EPAM SYSTEMS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and the related notes included elsewhere in this annual report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management's expectations. Factors that could cause such differences are discussed in the sections entitled "Forward-Looking Statements" and "Part I. Item 1A. Risk Factors." We assume no obligation to update any of these forward-looking statements.
Executive Summary
We are a leading global provider of digital platform engineering and software development services to many of the world's leading organizations.
Our customers depend on us to solve their complex technical challenges and rely
on our expertise in core engineering, advanced technology, digital design and
intelligent enterprise development. We continuously explore opportunities in new
industries to expand our core industry client base in software and technology,
financial services, business information and media, travel and consumer, and
life sciences and healthcare. Our teams of developers, architects, consultants,
strategists, engineers, designers, and product experts have the capabilities and
skill sets to deliver business results.
Our global delivery model and centralized support functions, combined with the
benefits of scale from the shared use of fixed-cost resources, enhance our
productivity levels and enable us to better manage the efficiency of our global
operations. As a result, we have created a delivery base whereby our
applications, tools, methodologies and infrastructure allow us to seamlessly
deliver services and solutions from our delivery centers to global customers
across all geographies, further strengthening our relationships with them.
26--------------------------------------------------------------------------------
Table of Contents
Through increased specialization in focused verticals and a continued emphasis on strategic partnerships, we are leveraging our roots in software engineering to grow as a recognized brand in software development and end-to-end digital transformation services for our customers. In 2021, we have become a member of the S&P 500 and a Forbes Global 2000 company.
Business Update Regarding Military Action in
OnFebruary 24, 2022 , Russian forces launched significant military action againstUkraine , and sustained conflict and disruption in the region is likely. The impact toUkraine as well as actions taken by other countries, including new and stricter sanctions byCanada , theUnited Kingdom , theEuropean Union , theU.S. and other companies and organizations against officials, individuals, regions, and industries inRussia ,Ukraine , andBelarus , and each country's potential response to such sanctions, tensions, and military actions could have a material adverse effect on our operations. Any such material adverse effect from the conflict and enhanced sanctions activity may disrupt our delivery of services, cause us to shift all or portions of our work occurring in the region to other countries, and may restrict our ability to engage in certain projects in the region or involving certain customers in the region. The information contained in this section is accurate as of the date hereof, but may become outdated due to changing circumstances beyond our present awareness or control.
Our Response to the Military Action in
As noted in "Item 1. Business - Global Delivery Model" in Part I of this Annual Report on Form 10-K,Ukraine is our largest delivery location by number of personnel andBelarus andRussia are our second and third largest delivery locations by number of personnel, respectively. We are actively monitoring the security of our personnel and the stability of our infrastructure, including communications and internet availability. We are also executing our business continuity plan and adapting to developments as they occur to protect the safety of our people and handle potential impacts to our delivery infrastructure, including reallocating work to other geographies within our global footprint. We are actively working with our personnel and with our customers to meet their needs and to mitigate delivery challenges.
Moving Forward
We have no way to predict the progress or outcome of the situation, as the conflict and government reactions are rapidly developing and beyond our control. Prolonged unrest, military activities, or broad-based sanctions, should they be implemented, could have a material adverse effect on our operations and business outlook. We have accelerated hiring in locations outside of the region as part of our business continuity planning and in order to support client demand. In addition, we have implemented plans to move some of our existing personnel to other countries in order to keep them safe and mitigate impacts on our delivery of services to our customers.
For additional information on the various risks posed by the military action in
Business Update Regarding COVID-19
The COVID-19 pandemic continued its substantial and varying influence on global
public health, economies, business operations, and financial markets. Numerous
evolving factors prevent us from accurately predicting the extent to which the
COVID-19 pandemic will continue to directly and indirectly impact our employees,
customers, communities, business, results of operations and financial condition.
To the extent that the remainder of this Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") refers to a financial or
performance metric that has been affected by a trend or activity, that reference
is in addition to any impact of the COVID-19 pandemic disclosed in and
supplemented by this section. The information contained in this section is
accurate as of the date hereof, but may become outdated due to changing
circumstances beyond our present awareness or control.
27--------------------------------------------------------------------------------
Table of Contents
Our COVID-19 Pandemic Response
Since the beginning of the COVID-19 pandemic, the vast majority of our employees
have been able to productively and securely work from a remote location, so we
do not expect that COVID-19 will have a material adverse effect on our ability
to operate our business or productively deliver services to our customers, nor
on our financial reporting systems, internal control over financial reporting,
or disclosure controls and procedures. Extended or expanded restrictions on
travel and immigration from other countries may continue to impact our
operations. However, we do not believe that the current travel and immigration
restrictions will have a material adverse effect on our business or financial
condition.
Our adaptive global delivery model enables us to deliver our services and
solutions to our customers from remote locations, so we continue to effectively
provide our customers with the products, services, and solutions they seek.
Economic conditions resulting from the pandemic, including supply chain
disruptions, persistent inflation for both goods and services, and worker
shortages could negatively affect our operations and the operations of our
customers and their customers and could adversely impact our revenues and our
results of operations.
Moving Forward
We expect continued uncertainty regarding the impacts the pandemic will have on
our business, financial condition, and results of operations. We actively
monitor our business and the needs of our employees, customers and communities
to determine the appropriate actions to take to ensure the safety of our
employees and our ongoing operations. Our business continuity plans and
adherence to the recommendations of public health authorities are intended to
protect the health and safety of approximately 58,000 EPAM professionals and the
customers they serve. Economic and demand uncertainty in the current environment
may impact our future results. We continue to monitor the demand for our
services and our ability to deliver them, while continuing to assess how the
economic effects of COVID-19 may impact our human capital allocation, revenues,
operating expenses and profitability.
