EPAM Reports Results for Second Quarter 2022

EPAM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)

Three Months Ended

June 30,

Six Months Ended

June 30,

2022

2021

2022

2021

Revenues

$    1,194,861

$       881,366

$ 2,366,475

$ 1,662,141

Operating expenses:

Cost of revenues (exclusive of depreciation and
amortization)

846,323

583,728

1,627,159

1,103,056

Selling, general and administrative expenses

232,527

151,910

469,804

288,299

Depreciation and amortization expense

22,991

20,454

47,250

38,261

Income from operations

93,020

125,274

222,262

232,525

Interest and other income, net

1,579

2,580

1,414

7,954

Foreign exchange loss

(85,941)

(4,693)

(108,726)

(2,394)

Income before provision for income taxes

8,658

123,161

114,950

238,085

(Benefit from)/ provision for income taxes

(9,946)

8,490

6,627

14,368

Net income

$         18,604

$       114,671

$     108,323

$     223,717

Net income per share:

Basic

$              0.33

$              2.03

$           1.90

$           3.97

Diluted

$              0.32

$              1.94

$           1.84

$           3.80

Shares used in calculation of net income per share:

Basic

57,240

56,463

57,078

56,317

Diluted

59,020

59,011

58,981

58,896

EPAM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value)

As of

June 30,

2022

As of

December 31,

2021

Assets

Current assets

Cash and cash equivalents

$    1,293,518

$    1,446,625

Trade receivables and contract assets, net of allowance of $18,554

 and $5,521, respectively

929,217

768,928

Short-term investments

60,098

—

Prepaid and other current assets

76,845

53,927

Total current assets

2,359,678

2,269,480

Property and equipment, net

211,119

236,214

Operating lease right-of-use assets, net

159,726

184,841

Intangible assets, net

89,032

101,143

Goodwill

521,267

530,723

Deferred tax assets

172,807

143,928

Other noncurrent assets

50,335

56,898

Total assets

$    3,563,964

$    3,523,227

Liabilities

Current liabilities

Accounts payable

$         22,488

$         24,847

Accrued compensation and benefits expenses

414,674

502,997

Accrued expenses and other current liabilities

181,525

142,014

Short-term debt

6,701

16,018

Income taxes payable, current

18,190

27,440

Operating lease liabilities, current

41,125

50,104

Total current liabilities

684,703

763,420

Long-term debt

30,221

30,234

Income taxes payable, noncurrent

45,441

42,454

Operating lease liabilities, noncurrent

130,891

142,802

Other noncurrent liabilities

48,702

48,480

Total liabilities

939,958

1,027,390

Commitments and contingencies

Stockholders' equity

Common stock, $0.001 par value; 160,000 shares authorized; 57,373 and 56,868
shares issued, 57,353 and 56,849 shares outstanding at June 30, 2022 and December
31, 2021, respectively

57

57

Additional paid-in capital

760,975

711,912

Retained earnings

1,937,855

1,829,532

Treasury stock

(177)

(177)

Accumulated other comprehensive loss

(76,357)

(54,207)

Total EPAM Systems Inc. stockholders' equity

2,622,353

2,487,117

Noncontrolling interest in consolidated subsidiaries

1,653

8,720

Total stockholders' equity

$    2,624,006

$    2,495,837

Total liabilities and stockholders' equity

$    3,563,964

$    3,523,227

EPAM SYSTEMS, INC. AND SUBSIDIARIES

Reconciliations of Non-GAAP Financial Measures to Comparable GAAP Financial Measures

(Unaudited)

(In thousands, except percent and per share amounts)

Reconciliation of revenue growth as reported on a GAAP basis to revenue growth on a constant currency basis is presented in the table below:

Three Months Ended

June 30, 2022

Six Months Ended

June 30, 2022

Revenue growth as reported

35.6 %

42.4 %

Foreign exchange rates impact

4.5 %

3.8 %

Revenue growth on a constant currency basis⁽¹⁾

40.1 %

46.2 %

(1)

Constant currency revenue results are calculated by translating current period revenues in local currency into U.S. dollars at the weighted average exchange rates of the comparable prior period.

