UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________________________________________

FORM 10-Q

_________________________________________________________

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017

OR

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

FOR THE TRANSITION PERIOD FROMTO

COMMISSION FILE NUMBER 001-33089

_________________________________________________________

EXLSERVICE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

_________________________________________________________

DELAWARE	82-0572194
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
280 PARK AVENUE, 38 TH FLOOR, NEW YORK, NEW YORK	10017
(Address of principal executive offices)	(Zip code)

(212) 277-7100

(Registrant’s telephone number, including area code)

________________________________________________________

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

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

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

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

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

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

As of October 24, 2017, there were 33,942,974 shares of the registrant’s common stock outstanding, par value $0.001 per share.

TABLE OF CONTENTS

		PAGE
ITEM
	Part I. Financial Information	3
1.	FINANCIAL STATEMENTS
	Consolidated Balance Sheets as of September 30, 2017 (Unaudited) and December 31, 2016	3
	Consolidated Statements of Income (Unaudited) for the Three months and Nine months ended September 30, 2017 and 2016	4
	Consolidated Statements of Comprehensive Income (Unaudited) for the Three months and Nine months ended September 30, 2017 and 2016	5
	Consolidated Statements of Cash Flows (Unaudited) for the Nine months ended September 30, 2017 and 2016	6
	Notes to Consolidated Financial Statements (Unaudited)	7
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
3.	Quantitative and Qualitative Disclosures About Market Risk	42
4.	Controls and Procedures	42
	Part II. Other Information	42
1.	Legal Proceedings	42
1A.	Risk Factors	42
2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
3.	Defaults Upon Senior Securities	43
4.	Mine Safety Disclosures	43
5.	Other Information	43
6.	Exhibits	43
Signatures		44

2

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EXLSERVICE HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

	As of
	September 30, 2017			December 31, 2016
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	87,665		$	213,155
Short-term investments	161,702			13,491
Restricted cash	1,913			3,846
Accounts receivable, net	133,862			113,067
Prepaid expenses	6,958			7,855
Advance income tax, net	8,821			6,242
Other current assets	22,333			21,168
Total current assets	423,254			378,824
Property, plant and equipment, net	63,729			49,029
Restricted cash	3,710			3,393
Deferred taxes, net	16,118			14,799
Intangible assets, net	43,568			53,770
Goodwill	187,953			186,770
Other assets	30,672			19,943
Total assets	$	769,004		$	706,528
Liabilities and Equity
Current liabilities:
Accounts payable	$	3,834		$	3,288
Short-term borrowings	—			10,000
Deferred revenue	8,662			16,615
Accrued employee cost	49,385			50,832
Accrued expenses and other current liabilities	49,040			43,264
Current portion of capital lease obligations	168			232
Total current liabilities	111,089			124,231
Long term borrowings	45,000			35,000
Capital lease obligations, less current portion	315			300
Non-current liabilities	16,234			14,819
Total liabilities	172,638			174,350
Commitments and contingencies (See Note 21)
Preferred stock, $0.001 par value; 15,000,000 shares authorized, none issued	—			—
Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized, 36,525,692 shares issued and 33,804,962 shares outstanding as of September 30, 2017 and 35,699,819 shares issued and 33,628,109 shares outstanding as of December 31, 2016	37			36
Additional paid-in capital	311,691			284,646
Retained earnings	436,419			382,722
Accumulated other comprehensive loss	(59,290		)	(75,057		)
Total including shares held in treasury	688,857			592,347
Less: 2,720,730 shares as of September 30, 2017 and 2,071,710 shares as of December 31, 2016, held in treasury, at cost	(92,698		)	(60,362		)
Stockholders’ equity	$	596,159		$	531,985
Non-controlling interest	207			193
Total equity	$	596,366		$	532,178
Total liabilities and equity	$	769,004		$	706,528

See accompanying notes to unaudited consolidated financial statements.