For additional information on the various risks posed by the COVID-19 pandemic,
please read "Part II. Item 7A. Quantitative and Qualitative Disclosures About
Market Risk" and "Part I. Item 1A. Risk Factors" included in this Annual Report
on Form 10-K.
28--------------------------------------------------------------------------------
Table of Contents
Overview of 2021 and Financial Highlights
The following table presents a summary of our results of operations for the
years ended
Year Ended December 31,
2021 2020 2019
% of revenues % of revenues % of revenues
(in millions, except percentages and per share data)
Revenues $ 3,758.1 100.0 % $ 2,659.5 100.0 % $ 2,293.8 100.0 %
Income from operations $ 542.3 14.4 % $ 379.3 14.3 % $ 302.9 13.2 %
Net income $ 481.7 12.8 % $ 327.2 12.3 % $ 261.1 11.4 %
Effective tax rate 9.7 % 13.6 % 12.8 %
Diluted earnings per share $ 8.15 $ 5.60 $ 4.53 The key highlights of our consolidated results for 2021 were as follows:
•We recorded revenues of$3.8 billion , or a 41.3% increase from$2.7 billion in the previous year, positively impacted by$38.8 million or 1.4% due to changes in certain foreign currency exchange rates as compared to the previous year. •Income from operations grew 43.0% to$542.3 million in 2021 from$379.3 million in 2020. Expressed as a percentage of revenues, income from operations was 14.4% compared to 14.3%. During the year endedDecember 31, 2021 , income from operations as a percentage of revenues was positively impacted by reduced facility-related expenses as a percentage of revenues and negatively impacted by higher levels of accrued variable compensation. •Our effective tax rate was 9.7% compared to 13.6% in the previous year. The provision for income taxes was impacted primarily by the excess tax benefits recorded upon vesting or exercise of stock-based awards in 2021 and 2020. •Net income increased 47.2% to$481.7 million compared to$327.2 million in 2020. Expressed as a percentage of revenues, net income increased 0.5% compared to last year, which was largely driven by the improvement in income from operations and a decrease in our effective tax rate.
•Diluted earnings per share increased 45.5% to
•Cash provided by operations increased$27.9 million , or 5.1%, to$572.3 million during 2021 as compared to last year. This increase was largely driven by the increase in net income as well as an increase in accrued variable compensation expense in 2021. The increase was partially offset by an increase in accounts receivable during 2021, largely attributable to the 41.3% growth in revenue in 2021 as compared to 2020.
The operating results in any period are not necessarily indicative of the results that may be expected for any future period.
29--------------------------------------------------------------------------------
Table of Contents
Critical Accounting Policies
We prepare our consolidated financial statements in accordance withU.S. generally accepted accounting principles ("GAAP"), which require us to make judgments, estimates and assumptions that affect: (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the end of each reporting period and (iii) the reported amounts of revenues and expenses during each reporting period. We evaluate these estimates and assumptions based on historical experience, knowledge and assessment of current business and other conditions, and expectations regarding the future based on available information and reasonable assumptions, which together form a basis for making judgments about matters not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. When reviewing our audited consolidated financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgment and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions. We consider the policies discussed below to be critical to an understanding of our consolidated financial statements as their application places significant demands on the judgment of our management. An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe that the following critical accounting policies are the most sensitive and require more significant estimates and assumptions used in the preparation of our consolidated financial statements. You should read the following descriptions of critical accounting policies, judgments and estimates in conjunction with our audited consolidated financial statements and other disclosures included elsewhere in this annual report. Additional information on our policies is in Note 1 "Business and Summary of Significant Accounting Policies" in the notes to our consolidated financial statements in this Annual Report on Form 10-K. Revenues - We recognize revenues when control of goods or services is passed to a customer in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Such control may be transferred over time or at a point in time depending on satisfaction of obligations stipulated by the contract. Consideration expected to be received may consist of both fixed and variable components and is allocated to each separately identifiable performance obligation based on the performance obligation's relative standalone selling price. Variable consideration usually takes the form of volume-based discounts, service level credits, price concessions or incentives. Determining the estimated amount of such variable consideration involves assumptions and judgment that can have an impact on the amount of revenues reported. We derive revenues from a variety of service arrangements, which have been evolving to provide more customized and integrated solutions to customers by combining software engineering with customer experience design, business consulting and technology innovation services. Fees for these contracts may be in the form of time-and-materials or fixed-price arrangements. We generate the majority of our revenues under time-and-material contracts, which are billed using hourly, daily or monthly rates to determine the amounts to be charged directly to the customer. We apply a practical expedient and revenues related to time-and-material contracts are recognized based on the right to invoice for services performed. Fixed-price contracts include maintenance and support arrangements, which may exceed one year in duration. Maintenance and support arrangements generally relate to the provision of ongoing services and revenues for such contracts are recognized ratably over the expected service period. Fixed-price contracts also include application development arrangements, where progress towards satisfaction of the performance obligation is measured using input or output methods and input methods are used only when there is a direct correlation between hours incurred and the end product delivered. Assumptions, risks and uncertainties inherent in the estimates used to measure progress could affect the amount of revenues, receivables and deferred revenues at each reporting period. Revenues from licenses which have significant stand-alone functionality are recognized at a point in time when control of the license is transferred to the customer. Revenues from licenses which do not have stand-alone functionality are recognized over time. If there is an uncertainty about the receipt of payment for the services, revenue recognition is deferred until the uncertainty is sufficiently resolved. We apply a practical expedient and do not assess the existence of a significant financing component if the period between transfer of the service to a customer and when the customer pays for that service is one year or less.