Reconciliation of various income statement amounts from GAAP to non-GAAP for the three and six months ended June 30, 2022 and 2021:

Three Months Ended

June 30, 2022

Six Months Ended

June 30, 2022

GAAP

Adjustments

Non-GAAP

GAAP

Adjustments

Non-GAAP

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

$   846,323

$   (27,272)

$  819,051

$  1,627,159

$    (27,218)

$  1,599,941

Selling, general and
  administrative expenses⁽³⁾

$   232,527

$   (51,439)

$  181,088

$     469,804

$  (105,693)

$       64,111

Income from operations⁽⁴⁾

$     93,020

$    84,467

$  177,487

$     222,262

$   143,911

$    366,173

Operating margin

7.8 %

7.1 %

14.9 %

9.4 %

6.1 %

15.5 %

Net income⁽⁵⁾

$     18,604

$  121,634

$  140,238

$     108,323

$   178,958

$    287,281

Diluted earnings per share

$         0.32

$        2.38

$           1.84

$          4.87

Three Months Ended

June 30, 2021

Six Months Ended

June 30, 2021

GAAP

Non-GAAP

GAAP

Adjustments

Non-GAAP

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

$  583,728

$   (11,261)

$  572,467

$  1,103,056

$   (22,378)

$  1,080,678

Selling, general and
  administrative expenses⁽³⁾

$  151,910

$   (14,744)

$  137,166

$     288,299

$   (30,122)

$     258,177

Income from operations⁽⁴⁾

$  125,274

$    29,966

$  155,240

$     232,525

$    59,601

$     292,126

Operating margin

14.2 %

3.4 %

17.6 %

14.0 %

3.6 %

17.6 %

Net income⁽⁵⁾

$  114,671

$      6,467

$  121,138

$     223,717

$      3,621

$     227,338

Diluted earnings per share

$        1.94

$        2.05

$           3.80

$           3.86

Items (2) through (5) above are detailed in the table below with the specific cross-reference noted in the appropriate item.

Three Months Ended

June 30,

Six Months Ended

June 30,

2022

2021

2022

2021

Stock-based compensation expense

$         14,732

$         11,261

$     14,308

$     22,378

Humanitarian support in Ukraine ^(a)

3,279

—

22,435

—

Unbilled business continuity resources ^(b)

9,261

—

11,831

—

Discretionary compensation ^(c)

—

—

(21,356)

—

Total adjustments to GAAP cost of revenues⁽²⁾

27,272

11,261

27,218

22,378

Stock-based compensation expenses

13,161

12,637

20,697

26,073

Other acquisition-related expenses

91

2,099

670

4,032

One-time charges

2,513

8

3,876

17

Humanitarian support in Ukraine ^(a)

5,088

—

11,588

—

Geographic repositioning ^(d)

14,366

—

33,072

—

Russia long-lived asset impairment charges ^(e)

—

—

19,570

—

Russia business restructuring ^(f)

16,220

—

16,220

—

Total adjustments to GAAP selling, general and
  administrative expenses⁽³⁾

51,439

14,744

105,693

30,122

Amortization of acquired intangible assets

5,756

3,961

11,000

7,101

Total adjustments to GAAP income from operations⁽⁴⁾

84,467

29,966

143,911

59,601

Change in fair value of contingent consideration included in
  Interest and other income, net

2,733

(692)

6,106

(5,636)

Impairment of financial asset

—

—

1,300

—

Foreign exchange loss

85,941

4,693

108,726

2,394

Provision for income taxes:

Tax effect on non-GAAP adjustments

(36,930)

(6,525)

(53,399)

(10,259)

Excess tax benefits related to stock-based compensation

(7,382)

(20,975)

(20,491)

(42,479)

Net discrete benefit from tax planning ^(g)

(7,195)

—

(7,195)

—

Total adjustments to GAAP net income⁽⁵⁾

$       121,634

$            6,467

$   178,958

$       3,621

(a) Humanitarian support in Ukraine includes expenses related to EPAM's $100 million humanitarian commitment in response to Russia's invasion of Ukraine to support EPAM professionals and their families in and displaced from Ukraine. These expenses are incremental to those expenses incurred prior to the crisis, clearly separable from normal operations, and not expected to recur once the crisis has subsided and operations return to normal.

(b) Given the uncertainty in the region introduced by Russia's invasion of Ukraine, EPAM has assigned delivery employees in locations outside of the region to ensure the continuity of delivery for customers who have substantial delivery exposure to Ukraine or other delivery concerns resulting from the invasion. These employees are not billed to clients and operate largely in a standby or backup capacity. These expenses are incremental to those expenses incurred prior to the crisis, clearly separable from normal operations, and not expected to recur once the crisis has subsided and operations return to normal.

