EXLSERVICE HOLDINGS, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion in connection with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. Some of the statements in the following discussion are forward looking statements. See "-Forward Looking Statements." Forward Looking Statements This Annual Report on Form 10-K contains forward looking statements. You should not place undue reliance on those 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 Annual Report on Form 10-K, you should understand that these statements are not guarantees of performance or results. They involve known and unknown risks, uncertainties and assumptions. Although we believe that these forward looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward looking statements. These factors include but are not limited to: • our dependence on a limited number of clients in a limited number of industries; • worldwide political, economic or business conditions; • negative public reaction in the U.S. or elsewhere to offshore outsourcing; • fluctuations in our earnings; • our ability to attract and retain clients; • our ability to successfully consummate or integrate strategic acquisitions; • 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 Annual Report on Form 10-K. These and other risks could cause actual results to differ materially from those implied by forward looking statements in this Annual Report on Form 10-K.

36 -------------------------------------------------------------------------------- Table of Contents You should keep in mind that any forward looking statement made by us in this Annual Report on Form 10-K, 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 these events or how they may affect us. We have no obligation to update any forward looking statements in this Annual Report on Form 10-K after the date of this Annual Report on Form 10-K, 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 for our clients, who are primarily global companies. Outsourcing services involve the transfer to us of select business operations of a client, such as claims processing, policy administration and finance and accounting, 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 provide additional insight into their future financial and operational results, improve their operating environments through cost reduction, enhanced efficiency and productivity initiatives, and enhance 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, travel, transportation and logistics sectors.

On October 12, 2012, we acquired Landacorp, a leading provider of healthcare solutions and technology (the "Landacorp Acquisition"). Landacorp has more than 50 million lives under management on its software platforms and has developed services and technology solutions that share vital clinical data with payers, providers, plan participants and accountable care organizations.

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. We operate fifteen operations centers in India, including our new operations center in Pune, India and Manila, Philippines which began operations in 2012. We also have six operations centers in the U.S., two operations centers each in the Philippines and Bulgaria and one operations center in each of Romania, Malaysia and the Czech Republic.

Revenues We generate revenues principally from contracts to provide outsourcing and transformation services. Total revenues increased $82.4 million, or 22.9%, from $360.5 million for the year ended December 31, 2011 to $442.9 million for the year ended December 31, 2012.

Revenues from outsourcing services increased from $294.4 million for the year ended December 31, 2011 to $366.8 million for the year ended December 31, 2012.

The increase in revenues from outsourcing services of $72.4 million was driven primarily by revenues of $49.9 million due to the Landacorp Acquisition in 2012 and the acquisitions in 2011 of OPI (the "OPI Acquisition") and Trumbull ( the "Trumbull Acquisition") and net volume increases from existing and new clients aggregating to $35.7 million. These increases were offset partially by a net decrease in revenues of $13.2 million, primarily due to the depreciation of the Indian rupee, the U.K. pound sterling and Czech koruna against the U.S. dollar during the year ended December 31, 2012 compared to the year ended December 31, 2011.

37 -------------------------------------------------------------------------------- Table of Contents Revenues from transformation services increased from $66.2 million for the year ended December 31, 2011 to $76.2 million for the year ended December 31, 2012.

The increase was primarily due to a combination of increased revenues in recurring or annuity-based decision analytics services and an increase in project-based engagements both in our decision analytics and operations and process excellence services. Revenues from new clients for transformation services were $9.4 million and $0.9 million during the year ended December 31, 2012 and 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, healthcare, utilities, banking and financial services, travel, transportation and logistics 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. For risks relating to termination of our client contracts, see "Item 1A. Risk Factors-Risks Related to Our Business-Our client contracts contain certain termination and other provisions that could have an adverse effect on our business, results of operations and financial condition." For risks relating to our selling cycles, see "Item 1A. Risk Factors-Risks Related to Our Business-We have a long selling cycle for our outsourcing services that requires significant funds and management resources and a long implementation cycle that requires significant resource commitments." Through the Landacorp Acquisition on October 12, 2012, we added a leading care management software platform for healthcare payers. As a result of our Trumbull Acquisition, on October 1, 2011, we acquired the capability to provide subrogation services as well as access to a software platform called SubroSource™ for providing subrogation services to property and casualty insurers. In connection with our acquisition of Professional Data Management Again ("PDMA") in April 2010, we acquired an insurance policy administration platform called LifePRO® to administer life insurance, health insurance annuities and credit life and disability insurance policies for insurance and healthcare clients. As we increase our service capabilities utilizing platform- and other software-based services, revenues from such services will continue to grow in proportion to our total revenues. Revenues from annual maintenance and support contracts for our software platforms provide us with a relatively predictable revenue base and are generally recognized ratably over the terms of the contracts. New license sales and implementation projects have a long selling cycle and it is difficult to predict the timing of signing of such new contracts which may lead to fluctuations in our short term revenues.

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 to three years 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 72.3% and 20.2%, respectively, of our total revenues for the year ended December 31, 2012 and approximately 71.8% and 22.0%, respectively, of our total revenues for the year ended December 31, 2011.

38-------------------------------------------------------------------------------- Table of Contents In the years ended December 31, 2012 and 2011, our total revenues from our top ten clients accounted for 59.1% and 61.9% of our total revenues, respectively.

Only one client accounted for more than 10% of our total revenues in the year ended December 31, 2012 compared to two clients in the year ended December 31, 2011. 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.

Pursuant to a services agreement, we provide services to The Travelers Company ("Travelers"). These services to Travelers represented $44.6 million, or 10.1%, of our total revenues for the year ended December 31, 2012, and $41.9 million, or 11.6%, of our total revenues for the year ended December 31, 2011. Travelers may terminate the services agreement, or any work assignment or work order thereunder all of which expire in December 2013, without cause upon 60 days' prior notice.