We report gross reimbursable "out-of-pocket" expenses incurred as both revenues and cost of revenues in the consolidated statements of income.
30--------------------------------------------------------------------------------
Table of Contents
Business Combinations - We account for business combinations using the acquisition method which requires us to estimate the fair value of identifiable assets acquired and liabilities assumed, including any contingent consideration, to properly allocate purchase price to the individual assets acquired and liabilities assumed. The allocation of the purchase price utilizes significant estimates in determining the fair values of identifiable assets acquired and liabilities assumed, especially with respect to intangible assets. The significant estimates and assumptions used include the timing and amount of forecasted revenues and cash flows, anticipated growth rates, customer attrition rates, the discount rate reflecting the risk inherent in future cash flows, and the useful lives for finite-lived assets. There are different valuation models for each component, the selection of which requires considerable judgment. These determinations will affect the amount of amortization expense recognized in future periods. We base our fair value estimates on assumptions we believe are reasonable, but recognize that the assumptions are inherently uncertain. The acquired assets typically include customer relationships, software, trade names, non-competition agreements, and assembled workforce and as a result, a substantial portion of the purchase price is typically allocated to goodwill and other intangible assets. We determine the fair value of the contingent consideration liabilities usingMonte Carlo simulations (which involve a simulation of future revenues and earnings during the earn-out period using management's best estimates) or probability-weighted expected return methods. Changes in financial projections, market risk assumptions, discount rates or probability assumptions related to achieving the various earn-out criteria would result in a change in the fair value of contingent consideration. Such changes, if any, are recorded within Interest and other income, net in the Company's consolidated statements of income. If the initial accounting for the business combination has not been completed by the end of the reporting period in which the business combination occurs, provisional amounts are reported to present information about facts and circumstances that existed as of the acquisition date. Once the measurement period ends, which in no case extends beyond one year from the acquisition date, revisions to the accounting for the business combination are recorded in earnings.
Recent Accounting Pronouncements
See Note 1 "Business and Summary of Significant Accounting Policies" in the notes to our consolidated financial statements in this Annual Report on Form 10-K for information regarding recent accounting pronouncements.
31--------------------------------------------------------------------------------
Table of Contents
Results of Operations
The following table sets forth a summary of our consolidated results of
operations for the periods indicated. This information should be read together
with our consolidated financial statements and related notes included elsewhere
in this annual report. The operating results in any period are not necessarily
indicative of the results that may be expected for any future period.
Year Ended December 31,
2021 2020 2019
% of revenues % of revenues % of revenues
(in thousands, except percentages and per share data) Revenues
$ 3,758,144 100.0 %$ 2,659,478 100.0 %$ 2,293,798 100.0 % Operating expenses: Cost of revenues (exclusive of depreciation and amortization)(1) 2,483,697 66.1 1,732,522 65.1 1,488,198 64.9 Selling, general and administrative expenses(2) 648,736 17.3 484,758 18.2 457,433 19.9 Depreciation and amortization expense 83,395 2.2 62,874 2.4 45,317 2.0 Income from operations 542,316 14.4 379,324 14.3 302,850 13.2 Interest and other (loss)/income, net (1,727) - 3,822 0.1 8,725 0.4 Foreign exchange loss (7,197) (0.2) (4,667) (0.2) (12,049) (0.5) Income before provision for income taxes 533,392 14.2 378,479 14.2 299,526 13.1 Provision for income taxes 51,740 1.4 51,319 1.9 38,469 1.7 Net income$ 481,652 12.8 %$ 327,160 12.3 %$ 261,057 11.4 % Effective tax rate 9.7 % 13.6 % 12.8 % Diluted earnings per share$ 8.15 $ 5.60 $ 4.53 (1) Includes$51,580 ,$32,785 and$37,580 of stock-based compensation expense for the years endedDecember 31, 2021 , 2020 and 2019, respectively. (2) Includes$60,075 ,$42,453 and$34,456 of stock-based compensation expense for the years endedDecember 31, 2021 , 2020 and 2019, respectively.
Revenues
We continue to expand our presence across multiple geographies and verticals, both organically and through strategic acquisitions. During the year endedDecember 31, 2021 , our total revenues grew 41.3% over the previous year to$3.8 billion . This growth resulted from our ability to retain existing customers and increase the level of services we provide to them and our ability to produce revenues from new customer relationships. During the year endedDecember 31, 2021 we experienced a decrease in customer concentration as compared to the previous year, with revenues from our top five, top ten and top twenty customer groups decreasing as a percentage of total revenues. Revenues have been positively impacted by our acquisitions in 2021, which contributed 4.3% to our revenue growth, and by the fluctuations in foreign currencies, which increased our revenue growth by 1.4% during the year endedDecember 31, 2021 as compared to the previous year.
We discuss below the breakdown of our revenues by vertical, customer location, service arrangement type, and customer concentration.
Revenues by Vertical
We assign our customers into one of our five main vertical markets or a group of
various industries where we are increasing our presence, which we label as
"Emerging Verticals", including energy, utilities, manufacturing, automotive,
telecommunications and several others.
