EPAM Reports Results for Third Quarter 2022

EPAM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)

Three Months Ended

September 30,

Nine Months Ended

September 30,

2022

2021

2022

2021

Revenues

$    1,226,920

$       988,539

$ 3,593,395

$ 2,650,680

Operating expenses:

Cost of revenues (exclusive of depreciation and amortization)

826,796

653,374

2,453,955

1,756,430

Selling, general and administrative expenses

198,021

169,498

667,825

457,797

Depreciation and amortization expense

21,876

21,543

69,126

59,804

Income from operations

180,227

144,124

402,489

376,649

Interest and other income/(loss), net

4,228

(5,325)

5,642

2,629

Foreign exchange gain/(loss)

6,691

(3,441)

(102,035)

(5,835)

Income before provision for income taxes

191,146

135,358

306,096

373,443

Provision for income taxes

35,092

19,702

41,719

34,070

Net income

$       156,054

$       115,656

$     264,377

$     339,373

Net income per share:

Basic

$              2.72

$              2.04

$           4.62

$           6.01

Diluted

$              2.63

$              1.95

$           4.47

$           5.75

Shares used in calculation of net income per share:

Basic

57,420

56,649

57,194

56,429

Diluted

59,357

59,203

59,108

58,999

EPAM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value)

As of

September 30,

2022

As of

December 31,

2021

Assets

Current assets

Cash and cash equivalents

$    1,487,599

$    1,446,625

Trade receivables and contract assets, net of allowance of $18,666

 and $5,521, respectively

917,139

768,928

Short-term investments

60,216

—

Prepaid and other current assets

63,032

53,927

Total current assets

2,527,986

2,269,480

Property and equipment, net

209,700

236,214

Operating lease right-of-use assets, net

148,219

184,841

Intangible assets, net

79,220

101,143

Goodwill

505,542

530,723

Deferred tax assets

214,219

143,928

Other noncurrent assets

50,717

56,898

Total assets

$    3,735,603

$    3,523,227

Liabilities

Current liabilities

Accounts payable

$         28,288

$         24,847

Accrued compensation and benefits expenses

456,965

502,997

Accrued expenses and other current liabilities

161,922

142,014

Short-term debt

7,790

16,018

Income taxes payable, current

34,390

27,440

Operating lease liabilities, current

38,602

50,104

Total current liabilities

727,957

763,420

Long-term debt

28,198

30,234

Income taxes payable, noncurrent

57,375

42,454

Operating lease liabilities, noncurrent

122,700

142,802

Other noncurrent liabilities

40,729

48,480

Total liabilities

976,959

1,027,390

Commitments and contingencies

Stockholders' equity

Common stock, $0.001 par value; 160,000 shares authorized; 57,516 and 56,868 shares issued, 57,502 and 56,849 shares outstanding at September 30, 2022 and December 31, 2021, respectively

57

57

Additional paid-in capital

801,950

711,912

Retained earnings

2,093,909

1,829,532

Treasury stock

(118)

(177)

Accumulated other comprehensive loss

(138,632)

(54,207)

Total EPAM Systems Inc. stockholders' equity

2,757,166

2,487,117

Noncontrolling interest in consolidated subsidiaries

1,478

8,720

Total stockholders' equity

$    2,758,644

$    2,495,837

Total liabilities and stockholders' equity

$    3,735,603

$    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

September 30, 2022

Nine Months Ended

September 30, 2022

Revenue growth as reported

24.1 %

35.6 %

Foreign exchange rates impact

5.7 %

4.5 %

Revenue growth on a constant currency basis⁽¹⁾

29.8 %

40.1 %

(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 nine months ended September 30, 2022 and 2021:

Three Months Ended

September 30, 2022

Nine Months Ended

September 30, 2022

GAAP

Adjustments

Non-GAAP

GAAP

Adjustments

Non-GAAP

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

$   826,796

$   (21,358)

$ 805,438

$  2,453,955

$    (48,576)

$   2,405,379

Selling, general and administrative expenses⁽³⁾

$   198,021

$   (25,221)

$ 172,800

$     667,825

$  (130,914)

$      536,911

Income from operations⁽⁴⁾

$   180,227

$    52,163

$ 232,390

$     402,489

$   196,074

$      598,563

Operating margin

14.7 %

4.2 %

18.9 %

11.2 %

5.5 %

16.7 %

Net income⁽⁵⁾

$   156,054

$    27,685

$ 183,739

$     264,377

$   206,643

$     471,020

Diluted earnings per share

$         2.63

$       3.10

$           4.47

$           7.97

Three Months Ended

September 30, 2021

Nine Months Ended

September 30, 2021

GAAP

Adjustments

Non-GAAP

GAAP

Adjustments

Non-GAAP

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

$  653,374

$   (12,174)