(c) Discretionary compensation includes the reduction of previously accrued amounts associated with the Company's variable compensation program for the year ended December 31, 2021. This adjustment was made in response to Russia's invasion of Ukraine and is not expected to recur in the future.

(d) Geographic repositioning includes expenses associated with the Company's accelerated efforts to relocate employees in Russia and Belarus to other countries and includes the cost of accommodations, travel and food. These expenses are incremental to those expenses incurred prior to the crisis, clearly separable from normal operations, and not expected to recur once the crisis has subsided and operations return to normal.

(e) As a result of the Company's decision to no longer serve customers in Russia, the Company incurred impairment charges for long-lived assets in Russia including charges of $15.1 million associated with property and equipment, $3.8 million associated with right-of-use assets and $0.7 million associated with goodwill for the six months ended June 30, 2022. Consistent with the Company's historical non-GAAP policy, impairment charges have been excluded from non-GAAP results as these are one-time and unusual in nature.

(f) As a result of the Company's decision to no longer serve customers in Russia and begin the process of a phased exit of its operations in Russia, the Company incurred charges associated with employee separation. Consistent with the Company's historical non-GAAP policy, employee separation costs incurred in connection with formal restructuring initiatives have been excluded from non-GAAP results as these are one-time and unusual in nature.

(g) A one-time benefit related to the implementation of tax planning to disregard certain foreign subsidiaries as separate entities for U.S. income tax purposes. Consistent with the Company's historical non-GAAP policy, the benefit related to the implementation of tax planning has been excluded from non-GAAP results as it is one-time and unusual in nature.

EPAM SYSTEMS, INC. AND SUBSIDIARIES

Reconciliations of Guidance Non-GAAP Financial Measures to Comparable GAAP Financial Measures

(Unaudited)

The below guidance constitutes forward-looking statements within the meaning of the federal securities laws and is based on a number of assumptions that are subject to change and many of which are outside the control of the Company. Actual results may differ materially from the Company's expectations depending on factors discussed in the Company's filings with the Securities and Exchange Commission.

Reconciliation of expected revenue growth on a GAAP basis to expected revenue growth on a constant currency basis is presented in the table below:

Third Quarter 2022

Revenue growth (at least)

22 %

Foreign exchange rates impact

4 %

Revenue growth on a constant currency basis (at least) ⁽⁶⁾  

26 %

(6)

Constant currency revenue results are calculated by translating expected revenues in local currency into U.S. dollars at the weighted average exchange rates of the comparable prior period.

Reconciliation of expected GAAP to non-GAAP income from operations as a percentage of revenues is presented in the table below:

Third Quarter 2022

GAAP income from operations as a percentage of revenues

9.5% to 10.5%

Stock-based compensation expenses

3.1 %

Included in cost of revenues (exclusive of depreciation and amortization)

1.6 %

Included in selling, general and administrative expenses

1.5 %

Humanitarian support in Ukraine ^(a)

0.6 %

Unbilled business continuity resources ^(b)

0.3 %

Geographic repositioning ^(d)

0.6 %

One-time charges

0.3 %

Other acquisition-related expenses

0.1 %

Amortization of purchased intangible assets

0.5 %

Non-GAAP income from operations as a percentage of revenues

15% to 16%

Reconciliation of expected GAAP to non-GAAP effective tax rate is presented in the table below:

Third Quarter 2022

GAAP effective tax rate (approximately)

19 %

Tax effect on non-GAAP adjustments

2.1 %

Excess tax benefits related to stock-based compensation

0.9 %

Non-GAAP effective tax rate (approximately)

22 %

Reconciliation of expected GAAP to non-GAAP diluted earnings per share is presented in the table below:

Third Quarter 2022

GAAP diluted earnings per share (at least)

$                       1.65

Stock-based compensation expenses

0.64

Included in cost of revenues (exclusive of depreciation and amortization)

0.34

Included in selling, general and administrative expenses

0.30

Humanitarian support in Ukraine ^(a)

0.12

Unbilled business continuity resources ^(b)

0.06

Geographic repositioning ^(d)

0.14

One-time charges

0.09

Other acquisition-related expenses

0.01

Amortization of purchased intangible assets

0.10

Provision for income taxes:

     Tax effect on non-GAAP adjustments

(0.23)

     Excess tax benefits related to stock-based compensation

Non-GAAP diluted earnings per share (at least)

$                       2.48