32--------------------------------------------------------------------------------
Table of Contents
The following table presents our revenues by vertical and revenues as a percentage of total revenues by vertical for the periods indicated:
Year Ended December 31,
2021 2020 2019
(in thousands, except percentages)
Financial Services $ 848,370 22.6 % $ 555,235 20.9 % $ 500,872 21.8 %
Travel & Consumer 741,128 19.7 458,789 17.2 439,358 19.2
Business Information & Media 666,941 17.7 560,680 21.1 420,923 18.4
Software & Hi-Tech 664,597 17.7 496,813 18.7 433,398 18.9
Life Sciences & Healthcare 391,309 10.4 296,313 11.1 248,452 10.8
Emerging Verticals 445,799 11.9 291,648 11.0 250,795 10.9
Revenues $ 3,758,144 100.0 % $ 2,659,478 100.0 % $ 2,293,798 100.0 %
Financial Services became our largest vertical during 2021, growing 52.8% as
compared to 2020. Except for Business Information & Media, which grew at a rate
of 19.0% in 2021 over the prior year, all of our verticals grew over 30% in 2021
over the prior year.
Revenues by Customer Location
Our revenues are sourced from multiple countries, which we assign into four geographic markets and identify asAmericas , EMEA, CEE and APAC. We present and discuss our revenues by customer location based on the location of the specific customer site that we serve, irrespective of the location of the headquarters of the customer or the location of the delivery center where the work is performed. Revenues by customer location is different from revenues by reportable segment in our consolidated financial statements included elsewhere in this annual report. Segments are not based on the geographic location of the customers, but instead they are based on the location of the Company's management responsible for a particular customer or market.
The following table sets forth revenues by customer location by amount and as a percentage of our revenues for the periods indicated:
Year Ended December 31,
2021 2020 2019
(in thousands, except percentages)
Americas (1) $ 2,226,830 59.3 % $ 1,595,136 60.0 % $ 1,390,015 60.6 %
EMEA (2) 1,259,717 33.4 879,842 33.1 746,866 32.6
CEE (3) 168,038 4.5 114,702 4.3 100,471 4.4
APAC (4) 103,559 2.8 69,798 2.6 56,446 2.4
Revenues $ 3,758,144 100.0 % $ 2,659,478 100.0 % $ 2,293,798 100.0 %
(1)
(2)EMEA includes revenues from customers in
(3)CEE includes revenues from customers in
(4)APAC, or
During the year endedDecember 31, 2021 , revenues in theAmericas , our largest geography, were$2,226.8 million , growing$631.7 million , or 39.6%, from$1,595.1 million reported for the year endedDecember 31, 2020 . Revenues from this geography accounted for 59.3% of total revenues in 2021, a decrease from 60.0% in the prior year.The United States continued to be our largest customer location contributing revenues of$2,125.3 million in 2021 compared to$1,523.7 million in 2020. 33
--------------------------------------------------------------------------------
Table of Contents
Revenues in our EMEA geography were$1,259.7 million , an increase of$379.9 million , or 43.2%, over$879.8 million in the previous year. Revenues in this geography accounted for 33.4% of consolidated revenues in 2021 as compared to 33.1% in the previous year. The top three revenue contributing customer location countries in EMEA were theUnited Kingdom ,Switzerland andthe Netherlands generating revenues of$474.9 million ,$271.2 million and$154.8 million in 2021, respectively, compared to$331.2 million ,$203.4 million and$114.7 million in 2020, respectively. Fluctuations in foreign currency exchange rates with theU.S. dollar, particularly the euro and the British pound, during 2021 compared to the same period in the prior year positively impacted revenue growth in the EMEA geography by 3.3%.
During 2021, revenues in our CEE geography increased
Revenues from customers in locations in our APAC region comprised 2.8% of total revenues in 2021, a level consistent with the prior year.
Discussion of revenues from 2020 as compared to 2019 is included in "Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" of our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Revenues by Customer Concentration
We have long-standing relationships with many of our customers and we seek to grow revenues from our existing customers by continually expanding the scope and size of our engagements. Revenues derived from these customers may fluctuate as these accounts mature or upon beginning or completion of multi-year projects. We believe there is a significant potential for future growth as we expand our capabilities and offerings within existing customers. In addition, we remain committed to diversifying our client base and adding more customers to our client mix through organic growth and strategic acquisitions, and over the long-term, we expect revenue concentration from our top customers to decrease.
The following table presents revenues contributed by our customers by amount and as a percentage of our revenues for the periods indicated:
Year Ended December 31,
2021 2020 2019
(in thousands, except percentages)
Top five customers $ 682,147 18.2 % $ 584,303 22.0 % $ 456,985 19.9 %
Top ten customers $ 966,486 25.7 % $ 822,824 30.9 % $ 666,584 29.1 %
Top twenty customers $ 1,394,546 37.1 % $ 1,124,552 42.3 % $ 933,178 40.7 %
Customers below top twenty $ 2,363,598 62.9 % $ 1,534,926 57.7 % $ 1,360,620 59.3 %
The following table shows the number of customers grouped by revenues recognized by the Company for each year presented:
Year Ended December 31,
2021 2020 2019
Over $20 Million 40 28 22
$10 - $20 Million 38 27 27
$5 - $10 Million 63 43 42
$1 - $5 Million 271 225 206
$0.5 - $1 Million 133 107 105
Revenues by Service Offering
Our service arrangements have been evolving to provide more customized and
integrated solutions to our customers where we combine software engineering with
customer experience design, business consulting and technology innovation
services. We are continually expanding our service capabilities, moving beyond
traditional services into business consulting, design and physical product
development.