We derived revenues from 38 and 17 new clients for our services in the years ended December 31, 2012 and 2011, respectively. Another three new clients acquired during 2012 did not generate any revenues in 2012 but are expected to start generating revenues from 2013.

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 depending on each client's situation and on the type of services provided. For the years ended December 31, 2012 and 2011, 4.3% and 4.5%, respectively, of our total 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 foreign currency 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 relationship with such clients.

Expenses Cost of Revenues Our cost of revenues primarily consists of: • employee costs, which include salary, bonus and other compensation expenses; recruitment and training costs; employee insurance; transport and meals; rewards and recognition for certain employees; and non-cash stock compensation expense; and • costs relating to our facilities and communications network, which include telecommunication and IT costs; facilities and customer management support; operational expenses for our outsourcing centers; rent expenses; and travel and other billable costs to our clients.

The most significant components of our cost of revenues are employee compensation, recruitment, training, transport, meals, rewards and recognition and employee insurance. Salary levels, employee turnover rates and our ability to efficiently manage and utilize our employees significantly affect our cost of revenues. Salary increases for most of our operations personnel are 39-------------------------------------------------------------------------------- Table of Contents generally awarded each year effective April 1. Accordingly, employee costs are generally lower in the first quarter of each year compared to the rest of the year. We make every effort to manage employee and capacity utilization and continuously monitor service levels and staffing requirements. Although we generally have been able to reallocate our employees as client demand has fluctuated, a contract termination or significant reduction in work assigned to us by a major client could cause us to experience a higher-than-expected number of unassigned employees, which would increase our cost of revenues as a percentage of revenues until we are able to reduce or reallocate our headcount.

A significant increase in the turnover rate among our employees, particularly among the highly skilled workforce needed to execute certain services, would increase our recruiting and training costs and decrease our operating efficiency, productivity and profit margins. In addition, cost of revenues also includes a non-cash amortization of stock compensation expense relating to our issuance of equity awards to employees directly involved in providing services to our clients.

We expect our cost of revenues to continue to increase as we continue to add professionals in our operating centers globally to service additional business and as wages continue to increase globally. In particular, we expect training costs to continue to increase as we continue to add staff to service new clients and provide existing staff with additional skill sets. There is significant competition for professionals with skills necessary to perform the services we offer to our clients. As our existing competitors continue to grow, and as new competitors enter the market, we expect competition for skilled professionals in each of these areas to continue to increase, with corresponding increases in our cost of revenues to reflect increased compensation levels for such professionals. However, a significant portion of our client contracts include inflation-based adjustments to our billing rates year over year which partially offset such increase in cost of revenues. We also expect our cost of revenues to increase due to employee turnover resulting in higher recruitment and training costs. See "Item 1A-Risk Factors-Employee wage increases may prevent us from sustaining our competitive advantage and may reduce our profit margin." Cost of revenues is also affected by our long selling cycle and implementation period for our outsourcing services, which require significant commitments of capital, resources and time by both our clients and us. Before committing to use our services, potential clients require us to expend substantial time and resources educating them as to the value of our services and assessing the feasibility of integrating our systems and processes with theirs. In addition, once a client engages us in a new contract, our cost of revenues may represent a higher percentage of revenues until the implementation phase for that contract, generally three to four months, is completed.

Selling, General and Administrative Expenses Our general and administrative expenses are comprised of expenses relating to salaries of senior management and other support personnel, legal and other professional fees, telecommunications, utilities, travel and other miscellaneous administrative costs. Selling and marketing expenses primarily consist of salaries and other compensation expenses of sales and marketing and client management personnel, sales commission, travel and brand building, client events and conferences. We expect that sales and marketing expenses will continue to increase as we invest in our sales and client management functions to better serve our clients and in our branding. We also expect our costs to increase as we continue to strengthen our support and enabling functions and invest in leadership development, performance management and training programs. However, our SG&A as a percentage of revenues has declined from 21.1% in 2011 to 19.9% in 2012 as a result of our acquisitions in 2011 and 2012 and operating leverage in 2012. SG&A expenses also include acquisition-related costs, professional fees, which represent the costs of third party legal, tax, accounting and other advisors, bad debt allowance and non-cash amortization of stock compensation expense related to our issuance of equity awards to senior management, members of our board of directors, other support personnel and consultants.

Depreciation and Amortization Depreciation and amortization pertains to depreciation and amortization of our tangible assets, including network equipment, cabling, computers, office furniture and equipment, motor vehicles and leasehold improvements and intangible assets. As we add new facilities and expand our existing operations centers, we expect that depreciation expense will increase, reflecting additional investments in equipment such as desktop computers, servers and other infrastructure. Amortization of intangible assets acquired is included in depreciation and 40 -------------------------------------------------------------------------------- Table of Contents amortization. Amortization of intangible assets has increased substantially in 2012 due to the Landacorp Acquisition in 2012 and the OPI Acquisition and the Trumbull Acquisition in 2011. We expect amortization of intangible assets to increase further as we pursue strategic relationships and acquisitions. As a percentage of revenues, depreciation and amortization expenses decreased from 6.4% for the year ended December 31, 2011 to 5.8% for the year ended December 31, 2012 Foreign Exchange Exchange Rates We report our financial results in U.S. dollars. However, a significant portion of our total revenues is earned in U.K. pounds sterling (20.2% and 22.0%, respectively, of our total revenues for the year ended December 31, 2012 and 2011) while a significant portion of our expenses is incurred and paid in Indian rupees (55.2% and 57.6%, respectively, of our total costs for the years ended December 31, 2012 and 2011) and the Philippine peso (7.2% and 5.6%, respectively, of our total costs for the year ended December 31, 2012 and 2011).

