EPAM SYSTEMS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our Annual Report on Form 10-K for the year endedDecember 31, 2021 and the unaudited condensed consolidated financial statements and the related notes included elsewhere in this quarterly 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" in this item and in "Part I. Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . We assume no obligation to update any of these forward-looking statements.
In this quarterly report, "EPAM," "
"EPAM" is a trademark of
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. 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. During the second quarter of 2022, to ensure safety and business continuity in the presence of the COVID-19 global pandemic, many of our personnel continue to work productively through secure remote working arrangements so they can respond to the rapidly changing needs and demands of our customers. We cannot accurately predict the extent to which the COVID-19 pandemic will continue to directly and indirectly impact our business, results of operations and financial condition. For additional information on the impact of the COVID-19 pandemic on our results and for further information on the various risks posed by the COVID-19 pandemic, please read "Part I. Item 1A. Risk Factors" under the sub-heading "Risks Related to COVID-19" which is included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Business Update Regarding the War in
OnFebruary 24, 2022 , Russian forces attackedUkraine and its people and EPAM has called for an immediate end to this unlawful and unconscionable attack. EPAM's highest priority is the safety and security of its employees and their families inUkraine and we have continued to relocate our employees to lower risk locations, both inUkraine and to other countries where we operate, and we have maintained our$100 million humanitarian aid commitment to our people. The vast majority of ourUkraine employees are in safe locations and operating at levels of productivity consistent with those achieved in 2021. We also continue to execute our business continuity plans and have sustained our accelerated hiring across multiple locations in Central andEastern Europe ,Latin America , andIndia . Our Board of Directors continues its oversight of our strategic, geopolitical, and cybersecurity risks and the risks related to our geographic expansion. Our Board has received updates from management during both regular and special meetings, while also providing oversight of the risks associated with the war inUkraine and other strategic areas of importance related to the invasion. 32
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OnApril 7, 2022 , the Company announced that we would begin the process of a phased exit of our operations inRussia in close collaboration with the Company's employees, contractors, and customers. We have discontinued services to certain customers located inRussia and expect to complete the phased exit of our operations inRussia as soon as feasible and subject to regulatory approvals. Through the date of issuance of these condensed consolidated financial statements, we continue to explore strategic alternatives for our operations inRussia , including the potential sale or liquidation of our holdings while executing our phased exit. We could incur additional significant charges in the future related to the exit of our operations inRussia . We expect to continue operating inBelarus while executing on ourBelarus -specific business continuity plans. A significant number of our employees inRussia andBelarus have already relocated, and we expect that moreBelarus -based employees will relocate to delivery locations in other countries, but at a reduced rate as compared to the second quarter of 2022. Prior to the attack inFebruary 2022 ,Ukraine was our largest delivery location by number of personnel andBelarus andRussia were our second and third largest delivery locations by number of personnel, respectively. We own an office building and lease office space in a number of cities inUkraine that we use for delivering services to our customers and internally. The impact of the attack on our operations, personnel, and physical assets inUkraine 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 andBelarus , and each of those country's responses to such sanctions and other actions has had and could continue to have a material adverse effect on our operations. Customers have and may continue to seek altered terms, conditions, and delivery locations for the performance of services, delay planned work or seek services from alternate providers, or suspend, terminate, fail to renew, or reduce existing contracts or services, which could have a material adverse effect on our financial condition. Some of our customers have implemented steps to block internet communications withRussia ,Ukraine , andBelarus to protect against potential cyberattacks or other information security threats, which has caused a material adverse effect on our ability to deliver our services to these customers from those locations. Such material adverse effects disrupt our delivery of services, cause us to shift all or portions of our work occurring in the region to other countries, restrict our ability to engage in certain projects in the region and serve certain customers in or from the region, and could negatively impact our personnel, operations, financial results and business outlook.