34--------------------------------------------------------------------------------
Table of Contents
The following table shows revenues by service offering as an amount and as a percentage of our revenues for the years indicated:
Year Ended December 31,
2021 2020 2019
(in thousands, except percentages)
Professional services $ 3,739,143 99.5 % $ 2,643,016 99.4 % $ 2,285,303 99.7 %
Licensing 15,552 0.4 11,139 0.4 5,081 0.2
Other 3,449 0.1 5,323 0.2 3,414 0.1
Revenues $ 3,758,144 100.0 % $ 2,659,478 100.0 % $ 2,293,798 100.0 %
See Note 11 "Revenues" in the notes to our consolidated financial statements in this Annual Report on Form 10-K for more information regarding our contract types and related revenue recognition policies.
Cost of Revenues (Exclusive of Depreciation and Amortization)
The principal components of our cost of revenues (exclusive of depreciation and amortization) are salaries, bonuses, fringe benefits, stock-based compensation, project-related travel costs and fees for subcontractors who are assigned to customer projects. Salaries and other compensation expenses of our delivery professionals are reported as cost of revenues regardless of whether the employees are actually performing customer services during a given period. Our employees are a critical asset, necessary for our continued success and therefore we expect to continue hiring talented employees and providing them with competitive compensation programs. We manage the utilization levels of our delivery professionals through strategic hiring and efficient staffing of projects. Some of these professionals are hired and trained to work for specific customers or on specific projects and some of our offshore development centers are dedicated to specific customers or projects. Our staff utilization also depends on the general economy and its effect on our customers and their business decisions regarding the use of our services. During the year endedDecember 31, 2021 , cost of revenues (exclusive of depreciation and amortization) was$2,483.7 million , representing an increase of 43.4% from$1,732.5 million reported last year. The increase was primarily due to an increase in compensation costs as a result of a 28.9% growth in the average number of production headcount for the year and a higher level of accrued variable compensation in 2021 as compared to the previous year. Expressed as a percentage of revenues, cost of revenues (exclusive of depreciation and amortization) was 66.1% and 65.1% during the years endedDecember 31, 2021 and 2020, respectively. The year-over-year increase is primarily due to a 1.7% increase in personnel-related costs, including stock-based compensation expense, as a percentage of revenues largely driven by a higher level of accrued variable compensation during 2021 as compared to the same period in 2020, partially offset by decreases in travel and entertainment expenses.
Discussion of cost of revenues (exclusive of depreciation and amortization) from
2020 as compared to 2019 is included in "Part II. Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations" of our Annual Report on Form 10-K for the year ended
Selling, General and Administrative Expenses
Selling, general and administrative expenses represent expenses associated with promoting and selling our services and general and administrative functions of our business. These expenses include the costs of salaries, bonuses, fringe benefits, stock-based compensation, severance, bad debt, travel, legal and accounting services, insurance, facilities including operating leases, advertising and other promotional activities. Our selling, general and administrative expenses have increased due to our continuously expanding operations, strategic business acquisitions, and the hiring of necessary personnel to support our growth. During the year endedDecember 31, 2021 , selling, general and administrative expenses were$648.7 million , representing an increase of 33.8% as compared to$484.8 million reported last year. The increase in selling, general and administrative expenses in 2021 was primarily due to a$136.8 million increase in personnel-related costs, which include stock-based compensation expense, primarily driven by an increase in headcount. 35
--------------------------------------------------------------------------------
Table of Contents
Expressed as a percentage of revenues, selling, general and administrative expenses decreased 0.9% to 17.3% for the year endedDecember 31, 2021 . The decrease was primarily attributable to a 1.2% decrease in facility-related expenses as a percentage of revenues, partially offset by increases in talent acquisition and development expenses and travel and entertainment expenses as a percentage of revenues. Discussion of selling, general and administrative expenses from 2020 as compared to 2019 is included in "Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" of our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Depreciation and Amortization Expense
Depreciation and amortization expense includes depreciation of physical assets used in the operation of our business such as computer equipment, software, buildings we purchased, leasehold improvements as well as various office furniture and equipment. Depreciation and amortization expense also includes amortization of acquired finite-lived intangible assets. During the year endedDecember 31, 2021 , depreciation and amortization expense was$83.4 million , representing an increase of$20.5 million from$62.9 million reported last year. The increase in depreciation and amortization expense was primarily driven by an increase in computer equipment to support headcount growth and amortization of acquired finite-lived intangible assets, which contributed$5.3 million to the year over year increase in depreciation and amortization expense. Expressed as a percentage of revenues, depreciation and amortization expense decreased to 2.2% during the year endedDecember 31, 2021 as compared to 2.4% in 2020. Discussion of depreciation and amortization expense from 2020 as compared to 2019 is included in "Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" of our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Interest and Other (Loss)/Income, Net
Interest and other (loss)/income, net includes interest earned on cash and cash equivalents and employee loans, gains and losses from certain financial instruments, interest expense related to our borrowings and changes in the fair value of contingent consideration. Interest and other (loss)/income, net decreased from a gain of$3.8 million during the year endedDecember 31, 2020 to a loss of$1.7 million during the year endedDecember 31, 2021 , which is primarily attributable to a$7.0 million increase in the charge from the change in fair value of contingent consideration reflecting improved expectations for the performance of certain acquisitions, partially offset by higher government grant income in 2021. There were no material changes in interest and other income, net in 2020 as compared to 2019.