The exchange rates among the Indian rupee, the Philippine peso, the U.K. pound sterling, Czech koruna and the U.S. dollar have changed substantially in recent years and may fluctuate substantially in the future. The results of our operations could be substantially impacted as the Indian rupee and U.K. pound sterling appreciate or depreciate against the U.S. dollar. See Notes 2 and 7 to our consolidated financial statements and "Item 7A-Quantitative and Qualitative Disclosures about Market Risk-Foreign Currency Risk." Currency Regulation According to the prevailing foreign exchange regulations in India, an exporter of outsourcing and transformation services that is registered with a software technology park in India, such as our Indian subsidiaries in India, is required to realize its export proceeds within a period of 12 months from the date of exports. Similarly, in the event that such exporter has received any advance against exports in foreign exchange from its overseas customers, it will have to render the requisite services so that the advances so received are earned within a period of 12 months. If those subsidiaries in India did not meet these conditions, they would be required to obtain permission from the Reserve Bank of India.

Income Taxes The fiscal year under the Indian Income Tax Act ends on March 31. Certain of our operations centers in India qualified for an exemption from corporate tax under the Indian Income Tax Act which expired on April 1, 2011. Therefore, profits generated from the services provided from such operations centers have become fully taxable and consequently, our tax expense increased significantly from 2011 and may continue to be higher going forward.

The Special Economic Zones Act, 2005 and rules framed thereunder (the "SEZ Regulations"), introduced a 15-year tax holiday scheme for operations established in designated SEZs. Under the SEZ Regulations, qualifying operations are eligible for a profit-based deduction from taxable income equal to (i) 100% of the export profits derived for the first five years from the commencement of operations; (ii) 50% of the export profits for the next five years; and (iii) subject to satisfying certain investment requirements, 50% of the export profits for a further five years.

Our operations centers in Jaipur and Noida, India, which were established in SEZs in 2010, are eligible for tax incentives until 2020, ten years from the year of their establishment. As part of the OPI Acquisition, we acquired operations centers in Bengaluru and Kochi, India that are also located in SEZs.

Our operations center in Bengaluru completed its first five years of operations on March 31, 2012 and benefitted from a 100% exemption on export profits in prior years. Under the tax regulations, the Bengaluru operations center is now entitled to a 50% tax exemption on export profits for five years beginning on April 1, 2012. After April 1, 2017, the applicable tax exemption will be further reduced. We also established a new operations center in Pune, India in June 2012, which is located in an SEZ. We anticipate establishing additional operations centers in SEZs in the future.

The Direct Taxes Code proposed by the Government of India and currently pending before the Indian Parliament proposes grandfathering the existing profit-based tax benefits for operations centers in SEZs already receiving such tax benefits.

The Direct Taxes Code also proposes discontinuing profit-based incentives for 41 -------------------------------------------------------------------------------- Table of Contents operations centers in SEZs set up after March 31, 2014 and replaces them with investment-based incentives for operations centers in SEZs established after that date.

Accordingly, we expect to continue receiving the benefit of tax deductions for our existing operations centers in SEZs pursuant to the current regulations until the currently proposed March 31, 2014 sunset date. If this grandfathering does not happen under the Direct Taxes Code and if the sunset date is brought forward, our new operations centers in SEZs will not receive profit-based tax benefits. Without such benefits, we expect that our tax rate in India and our overall tax rate will increase over the next few years and that such increase may be material.

One of our operations centers in the Philippines benefited from a four-year income tax holiday that expired in May 2012. In February 2013, PEZA, which can approve two successive one-year extensions, granted us a one year extension retroactively from May 2012. Our new operations center in the Philippines, which began operations in January 2012, benefits from a separate four-year income tax holiday that can be extended at PEZA's discretion. While we are reasonably certain that PEZA will extend these tax holidays, it is possible that such extension requests may be denied, or that these tax holidays may be conditioned or removed entirely due to changes in applicable legislation by the government of the Philippines. Should any of these events occur, our tax liability in the Philippines would likely increase.

We recognize deferred tax assets and liabilities for temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards. We determine if a valuation allowance is required or not on the basis of an assessment of whether it is more likely than not that a deferred tax asset will be realized.

Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon the financial statements included in this Annual Report on Form 10-K, which have been prepared in accordance with generally accepted accounting principles in the U.S. The notes to our consolidated financial statements contain a summary of our significant accounting policies. We consider the policies discussed below to be critical to an understanding of our consolidated financial statements, as their application places the most significant demands on management's judgment regarding matters that are inherently uncertain. These policies include revenue recognition, estimating tax liabilities, stock-based compensation, goodwill, intangibles and long-lived assets, derivative instruments and assets and obligations related to employee benefit plans. These accounting policies and the associated risks are set out below. Future events may not develop exactly as forecast and estimates routinely require adjustment.

Revenue Recognition The Company derives its revenues from outsourcing and transformation services.

Revenues from outsourcing services are recognized primarily on a time-and-material, cost-plus or unit-priced basis; revenues from transformation services are recognized primarily on a time-and-material, fixed price or contingent fee basis. The services provided within our contracts generally contain one unit of accounting. Revenues are recognized under our contracts generally when persuasive evidence of an arrangement exists, the sales price is fixed or determinable, services have been performed and collection of amounts billed is reasonably assured.

Revenues under time-and-material contracts are recognized as the services are performed. Revenues are recognized on cost-plus contracts on the basis of contractually agreed direct and indirect costs incurred on a client contract plus an agreed-upon profit markup. Revenues are recognized on unit-price based contracts based on the number of specified units of work (such as the number of email responses) delivered to a client. Such revenues are recognized as the related services are provided in accordance with the client contract. When the terms of the client contract specify service level parameters that must be met (such as turnaround time or accuracy), we monitor such service level parameters to determine if any service credits or penalties have been incurred. Revenues are recognized net of any service credits that are due to a client. We have experienced minimal service credits and penalties to date.

42-------------------------------------------------------------------------------- Table of Contents Revenues are recognized on fixed-price contracts using the proportional performance method when the pattern of performance under the contracts can be reasonably determined. We estimate the proportional performance of a contract by comparing the actual number of hours or days worked to the estimated total number of hours or days required to complete each engagement. The use of the proportional performance method requires significant judgment relative to estimating the number of hours or days required to complete the contracted scope of work, including assumptions and estimates relative to the length of time to complete the project and the nature and complexity of the work to be performed.