Moving Forward
We continue to execute our business continuity plans and adapt to developments as they occur to protect the safety of our people and address impacts to our delivery infrastructure, including reallocating work to other geographies within our global footprint. We have engaged both our personnel and our customers to meet their needs and to mitigate delivery challenges. EPAM continues to operate productively in more than 50 countries and provides consistent high-quality delivery to our customers. Our global delivery centers have sufficient resources, including infrastructure and capital, to support ongoing operations. EPAM continues to rapidly respond to the difficult conditions inUkraine while maintaining a focus on customers and long-term growth. Implementation and execution of our business continuity plans, relocation costs, our humanitarian commitment to our people inUkraine , and the cost of our phased exit fromRussia have resulted in materially increased expenses in the first six months of 2022. We expect some of those expenses will continue to be elevated in subsequent quarters. We expect that we may incur significant charges in the third quarter of 2022 related to the exit from operations inRussia in addition to the charges recorded during the six months endedJune 30, 2022 . We have no way to predict the progress or outcome of the attack againstUkraine because the conflict and government reactions change quickly and are beyond our control. Prolonged military activities, broad-based sanctions and counter-sanctions could have a material adverse effect on our operations and financial condition and there is significant uncertainty for our business outlook for the third quarter and the remainder of 2022. 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. For additional information on the various risks posed by the attack againstUkraine and the impact in the region, please read "Part I. Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 and "Part II. Item 1A. Risk Factors" in this quarterly report. 33
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Year-to-Date 2022 Developments and Trends
Our business was disrupted by the war inUkraine that began in the later part of the first quarter of 2022 and continued to create uncertainties through the second quarter endedJune 30, 2022 . For the first six months of 2022, our revenues were$2.366 billion , an increase of 42.4% over$1.662 billion reported for the same period of 2021. For the six months endedJune 30, 2022 , we experienced strong growth across all of our verticals with revenues growing above 25% year over year in each vertical. We have built an increasingly diversified portfolio across numerous industry verticals, geographies and service offerings which enables us to continue to grow revenues. Income from operations as a percentage of revenues decreased to 9.4% for the six months endedJune 30, 2022 as compared to 14.0% for the six months endedJune 30, 2021 , largely driven by incremental expenses associated with EPAM's humanitarian efforts inUkraine , the global repositioning of our workforce, the costs associated with our phased exit from operations inRussia and impairment of long-lived asset charges triggered by the discontinuance of services to customers located inRussia .
Summary of Results of Operations
The following table presents a summary of our results of operations for the
three and six months ended
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(in thousands, except per share data and percentages)
Revenues $ 1,194,861 100.0 % $ 881,366 100.0 % $ 2,366,475 100.0 % $ 1,662,141 100.0 %
Income from operations $ 93,020 7.8 % $ 125,274 14.2 % $ 222,262 9.4 % $ 232,525 14.0 %
Net income $ 18,604 1.6 % $ 114,671 13.0 % $ 108,323 4.6 % $ 223,717 13.5 %
Effective tax rate (114.9) % 6.9 % 5.8 % 6.0 %
Diluted earnings per $ 0.32 $ 1.94 $ 1.84 $ 3.80
share
The key highlights of our consolidated results for the three and six months
ended
•Revenues for the second quarter of 2022 were$1.195 billion , representing a 35.6% increase from$881.4 million reported in the same period last year. Revenue growth was strong in the second quarter of 2022 as a result of robust demand for our services. The second quarter of 2022 was negatively impacted by$39.9 million or 4.5% due to changes in certain foreign currency exchange rates as compared to the corresponding period last year. Revenues for the first half of 2022 were$2.366 billion , or a 42.4% increase from$1.662 billion reported in the corresponding period last year. Revenue growth in the first half of 2022 was negatively impacted by$63.1 million or 3.8% due to changes in certain foreign currency exchange rates as compared to the corresponding period last year. Revenues from acquisitions contributed$54.6 million and$132.2 million to our revenues for the three and six months endedJune 30, 2022 , respectively. •Income from operations decreased 25.7% and 4.4% to$93.0 million and$222.3 million during the three and six months endedJune 30, 2022 , respectively, as compared to the corresponding period in 2021. Expressed as a percentage of revenues, income from operations for the second quarter of 2022 decreased to 7.8% compared to 14.2% in the second quarter of last year and decreased to 9.4% for the first six months of 2022 as compared to 14.0% for the corresponding period in 2021. During the quarter endedJune 30, 2022 , income from operations as a percentage of revenues was negatively impacted by incremental expenses associated with EPAM's humanitarian efforts inUkraine , the continuing global repositioning of our workforce, and the costs associated with our phased exit from operations inRussia . During the six months endedJune 30, 2022 , income from operations as a percentage of revenues was negatively impacted by incremental expenses associated with EPAM's humanitarian efforts inUkraine , the global repositioning of our workforce, the costs associated with our phased exit from operations inRussia , and impairment of long-lived asset charges during the first quarter of 2022 triggered by the decision to discontinue services to customers inRussia . 34