Provision for Income Taxes
Determining the consolidated provision for income tax expense, deferred income tax assets and liabilities and any potential related valuation allowances involves judgment. We consider factors that may contribute, favorably or unfavorably, to the overall annual effective tax rate in the current year as well as the future. These factors include statutory tax rates and tax law changes in the countries where we operate and excess tax benefits upon vesting or exercise of equity awards as well as consideration of any significant or unusual items. As a global company, we are required to calculate and provide for income taxes in each of the jurisdictions in which we operate. During 2021, 2020 and 2019, we had$404.9 million ,$278.1 million and$234.2 million , respectively, in income before provision for income taxes attributed to our foreign jurisdictions. Changes in the geographic mix or level of annual pre-tax income can also affect our overall effective income tax rate. Our provision for income taxes also includes the impact of provisions established for uncertain income tax positions, as well as the related net interest and penalty expense. Tax exposures can involve complex issues and may require an extended period to resolve. Although we believe we have adequately reserved for our uncertain tax positions, we cannot provide assurance that the final tax outcome of these matters will not be different from our current estimates. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, statute of limitation lapse or the refinement of an estimate. To the extent that the final tax outcome of these matters differs from the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes was$51.7 million in 2021 and$51.3 million in 2020. The increase was primarily driven by the increase in pre-tax income year over year, partially offset by a significant increase in excess tax benefits recorded upon vesting or exercise of stock-based awards which were$71.6 million in 2021 compared to$36.6 million in 2020. The effective tax rate decreased from 13.6% in 2020 to 9.7% in 2021 primarily due to the increase in excess tax benefits recorded upon vesting or exercise of stock-based awards and tax benefits of certain one-time tax credits recorded in 2021. 36
--------------------------------------------------------------------------------
Table of Contents
Discussion of the provision for income taxes from 2020 as compared to 2019 is included in "Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" of our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Foreign Exchange Gain / Loss
For discussion of the impact of foreign exchange fluctuations see "Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Foreign Exchange Risk."
Results by Business Segment Our operations consist of three reportable segments:North America ,Europe , andRussia . The segments represent components of EPAM for which separate financial information is available and used on a regular basis by our chief executive officer, who is also our chief operating decision maker ("CODM"), to determine how to allocate resources and evaluate performance. Our CODM makes business decisions based on segment revenues and segment operating profits. Segment operating profit is defined as income from operations before unallocated costs. Expenses included in segment operating profit consist principally of direct selling and delivery costs as well as an allocation of certain shared services expenses. Certain corporate expenses are not allocated to specific segments as these expenses are not controllable at the segment level. Such expenses include certain types of professional fees, certain taxes included in operating expenses, compensation to non-employee directors and certain other general and administrative expenses, including compensation of specific groups of non-production employees. In addition, the Company does not allocate stock-based compensation, amortization of intangible assets acquired through business combinations, goodwill and other asset impairment charges, acquisition-related costs and certain other one-time charges. These unallocated amounts are combined with total segment operating profit to arrive at consolidated income from operations. We manage our business primarily based on the managerial responsibility for the client base and market. As managerial responsibility for a particular customer relationship generally correlates with the customer's geographic location, there is a high degree of similarity between customer locations and the geographic boundaries of our reportable segments. In some cases, managerial responsibility for a particular customer is assigned to a management team in another region and is usually based on the strength of the relationship between customer executives and particular members of EPAM's senior management team. In such cases, the customer's activity would be reported through the respective management team member's reportable segment. OurEurope segment includes our business in the APAC region, which is managed by the same management team. Segment revenues from external customers and segment operating profit, before unallocated expenses, for theNorth America ,Europe andRussia segments for the years endedDecember 31, 2021 , 2020 and 2019 were as follows: Year Ended December 31, 2021 2020 2019 (in thousands) Segment revenues: North America$ 2,242,248 $ 1,601,820 $ 1,380,944 Europe 1,350,484 947,305 820,717 Russia 165,412 110,353 92,137 Total segment revenues$ 3,758,144 $ 2,659,478 $ 2,293,798 Segment operating profit: North America$ 462,798 $ 345,196 $ 293,757 Europe 233,727 152,902 114,863 Russia 32,547 5,811 17,347
Total segment operating profit
37
--------------------------------------------------------------------------------
Table of Contents
North America Segment
During 2021,North America segment revenues increased$640.4 million , or 40.0%, over last year. Revenues from ourNorth America segment represented 59.7% of total segment revenues, a decrease from 60.2% reported in the corresponding period of 2020. During 2021 as compared to 2020,North America segment operating profits increased$117.6 million , or 34.1%, to$462.8 million . Expressed as a percentage of revenue,North America segment operating profit decreased to 20.6% in 2021 as compared to 21.6% in 2020. This decrease is primarily attributable to increases in personnel-related costs, largely driven by a higher level of accrued variable compensation. The following table presentsNorth America segment revenues by industry vertical for the periods indicated: Year Ended December 31, Change 2021 2020 Dollars Percentage Industry Vertical (in thousands, except percentages) Software & Hi-Tech$ 559,707 $ 419,895 $ 139,812 33.3 % Business Information & Media 389,613 334,063 55,550 16.6 % Financial Services 361,611 199,594 162,017 81.2 % Travel & Consumer 359,306 221,977 137,329 61.9 % Life Sciences & Healthcare 340,706 260,518 80,188 30.8 % Emerging Verticals 231,305 165,773 65,532 39.5 % Revenues$ 2,242,248 $ 1,601,820 $ 640,428 40.0 % Software & Hi-Tech remained the largest industry vertical in theNorth America segment during the year endedDecember 31, 2021 , growing 33.3% as compared to the prior year, which was a result of the continued focus on working with our technology customers. During the year endedDecember 31, 2021 , revenues from the Business Information & Media vertical experienced growth of 16.6% and largely benefited from expansion of services to several of our existing top 10 customers. Financial services grew 81.2% in 2021 compared to the prior year primarily due to growth in a wealth management customer that was previously one of our top 200 customers and is now one of our top 30 customers for the year. Emerging Verticals experienced 39.5% growth during 2021 compared to the prior year largely due to an increase in services provided to a customer in the automotive industry.