3

EXLSERVICE HOLDINGS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share amounts)

	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016
Revenues, net	$	192,345		$	171,200		$	564,435		$	508,714
Cost of revenues (exclusive of depreciation and amortization)	124,890			111,767			370,458			332,172
Gross profit	67,455			59,433			193,977			176,542
Operating expenses:
General and administrative expenses	26,870			21,854			75,809			63,620
Selling and marketing expenses	12,222			11,623			38,711			37,875
Depreciation and amortization	9,708			8,597			28,771			25,000
Total operating expenses	48,800			42,074			143,291			126,495
Income from operations	18,655			17,359			50,686			50,047
Foreign exchange gain, net	2,801			1,741			7,267			3,573
Interest expense	(482		)	(295		)	(1,379		)	(1,023		)
Other income, net	2,922			2,891			8,871			12,197
Income before income tax expense	23,896			21,696			65,445			64,794
Income tax expense	2,819			5,646			7,202			18,549
Net income	$	21,077		$	16,050		$	58,243		$	46,245
Earnings per share:
Basic	$	0.62		$	0.48		$	1.72		$	1.38
Diluted	$	0.60		$	0.46		$	1.66		$	1.34
Weighted-average number of shares used in computing earnings per share:
Basic	33,838,374			33,624,401			33,834,392			33,542,258
Diluted	35,043,987			34,675,485			35,048,672			34,512,815

See accompanying notes to unaudited consolidated financial statements.

4

EXLSERVICE HOLDINGS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016
Net income	$	21,077		$	16,050		$	58,243		$	46,245
Other comprehensive income:
Unrealized (loss)/gain on effective cash flow hedges, net of taxes ($162), $1,067, $2,874 and $1,094, respectively	(557		)	2,540			5,900			3,066
Foreign currency translation adjustment	(3,030		)	1,716			10,813			(2,652		)
Retirement benefits, net of taxes nil, $4, nil and $24, respectively	—			104			—			409
Reclassification adjustments
Realized gain on cash flow hedges, net of taxes ($129), ($205), ($476) and ($386), respectively(1)	(294		)	(261		)	(1,081		)	(486		)
Retirement benefits, net of taxes $30, $1, $77 and $3, respectively(2)	42			22			135			64
Total other comprehensive income/(loss)	$	(3,839	)	$	4,121		$	15,767		$	401
Total comprehensive income	$	17,238		$	20,171		$	74,010		$	46,646

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

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

See accompanying notes to unaudited consolidated financial statements.

5

EXLSERVICE HOLDINGS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine months ended September 30,
	2017			2016
Cash flows from operating activities:
Net income	$	58,243		$	46,245
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	28,771			25,000
Stock-based compensation expense	16,771			14,743
Unrealized gain on short term investments	(4,437		)	(4,955		)
Change in fair value of earn-out consideration	—			(4,060		)
Unrealized foreign exchange loss/(gain)	446			(147		)
Deferred income tax (benefit)/expense	(5,417		)	4,424
Allowances for doubtful accounts	2,706			37
Others, net	12			(84		)
Change in operating assets and liabilities:
Restricted cash	1,757			(464		)
Accounts receivable	(22,064		)	(16,559		)
Prepaid expenses and other current assets	5,194			(587		)
Accounts payable	371			(2,518		)
Deferred revenue	(8,155		)	(1,485		)
Accrued employee costs	(915		)	(3,812		)
Accrued expenses and other liabilities	267			5,688
Advance income tax, net	(2,607		)	(4,748		)
Other assets	1,241			(676		)
Net cash provided by operating activities	72,184			56,042
Cash flows from investing activities:
Purchase of property, plant and equipment	(26,759		)	(20,335		)
Business acquisition (net of cash acquired)	(724		)	(9,427		)
Purchase of investments	(197,897		)	(155,709		)
Proceeds from redemption of investments	54,238			59,229
Net cash used for investing activities	(171,142		)	(126,242		)
Cash flows from financing activities:
Principal payments on capital lease obligations	(133		)	(292		)
Repayments of borrowings	—			(25,000		)
Acquisition of treasury stock	(32,336		)	(15,169		)
Proceeds from exercise of stock options	4,275			6,226
Net cash used for financing activities	(28,194		)	(34,235		)
Effect of exchange rate changes on cash and cash equivalents	1,662			(2,514		)
Net decrease in cash and cash equivalents	(125,490		)	(106,949		)
Cash and cash equivalents, beginning of period	213,155			205,323
Cash and cash equivalents, end of period	$	87,665		$	98,374

See accompanying notes to unaudited consolidated financial statements.