We regularly monitor our estimates for completion of a project and record changes in the period in which a change in an estimate is determined. If a change in an estimate results in a projected loss on a project, such loss is recognized in the period in which it is first identified.

Revenues from software licensing arrangements are recognized at the later of time of delivery or expiration of significant termination rights if the license fee is fixed or determinable, collection is probable, and there is sufficient vendor specific evidence of the fair value of each undelivered element. When there are significant production modifications or customization, installation, systems integration or related services, the professional services and license revenues are combined and recorded based upon proportional performance, measured in the manner described above. Revenues from fixed-term maintenance and support contracts are recognized ratably on a monthly basis over the period of the contract.

We make accruals for revenues and receivables for services rendered between the last billing date and the balance sheet date. Accordingly, our accounts receivable include amounts for services that we have performed and for which an invoice has not yet been issued to the client. These are included in accounts receivable on our consolidated balance sheet and the amounts are disclosed in the notes to our consolidated financial statements.

Goodwill, Intangible Assets and Long-lived Assets Accounting Standards Codification (ASC) topic 805, "Business Combinations" (ASC No. 805), requires that the purchase method of accounting be used for all business combinations. The guidance specifies criteria as to intangible assets acquired in a business combination that must be recognized and reported separately from goodwill. In accordance with ASC topic 350, "Intangibles-Goodwill and Other" (ASC No. 350), all assets and liabilities of the acquired businesses including goodwill are assigned to reporting units. We evaluate goodwill for impairment at least annually, or as circumstances warrant.

When determining the fair value of our reporting units, we utilize various assumptions, including projections of future cash flows. Any adverse changes in key assumptions about our businesses and their prospects or an adverse change in market conditions may cause a change in the estimation of fair value and could result in an impairment charge.

We review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In general, we will recognize an impairment loss when the sum of undiscounted expected future cash flows is less than the carrying amount of such asset. The estimate of undiscounted cash flows and the fair value of assets require several assumptions and estimates like the weighted average cost of capital, discount rates, risk-free rates, market rate of return and risk premiums and can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. Although we believe the historical assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results.

Stock-based Compensation Under the fair value recognition provisions of ASC topic 718, "Compensation-Stock Compensation" (ASC No. 718), cost is measured at the grant date, based on the fair value of the award and is amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting periods. Determining the fair value of stock-based awards at the grant date requires significant judgment, including estimating the expected term over which the stock awards will be outstanding before they are exercised, the expected volatility of our stock and the number of stock-based awards that are expected to be forfeited. In order to determine the estimated period of time that we expect employees to hold their share-based options, we have used data on the historical exercise pattern of employees. We use the historical volatility of our common stock and the volatility of stocks of our comparative companies in order to estimate future share price trends. We use historical data to estimate pre-vesting option 43 -------------------------------------------------------------------------------- Table of Contents forfeitures and record stock-based compensation expense only for those awards that are expected to vest. The risk-free interest rate that we use 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. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option valuation model. If the actual forfeiture rate differs significantly from our estimates, our stock-based compensation expense and our results of operations could be materially impacted.

Derivative Instruments and Hedging Activities In the normal course of business, we actively look to mitigate the exposure of foreign currency market risk by entering into various hedging arrangements, authorized under our policies, with counterparties that are highly rated financial institutions. Our primary exchange rate exposure is with the U.K.

pound sterling and the Indian rupee. We also have exposure in Philippine pesos, Czech koruna and other local currencies where we operate. We use 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 the changes in foreign currency exchange rates and not for speculative trading purposes.

We hedge anticipated transactions that are subject to foreign exchange exposure with foreign currency exchange contracts that are designated effective and that qualify as cash flow hedges under ASC topic 815, "Derivatives and Hedging" (ASC No. 815). Changes in the fair value of these cash flow hedges which are deemed effective, are deferred and recorded as a component of accumulated other comprehensive income/(loss), net of tax until the hedged transactions occur and are then recognized in the consolidated statements of income. Changes in the fair value of cash flow hedges deemed ineffective are recognized in the consolidated statement of income and are included in foreign exchange gain/(loss).

We also use derivatives consisting of foreign currency exchange contracts not designated as hedging instruments under ASC No. 815 to hedge intercompany balances and other monetary assets or liabilities denominated in currencies other than the functional currency. Changes in the fair value of these derivatives are recognized in the consolidated statements of income and are included in foreign exchange gain/(loss).

We value our derivatives based on market observable inputs including both forward and spot prices for currencies. Derivative assets and liabilities included in Level 2 primarily represent foreign currency forward contracts. The quotes are taken primarily from independent sources, including highly rated financial institutions.

We evaluate 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 consolidated statements of income and is included in foreign exchange gain/(loss). 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.

Income Taxes We utilize the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized in respect of future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases and operating losses carried forward, if any. Deferred tax assets and liabilities are measured using the anticipated tax rates for the years in which such temporary differences are expected to be recovered or settled. We recognize the effect of a change in tax rates on deferred tax assets and liabilities during the period in which the new tax rate was enacted or the change in tax status was filed or approved. Deferred tax assets are recognized in full, subject to a valuation allowance that reduces the amount recognized to that which is more likely than not to be realized. In assessing the likelihood of realization, we consider estimates of future taxable income. With respect to any entity that benefits from a corporate tax holiday, deferred tax assets or liabilities for existing temporary differences are recorded only to the extent such temporary differences are expected to reverse following the expiration of the tax holiday.

44-------------------------------------------------------------------------------- Table of Contents We also evaluate potential exposures related to tax contingencies or claims made by the tax authorities in various jurisdictions in order to determine whether a reserve may be required. A reserve is recorded if we believe that a loss is more likely than not to occur and if the amount of such loss can be reasonably estimated. Such reserves are based on estimates and, consequently, are subject to changing facts and circumstances, including the progress of ongoing audits, changes in case law and the passage of new legislation. We believe that we have established adequate reserves to cover any potential additional tax assessments.