Europe Segment
During 2021,Europe segment revenues were$1,350.5 million , reflecting an increase of$403.2 million , or 42.6%, from last year. Revenues were positively impacted by changes in foreign currency exchange rates during 2021. Had ourEurope segment revenues been expressed in constant currency terms using the exchange rates in effect during 2020, we would have reported revenue growth of 39.3%. Revenues from ourEurope segment represent 35.9% and 35.6% of total segment revenues during 2021 and 2020, respectively. During 2021, this segment's operating profits increased$80.8 million , or 52.9% as compared to last year, to$233.7 million .Europe's operating profit represented 17.3% ofEurope segment revenues as compared to 16.1% in 2020.Europe segment operating profit was positively impacted by changes in foreign currency exchange rates, predominantly the euro and British pound, as well as the recognition of$6.5 million in revenues from performance obligations satisfied in previous periods, partially offset by a higher level of accrued variable compensation. During the year endedDecember 31, 2020 , segment operating profit was negatively impacted by temporary discounts provided to certain customers experiencing challenging economic conditions due to the impact of the COVID-19 pandemic. 38
--------------------------------------------------------------------------------
Table of Contents
The following table presentsEurope segment revenues by industry vertical for the periods indicated: Year Ended December 31, Change 2021 2020 Dollars Percentage Industry Vertical (in thousands, except percentages) Financial Services$ 372,394 $ 278,355 $ 94,039 33.8 % Travel & Consumer 354,041 220,448 133,593 60.6 % Business Information & Media 275,502 224,922 50,580 22.5 % Software & Hi-Tech 102,270 73,288 28,982 39.5 % Life Sciences & Healthcare 49,900 35,347 14,553 41.2 % Emerging Verticals 196,377 114,945 81,432 70.8 % Revenues$ 1,350,484 $ 947,305 $ 403,179 42.6 % Financial Services remained the largest industry vertical in theEurope segment during the year endedDecember 31, 2021 . TheEurope segment benefited from 60.6% growth in Travel & Consumer during the year endedDecember 31, 2021 as compared to 2020 primarily due to strong demand from several retail customers and recovery in demand from certain customers in the travel industry. For the year endedDecember 31, 2021 as compared to 2020, Business Information & Media vertical experienced slower relative growth at several clients where revenues from certain engagements plateaued compared to the prior year. Revenues in Software & Hi-Tech increased during the year endedDecember 31, 2021 as compared to 2020 primarily due to the expansion of services provided to one of our top 20 customers and revenues from companies acquired during 2021.
Russia Segment
During 2021, revenues from ourRussia segment increased$55.1 million relative to 2020 and represent 4.4% of total segment revenues during 2021 compared with 4.2% in 2020. Operating profits of ourRussia segment increased$26.7 million as compared to 2020. Expressed as a percentage ofRussia segment revenues, the segment's operating profits were 19.7% and 5.3% in 2021 and 2020, respectively. This increase is attributable to a net benefit in 2021 as compared to the corresponding period of last year from revenues from performance obligations satisfied in previous periods and a benefit from the change in the valuation of the Russian ruble relative to theU.S. dollar. The following table presentsRussia segment revenues by industry vertical for the periods indicated: Year Ended December 31, Change 2021 2020 Dollars Percentage Industry Vertical (in thousands, except percentages) Financial Services$ 114,365 $ 77,286 $ 37,079 48.0 % Travel & Consumer 27,781 16,364 11,417 69.8 % Software & Hi-Tech 2,620 3,630 (1,010) (27.8) % Business Information & Media 1,826 1,695 131 7.7 % Life Sciences & Healthcare 703 448 255 56.9 % Emerging Verticals 18,117 10,930 7,187 65.8 % Revenues$ 165,412 $ 110,353 $ 55,059 49.9 % Revenues in theRussia segment are generally subject to fluctuations and are impacted by the timing of revenue recognition associated with the execution of contracts and the foreign currency exchange rate of the Russian ruble to theU.S. dollar. Revenues in the Financial Services vertical primarily benefited from increased revenues from customers in the banking and insurance sector during 2021 as compared to 2020. Revenues in the Travel & Consumer vertical benefited in 2021 from increased revenues from a single retailer. There have been no significant changes in the other individual verticals during 2021 as compared to 2020. Currency fluctuations of the Russian ruble typically impact the results in theRussia segment. Ongoing economic and geopolitical uncertainty in the region and the volatility of the Russian ruble can significantly impact reported revenues and profitability in this segment. We continue to monitor geopolitical forces, economic and trade sanctions, and other issues involving this region. 39
--------------------------------------------------------------------------------
Table of Contents
Discussion of segment results from 2020 as compared to 2019 is included in "Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" of our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Effects of Inflation
Economies in some countries where we operate have periodically experienced high
rates of inflation. Periods of higher inflation may affect various economic
sectors in those countries and increase our cost of doing business there.