6

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(In thousands, except share and per share amounts)

1. Organization

ExlService Holdings, Inc. (“ExlService Holdings”) is organized as a corporation under the laws of the state of Delaware. ExlService Holdings, together with its subsidiaries (collectively, the “Company”), operates in the Business Process Management (“BPM”) industry providing operations management services and analytics services that help businesses enhance growth and profitability. Using its proprietary platforms, methodologies and tools, the Company looks deeper to help its clients improve global operations, enhance data-driven insights, increase customer satisfaction, and manage risk and compliance. The Company’s clients are located principally in the U.S. and the U.K.

2. Summary of Significant Accounting Policies

(a) Basis of Preparation and Principles of Consolidation

The unaudited interim consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“US GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

The unaudited interim consolidated financial statements reflect all adjustments (of a normal and recurring nature) that management considers necessary for a fair presentation of such statements for the interim periods presented. The unaudited consolidated statements of income for the interim periods presented are not necessarily indicative of the results for the full year or for any subsequent period.

The accompanying unaudited consolidated financial statements include the financial statements of ExlService Holdings and all of its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Non-controlling interest is the equity in a subsidiary not attributable, directly or indirectly, to the parent and it represents the minority partner’s interest in the operations of ExlService Colombia S.A.S. Non-controlling interest consists of the amount of such interest at the date of obtaining control over the subsidiary, and the non-controlling interest's share of changes in equity since that date. The non-controlling interest in the operations for all the periods presented were insignificant and are included under general and administrative expenses in the unaudited consolidated statements of income.

(b) Use of Estimates

The preparation of the unaudited consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the unaudited consolidated statements of income during the reporting period. Although these estimates are based on management’s best assessment of the current business environment, actual results may be different from those estimates. The significant estimates and assumptions that affect the financial statements include, but are not limited to, allowance for doubtful receivables, recoverability of service tax receivables, assets and obligations related to employee benefit plans, deferred tax valuation allowances, income-tax uncertainties and other contingencies, valuation of derivative financial instruments, assumptions used to calculate stock-based compensation expense, depreciation and amortization periods, purchase price allocation, recoverability of long-term assets including goodwill and intangibles, and estimates to complete fixed price contracts.

(c) Share-Based Compensation

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

7

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2017

(In thousands, except share and per share amounts)

Income taxes - Upon adoption of this standard, all excess tax benefits and tax deficiencies are recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur. The Company also recognizes excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. As a result, the Company recognized discrete adjustments to income tax expense for the three months ended September 30, 2017 in the amount of $3,488 and for the nine months ended September 30, 2017 in the amount of $7,169 related to excess tax benefits. No adjustment is recorded for any windfall benefits previously recorded in Additional Paid-In Capital.

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

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

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

(d) Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, “Revenue from Contracts with Customers”. This standard update along with subsequently issued updates, clarifies the principles for recognizing revenue and develops a common revenue standard for United States generally accepted accounting principles (GAAP) and is effective for reporting periods beginning after December 15, 2017. The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when promised goods or services ("performance obligations") are transferred to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services ("transaction price"). Adoption of the new rules could impact the timing of revenue recognition for certain contracts. ASU 2014-09 is effective for the Company in the first quarter of fiscal 2018 using either one of two methods: (i) retrospectively to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09 (modified retrospective method).

The Company is evaluating the impact of the new standard. The ultimate impact on revenue resulting from the application of the new standard will be subject to assessments that are dependent on many variables, including, but not limited to, the terms of the contractual arrangements and the mix of business. Upon adoption, the Company expect that variable consideration when present in a revenue arrangements will need to be estimated based on its achievability and recognized over the contractual period as compared to recognizing such revenue as the services are performed. The Company also expects a change in the manner that it recognizes certain incremental and fulfillment costs from expensing them as incurred to deferring and recognizing them over the contractual period.

The Company intends to adopt the new standard, effective January 1, 2018, using the modified retrospective method. The Company's considerations include, but are not limited to, the comparability of its financial statements and the comparability within its industry from application of the new standard to its contractual arrangements. The Company has established an implementation team to implement the standard update related to the recognition of revenue from contracts with customers and continues to evaluate the changes to accounting system and processes, and additional disclosure requirements that may be necessary.

8

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2017

(In thousands, except share and per share amounts)

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net). ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires the identification of arrangements that should be accounted for as leases by lessees. In general, for lease arrangements exceeding a twelve month term, these arrangements must now be recognized as assets and liabilities on the balance sheet of the lessee. Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all leases, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption of ASU 2016-02 must be calculated using the applicable incremental borrowing rate at the date of adoption. In addition, ASU 2016-02 requires the use of the modified retrospective method, which will require adjustment to all comparative periods presented in the consolidated financial statements. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and the implementation approach to be used.

