EPAM Reports Results for First Quarter 2022

EPAM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)

Three Months Ended

March 31,

Revenues

$    1,171,614

$       780,775

Operating expenses:

     Cost of revenues (exclusive of depreciation and amortization)

780,836

519,328

     Selling, general and administrative expenses

237,277

136,389

     Depreciation and amortization expense

24,259

17,807

Income from operations

129,242

107,251

Interest and other (loss)/income, net

(165)

5,374

Foreign exchange (loss)/gain

(22,785)

2,299

Income before provision for income taxes

106,292

114,924

Provision for income taxes

16,573

5,878

Net income

$         89,719

$       109,046

Net income per share:

     Basic

$              1.58

$              1.94

     Diluted

$              1.52

$              1.86

Shares used in calculation of net income per share:

     Basic

56,915

56,170

     Diluted

58,941

58,778

EPAM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value)

As of

March 31,

2022

As of

December 31,

2021

Assets

Current assets

     Cash and cash equivalents

$    1,276,461

$    1,446,625

     Trade receivables and contract assets, net of allowance of $14,229

      and $5,521, respectively

901,260

768,928

     Prepaid and other current assets

89,032

53,927

          Total current assets

2,266,753

2,269,480

Property and equipment, net

219,639

236,214

Operating lease right-of-use assets, net

175,514

184,841

Intangible assets, net

97,569

101,143

Goodwill

534,136

530,723

Deferred tax assets

161,302

143,928

Other noncurrent assets

52,657

56,898

Total assets

$    3,507,570

$    3,523,227

Liabilities

Current liabilities

     Accounts payable

$         19,406

$         24,847

     Accrued compensation and benefits expenses

408,789

502,997

     Accrued expenses and other current liabilities

177,872

142,014

     Short-term debt

9,900

16,018

     Income taxes payable, current

20,264

27,440

     Operating lease liabilities, current

47,021

50,104

          Total current liabilities

683,252

763,420

Long-term debt

30,550

30,234

Income taxes payable, noncurrent

44,103

42,454

Operating lease liabilities, noncurrent

140,814

142,802

Other noncurrent liabilities

55,095

48,480

Total liabilities

953,814

1,027,390

Commitments and contingencies

Stockholders' equity

     Common stock, $0.001 par value; 160,000 shares authorized; 57,153 and 56,868      shares issued, 57,133 and 56,849 shares outstanding at March 31, 2022 and      December 31, 2021, respectively

57

57

Additional paid-in capital

719,122

711,912

Retained earnings

1,919,251

1,829,532

Treasury stock

(177)

(177)

Accumulated other comprehensive loss

(86,150)

(54,207)

Total EPAM Systems Inc. stockholders' equity

2,552,103

2,487,117

Noncontrolling interest in consolidated subsidiaries

1,653

8,720

Total stockholders' equity

$    2,553,756

$    2,495,837

Total liabilities and stockholders' equity

$    3,507,570

$    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

March 31, 2022

Revenue growth as reported

50.1 %

Foreign exchange rates impact

2.9 %

     Revenue growth on a constant currency basis(1)

53.0 %

(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 months ended March 31, 2022 and 2021:

Three Months Ended

March 31, 2022

GAAP

Adjustments

Non-GAAP

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

$  780,836

$            54

$ 780,890

Selling, general and administrative expenses(3)

$  237,277

$    (54,254)

$ 183,023

Income from operations(4)

$  129,242

$     59,444

$ 188,686

Operating margin

11.0 %

5.1 %

16.1 %

Net income(5)

$    89,719

$     57,324

$ 147,043

Diluted earnings per share

$        1.52

$       2.49

Three Months Ended

March 31, 2021

GAAP

Adjustments

Non-GAAP

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

$  519,328

$   (11,117)

$  508,211

Selling, general and administrative expenses(3)

$  136,389

$  (15,378)

$  121,011

Income from operations(4)

$  107,251

$   29,635

$  136,886

Operating margin

13.7 %

3.8 %

17.5 %

Net income(5)

$  109,046

$    (2,846)

$  106,200

Diluted earnings per share

$        1.86

$        1.81

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

Three Months Ended

March 31,

2022

     Stock-based compensation (benefit)/ expense

$              (424)

$         11,117

     Humanitarian support in Ukraine (a)

19,156

—

     Unbilled business continuity resources (b)

2,570

—

     Discretionary compensation (c)

(21,356)

—

Total adjustments to GAAP cost of revenues(2)

(54)

11,117

     Stock-based compensation expenses

7,536

13,436

     Other acquisition-related expenses

579

1,933

     One-time charges

1,363

9

     Humanitarian support in Ukraine (a)

6,500

—

     Geographic repositioning (d)

18,706

—

     Russia long-lived asset impairment charges (e)

19,570

—

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

54,254

15,378

     Amortization of acquired intangible assets

5,244

3,140

Total adjustments to GAAP income from operations(4)

59,444

29,635

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

3,373

(4,944)

     Impairment of financial asset

1,300

—

     Foreign exchange loss/(gain)

22,785

(2,299)

     Provision for income taxes:

          Tax effect on non-GAAP adjustments

(16,469)

(3,734)

          Excess tax benefits related to stock-based compensation

(13,109)

(21,504)

Total adjustments to GAAP net income(5)

$         57,324

$          (2,846)

(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.  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.

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:

Second Quarter 2022

Revenue growth (at least)

29 %

Foreign exchange rates impact

5 %

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

34 %

(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:

Second Quarter 2022

GAAP income from operations as a percentage of revenues

3% to 5%

Stock-based compensation expenses

2.4 %

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

1.1  %

     Included in selling, general and administrative expenses

1.3  %

Humanitarian support in Ukraine (a)

1.1 %

Unbilled business continuity resources (b)

0.7 %

Geographic repositioning (d)

0.9 %

One-time charges

1.3 %

Other acquisition-related expenses

0.1 %

Amortization of purchased intangible assets

0.5 %

     Non-GAAP income from operations as a percentage of revenues

10% to 12%

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

Second Quarter 2022

GAAP effective tax rate (approximately)

19 %

Tax effect on non-GAAP adjustments

3.2 %

 Excess tax benefits related to stock-based compensation

0.8 %

     Non-GAAP effective tax rate (approximately)

23 %

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

Second Quarter 2022

GAAP diluted earnings per share (at least)

$                       0.73

Stock-based compensation expenses

0.46

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

0.21

     Included in selling, general and administrative expenses

0.25

Humanitarian support in Ukraine (a)

0.21

Unbilled business continuity resources (b)

0.12

Geographic repositioning (d)

0.16

One-time charges

0.23

Other acquisition-related expenses

0.01

Amortization of purchased intangible assets

0.10

Foreign exchange loss

0.03

Provision for income taxes:

     Tax effect on non-GAAP adjustments

(0.28)

     Excess tax benefits related to stock-based compensation

(0.07)

   Non-GAAP diluted earnings per share (at least)

$                       1.70