We generally anticipate that we will indefinitely reinvest the undistributed earnings of our foreign subsidiaries. Accordingly, we do not accrue any material income, distribution or withholding taxes that would otherwise arise if such earnings were repatriated in a taxable manner.

We employ a two-step process for recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining, based on the technical merits, that the position will, more likely than not, be sustained upon examination. The second step is to measure the tax benefit as the largest amount of the tax benefit that has a greater than 50% likelihood of being realized upon settlement. Our provision for income tax expense also takes into account any interest or penalties related to unrecognized tax benefits.

Retirement Benefits We provide our employees in India and the Philippines with benefits under a defined benefit plan, which we refer to as the Gratuity Plan. The Gratuity Plan provides 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 us. We determine our liability under the Gratuity Plan by actuarial valuation using the projected unit credit method. Under this method, we determine our liability based upon the discounted value of salary increases until the date of separation arising from retirement, death, resignation or other termination of services. Critical assumptions used in measuring the plan expense and projected liability under the projected unit credit method include the discount rate, expected return on assets and the expected increase in the compensation rates. We evaluate these critical assumptions at least annually. If actual results differ significantly from our estimates, our gratuity expense and our results of operations could be materially impacted.

45-------------------------------------------------------------------------------- Table of Contents Results of Operations The following table summarizes our results of operations: Year ended December 31, 2012 2011 2010 (in million) Revenues(1) $ 442.9 $ 360.5 $ 252.8 Cost of revenues (exclusive of depreciation and amortization)(2) 271.9 220.0 151.3 Gross profit 171.0 140.5 101.5 Operating expenses: General and administrative expenses(3) 57.2 50.6 40.3 Selling and marketing expenses(3) 31.0 25.6 18.8 Depreciation and amortization expenses(4) 25.6 23.0 15.9 Total operating expenses 113.8 99.2 75.0 Income from operations 57.2 41.3 26.5 Other income/(expense): Foreign exchange (loss)/gain (2.5 ) 3.4 4.2 Interest and other income 2.0 2.0 1.4 Income before income taxes 56.7 46.7 32.1 Income tax provision 14.9 11.9 5.5 Net income $ 41.8 $ 34.8 $ 26.6 (1) Revenues include reimbursable expenses of $18.9 million, $16.1 million and $11.8 million for the years ended December 31, 2012, 2011 and 2010, respectively. Revenues also include a one-time fee of $2.3 million in 2011.

(2) Cost of revenues includes $1.9 million, $1.6 million and $1.6 million for the years ended December 31, 2012, 2011 and 2010, respectively, of non-cash 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 consolidated financial statements.

(3) General and administrative expenses and selling and marketing expenses include $7.5 million, $7.8 million and $6.9 million for the years ended December 31, 2012, 2011 and 2010, respectively, as 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 consolidated financial statements.

(4) Depreciation and amortization includes $5.6 million, $4.3 million and $2.0 million for the years ended December 31, 2012, 2011 and 2010, respectively, of amortization of intangibles as described in Note 5 to our consolidated financial statements.

46 -------------------------------------------------------------------------------- Table of Contents Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Revenues. Revenues increased 22.9% from $360.5 million for the year ended December 31, 2011 to $442.9 million for the year ended December 31, 2012.

Revenues from outsourcing services increased from $294.4 million for the year ended December 31, 2011 to $366.8 million for the year ended December 31, 2012.

The increase in revenues from outsourcing services of $72.4 million was primarily driven by revenues of $49.9 million from the Landacorp Acquisition in 2012 and the OPI Acquisition and the Trumbull Acquisition in 2011 and net volume increases from existing and new clients aggregating to $35.7 million. These increases were partially offset by a net decrease in revenues of $13.2 million, primarily due to the depreciation of the Indian rupee, the U.K. pound sterling and Czech koruna against the U.S. dollar during the year ended December 31, 2012 compared to the year ended December 31, 2011.

Revenues from transformation services increased from $66.2 million for the year ended December, 2011 to $76.2 million for the year ended December 31, 2012. The increase was primarily due to a combination of increased revenues in recurring or annuity-based decision analytics services and an increase in project-based engagements both in our decision analytics and operations and process excellence services. Revenues from new clients for transformation services were $9.4 million and $0.9 million during the year ended December 31, 2012 and 2011, respectively.

Cost of Revenues. Cost of revenues increased 23.6% from $220.0 million for the year ended December 31, 2011 to $271.9 million for the year ended December 31, 2012. The increase in cost of revenues was primarily due to an increase in employee-related costs of $55.4 million as a result of an increase in the number of our personnel directly involved in providing services to our clients, including $25.8 million of employee-related costs related to our acquisitions.

We also experienced an increase in reimbursable expenses of $2.8 million and an increase in facilities, technology and other operating expenses of $14.4 million (primarily due to our acquisitions and new operating centers to support business growth). These increases were partially offset by a decrease of $20.8 million due to the net effect of depreciation of the Indian rupee and the Czech koruna and appreciation of the Philippines peso against the U.S. dollar during the year ended December 31, 2012 compared to the year ended December 31, 2011. Cost of revenues as a percentage of revenues increased from 61.0% for the year ended December 31, 2011 to 61.4% for the year ended December 31, 2012.

Gross Profit. Gross profit increased 21.7% from $140.6 million for the year ended December 31, 2011 to $171.1 million for the year ended December 31, 2012.

The increase in gross profit was primarily due to an increase in revenues of $82.4 million, offset by the increase in cost of revenues of $51.9 million.

Gross profit as a percentage of revenues decreased marginally from 39.0% for the year ended December 31, 2011 to 38.6% for the year ended December 31, 2012, primarily due to the OPI Acquisition and the Trumbull Acquisition in 2011, partially offset by the depreciation of the Indian rupee against the U.S. dollar during the year ended December 31, 2012 compared to the year ended December 31, 2011.