Inflation may increase some of our expenses such as wages. While inflation may
impact our results of operations and financial condition and it is difficult to
accurately measure the impact of inflation, we believe
the effects of inflation on our results of operations and financial condition
are not significant.
40--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources
Capital Resources
Our cash generated from operations has been our primary source of liquidity to fund operations and investments to support the growth of our business. As ofDecember 31, 2021 , our principal sources of liquidity were cash and cash equivalents totaling$1,446.6 million , as well as$675.0 million of available borrowings under our revolving credit facility. See Note 9 "Debt" in the notes to our consolidated financial statements in this Annual Report on Form 10-K for information regarding the terms of our revolving credit facility and information about debt. Cash Flows
The following table summarizes our cash flows for the periods indicated:
For the Years Ended
2021 2020 2019
(in thousands)
Consolidated Statements of Cash Flow Data:
Net cash provided by operating activities $ 572,327 $ 544,407 $ 287,453
Net cash used in investing activities (368,924) (167,154) (145,369)
Net cash (used in)/provided by financing activities (59,557) (765) 20,363
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(18,032) 9,357 3,530
Net increase in cash, cash equivalents and restricted cash
937,688 771,711
Cash, cash equivalents and restricted cash, end of period
Operating Activities
Net cash provided by operating activities during the year endedDecember 31, 2021 increased$27.9 million , or 5.1%, to$572.3 million , as compared to 2020 primarily driven by the increase in net income as well as an increase in accrued variable compensation expense in 2021. The increase was partially offset by an increase in accounts receivable during 2021, largely attributable to the 41.3% growth in revenue in 2021 as compared to 2020.
Investing Activities
Net cash used in investing activities during the year endedDecember 31, 2021 was$368.9 million compared to$167.2 million used in the same period in 2020. The cash used in investing activities was primarily attributable to$315.0 million used during 2021 for the acquisitions of businesses, net of cash acquired, compared to$18.9 million used for the acquisitions of businesses, net of cash acquired, during 2020. Cash used for capital expenditures was$111.5 million in 2021 compared to cash used for capital expenditures of$68.8 million during the comparable period in 2020. Additionally, net cash used in investing activities was positively impacted by the maturity of$60.0 million of time deposits during 2021 and negatively impacted by the$60.0 million use of cash to purchase these time deposits during 2020. Furthermore,$2.5 million was used for purchases of non-marketable securities during 2021 compared to$20.5 million used in 2020. Financing Activities During the year endedDecember 31, 2021 , net cash used in financing activities was$59.6 million , compared to$0.8 million net cash used in financing activities in 2020. During 2021, we received cash from the exercises of stock options issued under our long-term incentive plans of$26.3 million , compared to$26.4 million received in the corresponding period of 2020. These cash inflows were offset by cash used for the payments of withholding taxes related to net share settlements of restricted stock units of$41.6 million in 2021, compared to$20.1 million paid in 2020. Additionally, the year endedDecember 31, 2021 included payments of$40.2 million attributable to the acquisition-date fair value of contingent consideration compared to payments of$7.0 million attributable to acquisition-date fair value of contingent consideration during the year endedDecember 31, 2020 . Discussion of the comparison of the cash flows between 2020 and 2019 is included in "Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" of our Annual Report on Form 10-K for the year endedDecember 31, 2020 . 41
--------------------------------------------------------------------------------
Table of Contents
Future Capital Requirements
We believe that our existing cash and cash equivalents combined with our expected cash flow from operations will be sufficient to meet our projected operating and capital expenditure requirements for at least the next twelve months and that we possess the financial flexibility to execute our strategic objectives, including the ability to make acquisitions and strategic investments in the foreseeable future. However, our ability to generate cash is subject to our performance, general economic conditions, industry trends and other factors including the impact of the COVID-19 pandemic as described elsewhere in this MD&A. To the extent that existing cash and cash equivalents and operating cash flow are insufficient to fund our future activities and requirements, we may need to raise additional funds through public or private equity or debt financing. If we issue equity securities in order to raise additional funds, substantial dilution to existing stockholders may occur. If we raise cash through the issuance of additional indebtedness, we may be subject to additional contractual restrictions on our business. There is no assurance that we would be able to raise additional funds on favorable terms or at all.
Borrowings
See Note 8 "Leases" and Note 9 "Debt" in the notes to our consolidated financial statements in this Annual Report on Form 10-K.
Off-Balance Sheet Commitments and Arrangements
We do not have any material obligations under guarantee contracts or other
contractual arrangements other than as disclosed in Note 15 "Commitments and
Contingencies" in the notes to our consolidated financial statements in this
Annual Report on Form 10-K. We have not entered into any transactions with
unconsolidated entities where we have financial guarantees, subordinated
retained interests, derivative instruments, or other contingent arrangements
that expose us to material continuing risks, contingent liabilities, or any
other obligation under a variable interest in an unconsolidated entity that
provides financing, liquidity, market risk, or credit risk support to us, or
engages in leasing, hedging, or research and development services with us.
42--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
