” (ASU No. 2011-08), which allows entities to use a qualitative approach to test goodwill for impairment. ASU No. 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU No. 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this accounting pronouncement did not have a material impact on our unaudited consolidated financial statements and we do not expect it to have a material impact on our annual goodwill impairment assessment in the fourth quarter of fiscal 2012.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

During the six months ended June 30, 2012, there were no material changes in our market risk exposure. For a discussion of our market risk associated with exchange rate risk and interest rate risk, see Item 7A “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports the Company files under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), to allow timely decisions regarding required financial disclosure. In connection with the preparation of this Quarterly Report on Form 10-Q, the Company’s management carried out an evaluation, under the supervision and with the participation of the CEO and CFO, of the effectiveness and operation of our disclosure controls and procedures as of June 30, 2012. Based upon that evaluation, the CEO and CFO have concluded that, as of June 30, 2012, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

During the six months ended June 30, 2012, there was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

In the course of our normal business activities, various lawsuits, claims and proceedings may be instituted or asserted against us. We believe that the disposition of matters currently instituted or asserted will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. Please see Note 16 to our unaudited consolidated financial statements contained herein for details regarding our tax proceedings.

 

ITEM 1A. RISK FACTORS

We have disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011 a number of risks which may materially affect our business, financial condition or results of operations. You should carefully consider the “Risk Factors” set forth in our Annual Report on Form 10-K for the year ended December 31, 2011 and the other information set forth elsewhere in this Quarterly Report on Form 10-Q. You should be aware that these risk factors and other information may not describe every risk facing our Company. Additional risks and uncertainties not currently known to us may also materially adversely affect our business, financial condition and/or results of operations.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

None.

Use of Proceeds

None.

Purchases of Equity Securities by the Issuer

During the three months ended June 30, 2012, the Company acquired 5,410 shares of common stock from employees in connection with withholding tax payments related to the vesting of restricted stock for a total consideration of $149,424. The purchase price of $27.62 per share was the average of the high and low price of the Company’s shares of common stock on the Nasdaq Global Select Market on the trading day prior to the vesting date of the shares of restricted stock.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

ITEM 5. OTHER INFORMATION

None.

 

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ITEM 6. EXHIBITS

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

 

  31.1    Certification of the Vice Chairman and Chief Executive Officer of ExlService Holdings, pursuant to Rule 13a-14 of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of the Executive Vice President and Chief Financial Officer of ExlService Holdings, pursuant to Rule 13a-14 of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1
   Certification of the Vice Chairman and Chief Executive Officer of ExlService Holdings, pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of the Executive Vice President and Chief Financial Officer of ExlService Holdings, pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document *
101.SCH    XBRL Taxonomy Extension Schema *
101.CAL    XBRL Taxonomy Extension Calculation Linkbase *
101.DEF    XBRL Taxonomy Extension Definition Linkbase *
101.LAB    XBRL Taxonomy Extension Label Linkbase *
101.PRE    XBRL Taxonomy Extension Presentation Linkbase *

 

* This exhibit will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that the Company specifically incorporates it by reference.

 

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Table of Contents

SIGNATURES

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

 

  EXLSERVICE HOLDINGS, INC.
Date: August 3, 2012   By:  

/ S /    VISHAL CHHIBBAR        

    Vishal Chhibbar
   

Executive Vice President and Chief Financial Officer

(Duly Authorized Signatory, Principal Financial and Accounting Officer)

 

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