$ 641,200

$  1,756,430

$   (34,552)

$  1,721,878

Selling, general and administrative expenses⁽³⁾

$  169,498

$   (18,655)

$ 150,843

$     457,797

$   (48,777)

$     409,020

Income from operations⁽⁴⁾

$  144,124

$    35,513

$ 179,637

$     376,649

$    95,114

$     471,763

Operating margin

14.6 %

3.6 %

18.2 %

14.2 %

3.6 %

17.8 %

Net income⁽⁵⁾

$  115,656

$    27,549

$ 143,205

$     339,373

$    31,170

$     370,543

Diluted earnings per share

$        1.95

$       2.42

$           5.75

$           6.28

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

2022

2021

2022

2021

Stock-based compensation expenses

$         17,474

$         12,174

$     31,782

$     34,552

Humanitarian support in Ukraine ^(a)

2,853

—

25,288

—

Unbilled business continuity resources ^(b)

1,031

—

12,862

—

Discretionary compensation ^(c)

—

—

(21,356)

—

Total adjustments to GAAP cost of revenues⁽²⁾

21,358

12,174

48,576

34,552

Stock-based compensation expenses

15,813

17,013

36,510

43,086

Other acquisition-related expenses

264

1,553

934

5,585

One-time charges

2,360

89

6,236

106

Humanitarian support in Ukraine ^(a)

1,631

—

13,219

—

Geographic repositioning ^(d)

4,425

—

37,497

—

Russia long-lived asset impairment charges ^(e)

—

—

19,570

—

Russia business restructuring ^(f)

728

—

16,948

—

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

25,221

18,655

130,914

48,777

Amortization of acquired intangible assets

5,584

4,684

16,584

11,785

Total adjustments to GAAP income from operations⁽⁴⁾

52,163

35,513

196,074

95,114

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

2,414

6,998

8,520

1,362

Impairment of financial asset

—

—

1,300

—

Foreign exchange gain/(loss)

(6,691)

3,441

102,035

5,835

Provision for income taxes:

Tax effect on non-GAAP adjustments

(8,044)

(8,053)

(61,443)

(18,312)

Excess tax benefits related to stock-based compensation

(10,879)

(10,350)

(31,370)

(52,829)

Net discrete benefit from tax planning ^(g)

(1,278)

—

(8,473)

—

Total adjustments to GAAP net income⁽⁵⁾

$         27,685

$         27,549

$   206,643

$     31,170

(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 relocation of 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 nine months ended September 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)

One-time benefits 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:

Fourth Quarter 2022

Revenue growth (at midpoint of the range)

11 %

Foreign exchange rates impact

4 %

Revenue growth on a constant currency basis (at midpoint of the range) ⁽⁶⁾

15 %

(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:

Fourth Quarter 2022

GAAP income from operations as a percentage of revenues

12% to 13%

Stock-based compensation expenses

2.7 %

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

1.4 %

Included in selling, general and administrative expenses

1.3 %

Humanitarian support in Ukraine ^(a)

0.5 %

Unbilled business continuity resources ^(b)

0.1 %

Geographic repositioning ^(d)

0.2 %

Amortization of acquired intangible assets

0.5 %

Non-GAAP income from operations as a percentage of revenues

16% to 17%

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

Fourth Quarter 2022

GAAP effective tax rate (approximately)

21 %

Tax effect on non-GAAP adjustments

1.4 %

 Excess tax benefits related to stock-based compensation

0.6 %

Non-GAAP effective tax rate (approximately)

23 %

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

Fourth Quarter 2022

GAAP diluted earnings per share

$2.02 to $2.10

Stock-based compensation expenses

0.56

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

0.29

Included in selling, general and administrative expenses

0.27

Humanitarian support in Ukraine ^(a)

0.10

Unbilled business continuity resources ^(b)

0.02

Geographic repositioning ^(d)

0.04

Other acquisition-related expenses

0.01

Amortization of acquired intangible assets

0.10

Provision for income taxes:

     Tax effect on non-GAAP adjustments

(0.16)

     Excess tax benefits related to stock-based compensation

(0.07)

Non-GAAP diluted earnings per share

$2.62 to $2.70