SG&A Expenses. SG&A expenses increased 15.7% from $76.2 million for the year ended December 31, 2011 to $88.2 million for the year ended December 31, 2012.

The increase in SG&A expenses is primarily due to an increase in employee-related costs of $10.2 million, including $5.8 million of employee-related costs related to our acquisitions and our continued investment in sales and client management personnel. We also experienced an increase in other SG&A expenses of $5.7 million, primarily due to increased professional fees, facilities and technology costs incurred at our new operating centers, costs associated with our acquisitions as well as increases in other marketing expenses. These increases were partially offset by a decrease of $3.8 million due to the 47 -------------------------------------------------------------------------------- Table of Contents net effect of depreciation of the Indian rupee and the Czech koruna and appreciation of the Philippines peso against the U.S. dollar during the year ended December 31, 2012 compared to the year ended December 31, 2011. As a percentage of revenues, SG&A expenses decreased from 21.1% for the year ended December 31, 2011 to 19.9% for the year ended December 31, 2012 as a result of our acquisitions and operating leverage.

Depreciation and Amortization. Depreciation and amortization increased 11.4% from $23.0 million for the year ended December 31, 2011 to $25.6 million for the year ended December 31, 2012. The increase is primarily due to the increase in amortization of acquisition-related intangibles of $1.3 million and depreciation related to our new operations centers including our acquisitions of $3.4 million offset by a decrease of $2.0 million due to the net effect of depreciation of the Indian rupee and the Czech koruna and appreciation of the Philippines peso against the U.S. dollar during the year ended December 31, 2012 compared to the year ended December 31, 2011. As a percentage of revenues, depreciation and amortization expenses decreased from 6.4% for the year ended December 31, 2011 to 5.8% for the year ended December 31, 2012. As we add more operations centers, we expect that depreciation expense will increase to reflect the additional investment in equipment and operations centers necessary to meet our service requirements.

Income from Operations. Income from operations increased 38.5% from $41.3 million for the year ended December 31, 2011 to $57.2 million for the year ended December 31, 2012. As a percentage of revenues, income from operations increased from 11.5% for the year ended December 31, 2011 to 12.9% for the year ended December 31, 2012. The increase in income from operations as a percentage of revenues was primarily due to our operating leverage, resulting in lower SG&A and depreciation and amortization expenses as a percentage of revenue in 2012.

Other Income/(Expense). Other income/(expense) is comprised of foreign exchange gains and losses, interest income, interest expense and other items. Other income/(expense) decreased from $5.3 million for the year ended December 31, 2011 to ($0.5 million) for the year ended December 31, 2012, due to net foreign exchange loss of $2.5 million during the year ended December 31, 2012 compared to net foreign exchange gain of $3.4 million during the year ended December 31, 2011 attributable to movement of the U.S. dollar against the Indian rupee. The average exchange rate of the Indian rupee against the U.S. dollar increased from 46.92 during the year ended December 31, 2011 to 53.40 during the year ended December 31, 2012.

Provision for Income Taxes. Provision for income taxes increased from $11.9 million for the year ended December 31, 2011 to $14.9 million for the year ended December 31, 2012. The effective tax rate increased from 25.4% for the year ended December 31, 2011 to 26.2% for the year ended December 31, 2012. The increase is primarily due to the partial expiry of the tax holiday benefit for our operations center in Bengaluru, India and provision for taxes for one of our operating centers in Manila, Philippines. Please see Note 12 to our consolidated financial statements for further details.

Net Income. Net income increased from $34.8 million for the year ended December 31, 2011 to $41.8 million for the year ended December 31, 2012, primarily due to an increase in operating income of $15.9 million, offset by a decrease in other income of $5.9 million and an increase in provision for income taxes of $3.0 million. As a percentage of revenues, net income decreased marginally from 9.6% for the year ended December 31, 2011 to 9.4% for the year ended December 31, 2012.

48 -------------------------------------------------------------------------------- Table of Contents Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Revenues. Revenues increased 42.6% from $252.8 million for the year ended December 31, 2010 to $360.5 million for the year ended December 31, 2011.

Revenues from outsourcing services increased from $192.1 million for the year ended December 31, 2010 to $294.4 million for the year ended December 31, 2011.

The increase in revenues from outsourcing services of $102.3 million was primarily driven by revenues of $63.6 million from the OPI Acquisition and the Trumbull Acquisition in 2011 and our acquisitions of American Express Global Travel Service Center ("GTSC") and Professional Data Management Again ("PDMA") in 2010, revenues from a one-time payment of $2.3 million from a client with no associated costs and net volume increases from existing and new clients aggregating to $38.3 million. These increases were partially offset by a net decrease in revenues of $1.9 million, primarily due to the depreciation of the Indian rupee and appreciation of the U.K. pound sterling and Czech koruna against the U.S. dollar during the year ended December 31, 2011 compared to the year ended December 31, 2010.

Revenues from transformation services increased from $60.7 million for the year ended December, 2010 to $66.2 million for the year ended December 31, 2011. The increase was primarily due to a combination of increased revenues in recurring or annuity-based decision analytics services and an increase in project-based engagements both in our decision analytics and operations and process excellence services. Revenues from new clients for transformation services were $0.9 million and $4.1 million during the year ended December 31, 2011 and 2010, respectively.

Cost of Revenues. Cost of revenues increased 45.4% from $151.3 million for the year ended December 31, 2010 to $220.0 million for the year ended December 31, 2011. The increase in cost of revenues was primarily due to an increase in employee-related costs of $57.5 million as a result of an increase in the number of our personnel directly involved in providing services to our clients, including $33.9 million of employee-related costs related to the OPI Acquisition and our other acquisitions. We also experienced an increase in reimbursable expenses of $4.3 million (resulting in an increase in revenues) and an increase in facilities, technology and other operating expenses of $9.2 million (primarily due to our acquisitions and new operating centers to support business growth). These increases were partially offset by a decrease of $2.3 million due to the net effect of depreciation of the Indian rupee and appreciation of the Philippines peso and Czech koruna against the U.S. dollar during the year ended December 31, 2011 compared to the year ended December 31, 2010. Cost of revenues as a percentage of revenues increased from 59.9% for the year ended December 31, 2010 to 61.0% for the year ended December 31, 2011.