In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is to be deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The amendment should be applied through a modified retrospective approach. Early adoption as of the fiscal years beginning after December 15, 2018 is permitted. The adoption of ASU 2016-13 is not expected to have a material effect on the Company's consolidated financial statements.

In August 2016, FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. The amendments apply to all entities that are required to present a Statement of Cash Flows under Topic 230. The amendments are an improvement to GAAP because they provide guidance for each of eight issues identified therein, thereby reducing the current and potential future diversity in practice. The amendments are effective for fiscal years beginning after December 15, 2017 and interim periods within those annual periods and should be applied using a retrospective transition method to each period presented. The Company does not expect the adoption of this ASU to have a material effect on its financial position or results of operations.

In November 2016, FASB issued ASU 2016-18, Statement of Cash Flows - Restricted cash. The amendments apply to all entities that have restricted cash or restricted cash equivalents and are required to present a Statement of Cash Flows under Topic 230. The amendments in this update require that a Statement of Cash Flows should explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The amendments are effective for fiscal years beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted with an adjustment reflected as of the beginning of the fiscal year in which the amendment is adoption. The Company does not expect the adoption of this ASU to have a material effect on its financial position or results of operations.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), which eliminates Step 2 from the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017 and should be applied prospectively. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.

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

9

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2017

(In thousands, except share and per share amounts)

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

In May 2017, FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. Modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change in terms or conditions. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

In August 2017, FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in their financial statements. The amendments are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption being permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

3. Segment and Geographical Information

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

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

• Insurance

• Healthcare

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

• Finance and Accounting (“F&A”), and

• Analytics

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

10

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2017

(In thousands, except share and per share amounts)

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

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

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

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

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

11

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2017

(In thousands, except share and per share amounts)

Revenues and cost of revenues for the nine months ended September 30, 2017 and 2016, respectively, for each of the reportable segments, are as follows:

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

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

Net revenues of the Company by service type, were as follows:

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

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

12

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2017

(In thousands, except share and per share amounts)

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

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

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

	As of
	September 30, 2017		December 31, 2016
Property, plant and equipment, net
India	$	37,139	$	23,362
United States	14,829		10,809
Philippines	9,031		11,900
Rest of World	2,730		2,958
	$	63,729	$	49,029

4. Earnings Per Share

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

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

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

13

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2017

(In thousands, except share and per share amounts)

5. Other Income, net

Other income, net consists of the following:

	Three months ended September 30,					Nine months ended September 30,
	2017		2016			2017		2016
Interest and dividend income	$	322	$	354		$	1,317	$	1,208
Gain on mutual fund investments	2,556		2,562			6,777		6,191
Change in fair value of earn-out consideration	—		—			—		4,060
Other, net	44		(25		)	777		738
Other income, net	$	2,922	$	2,891		$	8,871	$	12,197

6. Property, Plant and Equipment

Property, Plant and Equipment consist of the following:

	Estimated useful lives	As of
	(Years)	September 30, 2017			December 31, 2016
Owned Assets:
Network equipment and computers	3-5	$	73,728		$	65,381
Software	3-5	56,369			44,617
Leasehold improvements	3-8	36,741			31,192
Office furniture and equipment	3-8	18,397			15,426
Motor vehicles	2-5	645			580
Buildings	30	1,218			1,171
Land	—	797			766
Capital work in progress	—	9,624			4,964
		197,519			164,097
Less: Accumulated depreciation and amortization		(134,245		)	(115,568		)
		$	63,274		$	48,529
Assets under capital leases:
Leasehold improvements		$	889		$	854
Office furniture and equipment		138			133
Motor vehicles		644			810
		1,671			1,797
Less: Accumulated depreciation and amortization		(1,216		)	(1,297		)
		$	455		$	500
Property, Plant and Equipment, net		$	63,729		$	49,029

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

14

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2017

(In thousands, except share and per share amounts)

The depreciation and amortization expense excluding amortization of acquisition-related intangibles was as follows:

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

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

7. Goodwill and Intangible Assets

Goodwill

The following table sets forth details of the Company’s goodwill balance as of September 30, 2017:

	Insurance			Healthcare		TT&L			F&A			All Other		Analytics		Total
Balance as at January 1, 2016	$	35,824		$	19,276	$	13,278		$	47,891		$	5,326	$	49,940	$	171,535
Acquisitions	2,510			—		—			—			—		13,598		16,108
Currency translation adjustments	(224		)	—		(295		)	(354		)	—		—		(873		)
Balance as at December 31, 2016	$	38,110		$	19,276	$	12,983		$	47,537		$	5,326	$	63,538	$	186,770
Currency translation adjustments	204			—		445			534			—		—		1,183
Balance as at September 30, 2017	$	38,314		$	19,276	$	13,428		$	48,071		$	5,326	$	63,538	$	187,953

15

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2017

(In thousands, except share and per share amounts)

Intangible Assets

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

	As of September 30, 2017
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Finite-lived intangible assets:
Customer relationships	$	75,372	$	(40,975	)	$	34,397
Leasehold benefits	2,826		(2,490		)	336
Developed technology	14,314		(8,177		)	6,137
Non-compete agreements	2,045		(1,739		)	306
Trade names and trademarks	5,379		(3,887		)	1,492
	$	99,936	$	(57,268	)	$	42,668
Indefinite-lived intangible assets:
Trade names and trademarks	$	900	$	—		$	900
Total intangible assets	$	100,836	$	(57,268	)	$	43,568

	As of December 31, 2016
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Finite-lived intangible assets:
Customer relationships	$	75,181	$	(32,968	)	$	42,213
Leasehold benefits	2,715		(2,247		)	468
Developed technology	14,186		(6,468		)	7,718
Non-compete agreements	2,045		(1,612		)	433
Trade names and trademarks	5,360		(3,322		)	2,038
	$	99,487	$	(46,617	)	$	52,870
Indefinite-lived intangible assets:
Trade names and trademarks	$	900	$	—		$	900
Total intangible assets	$	100,387	$	(46,617	)	$	53,770

The amortization expenses is as follows:

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

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

	(in years)
Customer relationships	5.15
Leasehold benefits	1.67
Developed technologies	3.77
Non-compete agreements	1.93
Trade names and trademarks (Finite lived)	5.23

16

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2017

(In thousands, except share and per share amounts)

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

8. Other current assets

Other current assets consists of the following:

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

9. Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consists of the following:

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

10. Non-current liabilities

Non-current liabilities consists of the following:

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

17

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2017

(In thousands, except share and per share amounts)

11. Accumulated Other Comprehensive Loss

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

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

12. Fair Value Measurements

Assets and Liabilities Measured at Fair Value

The following table sets forth the Company’s assets and liabilities that were accounted for at fair value as of September 30, 2017 and December 31, 2016. The table excludes accounts receivable, accounts payable and accrued expenses for which fair values approximate their carrying amounts.

As of September 30, 2017	Level 1		Level 2		Level 3		Total
Assets
Money market and mutual funds*	$	146,477	$	—	$	—	$	146,477
Derivative financial instruments	—		14,395		—		14,395
Total	$	146,477	$	14,395	$	—	$	160,872
Liabilities
Derivative financial instruments	$	—	$	2,883	$	—	$	2,883
Total	$	—	$	2,883	$	—	$	2,883
As of December 31, 2016	Level 1		Level 2		Level 3		Total
Assets
Money market and mutual funds	$	—	$	—	$	—	$	—
Derivative financial instruments	—		6,318		—		6,318
Total	$	—	$	6,318	$	—	$	6,318
Liabilities
Derivative financial instruments	$	—	$	2,258	$	—	$	2,258
Total	$	—	$	2,258	$	—	$	2,258

* Represents short-term investments carried on fair value option under ASC 825 “Financial Instruments” as of September 30, 2017.

18

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2017

(In thousands, except share and per share amounts)

Derivative Financial Instruments: The Company’s derivative financial instruments consist of foreign currency forward exchange contracts. Fair values for derivative financial instruments are based on independent sources including highly rated financial institutions and are classified as Level 2. See Note 13 to the unaudited consolidated financial statements contained herein for further details on Derivatives and Hedge Accounting.