Gross Profit. Gross profit increased 38.5% from $101.5 million for the year ended December 31, 2010 to $140.6 million for the year ended December 31, 2011.

The increase in gross profit was primarily due to an increase in revenues of $107.8 million, offset by the increase in cost of revenues of $68.7 million.

Gross profit as a percentage of revenues decreased from 40.1% for the year ended December 31, 2010 to 39.0% for the year ended December 31, 2011, primarily due to the impact of our acquisitions, partially offset by the depreciation of the Indian rupee against the U.S. dollar during the year ended December 31, 2011 compared to the year ended December 31, 2010.

SG&A Expenses. SG&A expenses increased 29.0% from $59.1 million for the year ended December 31, 2010 to $76.2 million for the year ended December 31, 2011.

The increase in SG&A expenses is primarily due to an increase in employee-related costs of $12.0 million, including $4.7 million of employee-related costs related to the OPI acquisition and our continued investment in sales and client management personnel. We also experienced an increase in other SG&A expenses of $3.6 million, primarily due to professional fees associated with our acquisitions 49-------------------------------------------------------------------------------- Table of Contents and travel-related expenses. These increases were partially offset by a decrease of $0.5 million due to the depreciation of the Indian rupee against the U.S.

dollar during the year ended December 31, 2011 compared to the year ended December 31, 2010. As a percentage of revenues, SG&A expenses decreased from 23.4% for the year ended December 31, 2010 to 21.1% for the year ended December 31, 2011.

Depreciation and Amortization. Depreciation and amortization increased 45.2% from $15.9 million for the year ended December 31, 2010 to $23.0 million for the year ended December 31, 2011. The increase is primarily due to the increase in amortization of acquisition-related intangibles of $2.3 million and depreciation related to our new operations centers (including those acquired from our acquisitions) of $5.3 million offset by a decrease of $0.5 million due to the depreciation of the Indian rupee and appreciation of the Philippine peso and the Czech koruna against the U.S. dollar during the year ended December 31, 2011 compared to the year ended December 31, 2010. As we add more operations centers, we expect that depreciation expense will increase to reflect the additional investment in equipment and operations centers necessary to meet our service requirements.

Income from Operations. Income from operations increased 55.8% from $26.5 million for the year ended December 31, 2010 to $41.3 million for the year ended December 31, 2011. As a percentage of revenues, income from operations increased from 10.5% for the year ended December 31, 2010 to 11.5% for the year ended December 31, 2011. 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 revenue in 2011.

Other Income/(Expense). Other income/(expense) is comprised of foreign exchange gains and losses, interest income, interest expense and other items. Other income/(expense) decreased from $5.6 million for the year ended December 31, 2010 to $5.3 million for the year ended December 31, 2011, primarily as a result of decrease in net foreign exchange gain of $3.4 million during the year ended December 31, 2011 compared to net foreign exchange gain of $4.2 million during the year ended December 31, 2010 attributable to movement of the U.S. dollar against the Indian rupee, offset by an increase of $0.6 million in net interest income and other income. The average exchange rate of the Indian rupee against the U.S. dollar increased from 45.65 during the year ended December 31, 2010 to 46.92 during the year ended December 31, 2011.

Provision for Income Taxes. Provision for income taxes increased from $5.5 million for the year ended December 31, 2010 to $11.9 million for the year ended December 31, 2011. The effective tax rate increased from 17.1% for the year ended December 31, 2010 to 25.4% for the year ended December 31, 2011. The increase in effective tax rate in 2011 was primarily due to a reversal in 2010 related to a tax position taken by one of our foreign subsidiaries in India.

During 2010, the Indian tax authorities issued a clarification with respect to the taxability of certain components of taxable income which reduced our foreign subsidiary's taxable income and its corresponding tax liability. This clarification decreased the level of uncertainty in our tax position and was the basis on which we reduced the amount of our income tax reserve by $2.8 million for 2010. The reversal of the tax reserve positively impacted our effective income tax rate by 8.9% for 2010.

Net Income. Net income increased from $26.6 million for the year ended December 31, 2010 to $34.8 million for the year ended December 31, 2011, primarily due to an increase in operating income of $14.8 million, offset by a decrease in other income of $0.2 million and an increase in provision for income taxes of $6.4 million. As a percentage of revenues, net income decreased from 10.5% for the year ended December 31, 2010 to 9.6% for the year ended December 31, 2011.

50 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources At December 31, 2012, we had $109.2 million in cash and cash equivalents and short-term investments which include $61.5 million held by our foreign subsidiaries. We do not intend to repatriate such funds since our future growth depends upon continued infrastructure and technology investments, geographical expansions and acquisitions outside of the U.S. Therefore, we need to continuously and permanently reinvest the earnings generated outside of the U.S.

If we were to repatriate the funds, we would need to accrue and pay applicable taxes.

Cash flows provided by operating activities increased from $56.2 million in the year ended December 31, 2011 to $65.8 million in the year ended December 31, 2012. Generally, factors that affect our earnings-including pricing, volume of services, costs and productivity-affect our cash flows provided by operations in a similar manner. However, while management of working capital, including timing of collections and payments affects operating results only indirectly, the impact on the working capital and cash flows provided by operating activities can be significant. The increase in cash flows provided by operations for the year ended December 31, 2012 was predominantly due to an increase in net income adjusted for non-cash items by $21.1 million offset by decrease in working capital of $11.6 million. The increase in net income adjusted for non-cash items is primarily due to an increase in net income of $7.0 million, depreciation and amortization expense of $2.6 million, deferred income taxes of $6.4 million and decrease in unrealized foreign exchange gain of $5.7 million.

Changes in working capital are primarily due to a decrease in trade accounts receivable of $3.0 million and accrued expenses and other liabilities of $9.2 million during the year ended December 31, 2012 compared to the year ended December 31, 2011. Our days' sales outstanding increased from 49 days as of December 31, 2011 to 56 days as of December 31, 2012, primarily due to our milestones-based billing pertaining to our software licensing and implementation contracts associated with the Landacorp Acquisition.

Cash flows used for investing activities decreased from $105.8 million in the year ended December 31, 2011 to $54.8 million in the year ended December 31, 2012. The decrease is primarily due to the payment of the purchase consideration of approximately $37.5 million for the Landacorp Acquisition in 2012 compared to $81.0 million (net of cash acquired of $20.1 million) paid for the OPI Acquisition and the Trumbull Acquisition during the year ended December 31, 2011. Further, net proceeds from short-term investments increased by $6.8 million during the year ended December 31, 2012 compared to the year ended December 31, 2011.

Cash flows provided by financing activities decreased from $24.9 million in the year ended December 31, 2011 to $9.9 million during the year ended December 31, 2012. The decrease was primarily due to net proceeds from the issuance of common stock in a public offering of $21.5 million during the year ended December 31, 2011. This decrease was partially offset by higher proceeds from the exercise of stock options of $9.6 million during the year ended December 31, 2012 compared to $5.5 million during the year ended December 31, 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 our facilities and purchase telecommunications equipment and computer hardware and software in connection with managing client operations. We incurred approximately $18.8 million and $19.5 million of capital expenditures in the year ended December 31, 2012 and 2011, respectively. We expect to incur capital expenditures of between $25.0 million to $30.0 million in the calendar year 2013, primarily to meet the growth requirements of our clients, including 51-------------------------------------------------------------------------------- Table of Contents additions to our facilities as well as investments in technology applications and infrastructure. 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 any tax assessment orders that have been issued or may be issued against us or our subsidiaries, including against exl Service.com (India) Private Limited ("Exl India") and Exl Service.com, Inc. ("Exl Inc."), we may be required to deposit additional amounts with respect to such assessment orders.

Refer to Note 15 to our consolidated financial statements for further details.

On May 26, 2011, we 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. Upon our request, and the fulfillment of certain conditions, the Credit Facility can be increased to $50.0 million. As of December 31, 2012, we did not have any borrowings under the Credit Facility.

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

Off-Balance Sheet Arrangements As of December 31, 2012, we had no off-balance sheet arrangements or obligations.

52 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations The following table sets forth our contractual obligations as of December 31, 2012: Payment Due by Period Less than 1-3 4-5 After 5 1 year years years years Total (in millions) Capital leases $ 2.0 $ 2.6 $ 0.4 $ - $ 5.0 Operating leases 8.1 13.4 3.5 1.1 26.1 Purchase obligations 3.4 - - - 3.4 Other obligations(a) 1.7 2.9 2.4 2.9 9.9 Total contractual cash obligations(b) $ 15.2 $ 18.9 $ 6.3 $ 4.0 $ 44.4 (a) Represents estimated payments under the Gratuity Plan.

(b) Excludes $3.0 million related to uncertain tax positions, since the extent of the amount and timing of payment is currently not reliably estimable or determinable.

Certain units of our Indian subsidiaries were established as 100% Export-Oriented units under the Software Technology Parks of India ("STPI") scheme promulgated by the Government of India which provides certain incentives on imported and indigenous capital goods upon the fulfillment of certain conditions. Although the corporate tax incentives under the STPI scheme are no longer available to us, 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. We believe, however, that these units have in the past satisfied and will continue to satisfy the required conditions.

Our operations centers in Manila, the Philippines are registered with PEZA. The registration provides us with certain fiscal incentives on the import of capital goods and requires that Exl Philippines meet certain performance and investment criteria. One of our operations centers in the Philippines benefited from a four-year income tax holiday that expired in May 2012. In February 2013, we received a one-year extension retroactively from May 2012 and expect to file another extension request after which no further extensions are presently permitted. Our new operations center in the Philippines, which began operations in January 2012, benefits from a separate four-year income tax holiday that can be extended at PEZA's discretion.

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 is intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and International Financial Reporting Standards ("IFRS"). ASU No. 2011-04 explains how to measure fair value and does not require additional measurements. Accordingly, our adoption of this accounting pronouncement from January 1, 2012 did not have an impact on our 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 53-------------------------------------------------------------------------------- Table of Contents 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. We adopted the option of presentation in two separate but consecutive statements. Refer to our consolidated statements of comprehensive income/(loss) for further details.

In December 2011, the FASB issued update No. 2011-12, "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards" (ASU 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 consolidated financial statements.

In September 2011, the FASB issued update No. 2011-08, "Testing Goodwill for Impairment" (ASU No. 2011-08), which 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 an entity concludes that the fair value of a reporting unit is less than its carrying value, it is necessary to perform a two-step goodwill impairment test. 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 consolidated financial statements and our annual goodwill impairment assessment for the fiscal year 2012.

In July 2012, the FASB issued update No. 2012-02, "Testing Indefinite-Lived Intangible Assets for Impairment" (ASU No. 2012-02), which simplifies the guidance for testing the impairment of indefinite-lived intangible assets other than goodwill. Examples of intangible assets subject to the guidance include indefinite-lived trademarks, licenses and distribution rights. The amendment provides the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. Under the option, an entity is no longer required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This amendment is effective for fiscal years beginning after September 15, 2012, with early adoption permitted. We do not expect the new guidance to have an impact on our 2013 impairment test results.

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2013-02, "Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income" (ASU 2013-02). Under ASU 2013-02, an entity is required to provide information about the amounts reclassified out of AOCI by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. ASU 2013-02 is effective for us on January 1, 2013 and we do not expect the new guidance to have an impact on our consolidated financial statements.

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