13. Derivatives and Hedge Accounting

The Company uses derivative instruments and hedging transactions to mitigate exposure to foreign currency fluctuation risks associated with forecasted transactions denominated in certain foreign currencies and to minimize earnings and cash flow volatility associated with changes in foreign currency exchange rates. The Company’s derivative financial instruments are largely foreign exchange forward contracts that are designated effective and that qualify as cash flow hedges under ASC 815. The Company had outstanding cash flow hedges totaling $297,643 (including $1,500 of range forward contracts) as of September 30, 2017 and $218,545 as of December 31, 2016. The fair value of these cash flow hedges is included in the other comprehensive loss on the Company's unaudited consolidated balance sheet.

The Company also enters into foreign currency forward contracts to economically hedge its intercompany balances and other monetary assets and liabilities denominated in currencies other than functional currencies. These derivatives do not qualify as fair value hedges under ASC 815. Changes in the fair value of these derivatives are recognized in the unaudited consolidated statements of income and are included in foreign exchange gain/loss. The Company’s primary exchange rate exposure is with the Indian Rupee, the U.K. Pound sterling and the Philippine peso. The Company also has exposure to Colombian pesos, Czech Koruna, Euro, South African Rand and other local currencies in which it operates. Outstanding foreign currency forward contracts amounted to $91,523 and GBP 17,244 as of September 30, 2017 and amounted to $63,980 and GBP 17,974 as of December 31, 2016.

The Company estimates that approximately $6,839 of net derivative gains included in accumulated other comprehensive loss (“AOCL”) could be reclassified into earnings within the next twelve months based on exchange rates prevailing as of September 30, 2017. At September 30, 2017, the maximum outstanding term of the cash flow hedges was forty-five months.

The Company evaluates hedge effectiveness at the time a contract is entered into as well as on an ongoing basis. If during this time, a contract is deemed ineffective, the change in the fair value is recorded in the unaudited consolidated statements of income and is included in foreign exchange gain/(loss). For hedging positions that are discontinued because the forecasted transaction is not expected to occur by the end of the originally specified period, any related derivative amounts recorded in equity are reclassified to earnings. There were no such significant amounts of gains or losses that were reclassified from AOCL into earnings during the three and nine months ended September 30, 2017 and 2016.

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

Derivatives designated as hedging instruments:

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

19

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2017

(In thousands, except share and per share amounts)

Derivatives not designated as hedging instruments:

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

The following tables set forth the effect of foreign currency exchange contracts on the unaudited consolidated statements of income for the three and nine months ended September 30, 2017 and 2016:

	Three months ended September 30,					Nine months ended September 30,
	2017			2016		2017		2016
Derivatives in Cash flow hedging relationship
Gain/(loss) recognized in AOCL on derivative - Effective portion	$	(719	)	$	3,607	$	8,774	$	4,160
Gain/(loss) reclassified from AOCL to foreign exchange gain/(loss) - Effective portion	$	423		$	466	$	1,557	$	872
Gain/(loss) recognized in foreign exchange gain/(loss) - Ineffective portion	$	—		$	—	$	—	$	—
Derivatives not designated as hedging instruments
Gain/(loss) recognized in foreign exchange gain/(loss)	$	(678	)	$	1,382	$	2,095	$	4,110

14. Borrowings

The Company has a revolving credit facility (the “Credit Facility”), including a letter of credit sub-facility, in the amount of $100,000. The Credit Facility has a maturity date of October 24, 2019 and is voluntarily pre-payable from time to time without premium or penalty.

Borrowings under the Credit Facility may be used for working capital, general corporate purposes and for acquisitions. The amount outstanding as of September 30, 2017 is $45,000 which is included under “long-term borrowings” in the unaudited consolidated balance sheets. The Credit Facility carried an effective interest rate of 2.9% per annum and 2.2% per annum, during the three months ended September 30, 2017 and 2016, respectively, and for the nine months ended September 30, 2017 and 2016 it was 2.7% per annum and 2.0% per annum, respectively.

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

The Credit Facility is guaranteed by the Company's domestic subsidiaries and material foreign subsidiaries and is secured by all or substantially all of the assets of the Company and its material domestic subsidiaries. The Credit Agreement governing the Credit Facility contains certain covenants including a restriction on our indebtedness, and a covenant to not permit the interest coverage ratio (the ratio of EBIT to cash interest expense) to be less than 3.5 to 1.0 or the leverage ratio (total funded indebtedness to EBITDA) to be greater than 2.5 to 1.0, for the four consecutive quarter period ending on the last day of each fiscal quarter. As of September 30, 2017, the Company was in compliance with the financial covenants listed above.

20

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2017

(In thousands, except share and per share amounts)

15. Capital Structure

Common Stock

The Company has one class of common stock outstanding.

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

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

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

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

During the three and nine months ended September 30, 2017, the Company purchased 160,033 and 584,017 shares of its common stock, respectively, for an aggregate purchase price of approximately $9,004 and $29,320, respectively, including commissions, representing an average purchase price per share of $56.26 and $50.20, respectively, under the 2014 and 2017 Repurchase Program.

During the three and nine months ended September 30, 2016, the Company purchased 108,143 and 302,953 shares of its common stock, respectively, for an aggregate purchase price of approximately $5,466 and $14,441, respectively, including commissions, representing an average purchase price per share of $50.54 and $47.67, respectively, under the 2014 Repurchase Program.

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

16. Employee Benefit Plans

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

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

21

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2017

(In thousands, except share and per share amounts)

Net gratuity cost includes the following components:

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

The Gratuity Plan in India is partially funded and the Philippines plan is unfunded. The Company makes annual contributions to the employees' gratuity fund established with Life Insurance Corporation of India and HDFC Standard Life Insurance Company. They calculate the annual contribution required to be made by the Company and manage the Gratuity Plans, including any required payouts. Fund managers manage these funds on a cash accumulation basis and declare interest retrospectively on March 31 of each year. The Company earned a return of approximately 8.0% on these Gratuity Plans for the period ended September 30, 2017.

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

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

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

22

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2017

(In thousands, except share and per share amounts)

17. Leases

The Company finances its use of certain motor vehicles and other equipment under various lease arrangements provided by financial institutions. Future minimum lease payments under these capital leases as of September 30, 2017 are as follows:

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

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

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

Rent expense

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

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

Deferred rent

	As of
	September 30, 2017		December 31, 2016
Cancelable and non - cancelable operating leases	$	8,763	$	7,915

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

23

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2017

(In thousands, except share and per share amounts)

18. Income Taxes

The Company determines the tax provision for interim periods using an estimate of its annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the Company updates its estimate of annual effective tax rate, and if its estimated tax rate changes, the Company makes a cumulative adjustment.

The Company recorded income tax expense of $2,819 and $5,646 for the three months ended September 30, 2017 and 2016, respectively. The effective tax rate decreased from 26.0% during the three months ended September 30, 2016 to 11.8% as a result of (i) excess tax benefit related to stock awards of $3,488 pursuant to ASU No. 2016-09 during the three months ended September 30, 2017, (ii) higher earnings from foreign subsidiaries and lower domestic profit in the U.S., partially offset by higher tax expense on account of the expiration of a tax holiday for some of the operating centers in India.

The Company recorded income tax expense of $7,202 and $18,549 for the nine months ended September 30, 2017 and 2016, respectively. The effective tax rate decreased from 28.6% during the nine months ended September 30, 2016 to 11.0% as a result of (i) excess tax benefit related to stock awards of $7,169 pursuant to ASU No. 2016-09 during the nine months ended September 30, 2017, (ii) conclusion of an uncertain tax position of $3,153 (including interest of $1,433), (iii) higher earnings from foreign subsidiaries and lower domestic profit in the U.S., partially offset by higher tax expense on account of the expiration of a tax holiday for some of the operating centers in India.

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

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

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

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

19. Stock-Based Compensation

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

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

As of September 30, 2017, the Company had 1,492,097 shares available for grant under the 2015 Amendment and Restatement of the 2006 Omnibus Award Plan.

24

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

September 30, 2017

(In thousands, except share and per share amounts)

Stock Options

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

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

The unrecognized compensation cost for outstanding options as of September 30, 2017 is nil. The Company did not grant any options during the three and nine months ended September 30, 2017 and 2016. There were no options that vested during the three months ended September 30, 2017 and 2016. The total grant date fair value of options vested during the nine months ended September 30, 2017 and 2016 was nil and $706, 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 Avg Grant Date Fair Value		Number		Weighted Avg Grant Date Fair Value
Outstanding at December 31, 2016*	246,940		$	42.42	1,256,288		$	37.38
Granted	—		—		391,927		48.02
Vested	(36,767	)	38.74		(449,977	)	34.69
Forfeited	(4,505