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•Our effective tax rate was (114.9)% and 5.8% for the three and six months endedJune 30, 2022 , respectively, and 6.9% and 6.0% for the three and six months endedJune 30, 2021 , respectively. The decrease in the effective tax rate in the three months endedJune 30, 2022 , as compared to the corresponding period in the prior year, is primarily attributable to higher excess tax benefits recorded upon vesting or exercise of stock-based awards as a percentage of pre-tax income and the impact from the decision to change the tax status and to classify certain foreign subsidiaries of the Company as disregarded entities forU.S. income tax purposes. •Net income decreased 83.8% to$18.6 million for the three months endedJune 30, 2022 , compared to$114.7 million reported in the corresponding period last year. Expressed as a percentage of revenues, net income was 1.6% for the second quarter of 2022, a decrease of 11.4% compared to 13.0% reported in the corresponding period of 2021. Net income decreased 51.6% during the six months endedJune 30, 2022 as compared to the corresponding period in the prior year. Net income for the quarter endedJune 30, 2022 was impacted by the incremental expenses associated with EPAM's humanitarian efforts inUkraine , the global repositioning of our workforce, the costs associated with our phased exit from operations inRussia , and the foreign exchange loss driven by the impact of appreciation of the Russian ruble on the Company's intercompany payables denominated in Russian rubles andU.S. dollar denominated assets held by our subsidiaries inRussia . Net income for the six months endedJune 30, 2022 was impacted by the incremental expenses associated with EPAM's ongoing humanitarian efforts inUkraine , the global repositioning of our workforce, the costs associated with our phased exit from operations inRussia , the impairment of long-lived asset charges triggered by the discontinuance of services to customers inRussia , and a foreign exchange loss primarily driven by the impact of appreciation of the Russian ruble on the Company's intercompany payables denominated in Rubles andU.S. dollar denominated assets held by our subsidiaries inRussia and losses from our foreign exchange forward contracts associated with the Russian ruble during the first quarter of 2022. •Diluted earnings per share was$0.32 and$1.84 for the three and six months endedJune 30, 2022 , respectively, a decrease of$1.62 and$1.96 compared to the corresponding period last year. •Cash provided by operating activities was$25.7 million during the six months endedJune 30, 2022 as compared to cash provided by operating activities of$81.7 million in the corresponding period last year. This decrease was largely driven by a higher level of variable compensation payments made in the first half of 2022 based on 2021 performance and cash outflows related to EPAM's humanitarian support efforts inUkraine and geographic repositioning.
The operating results in any period are not necessarily indicative of the results that may be expected for any future period.
Critical Accounting Policies
The discussion and analysis of our financial position and results of operations is based on our unaudited condensed consolidated financial statements which have been prepared in accordance withU.S. GAAP. The preparation of these condensed consolidated financial statements in accordance withU.S. GAAP requires us to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a recurring basis, we evaluate our estimates and judgments, including those related to revenue recognition and related allowances, impairments of long-lived assets including intangible assets, goodwill and right-of-use assets, income taxes including the valuation allowance for deferred tax assets, and stock-based compensation. Actual results may differ materially from these estimates under different assumptions and conditions. In addition, our reported financial condition and results of operations could vary due to a change in the application of a particular accounting standard. During the three and six months endedJune 30, 2022 , there have been no material changes to our critical accounting policies as reported in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 35
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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 unaudited condensed consolidated financial statements and related notes
included elsewhere in this quarterly report. The operating results in any period
are not necessarily indicative of the results that may be expected for any
future period.
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(in thousands, except percentages and per share data) Revenues
$ 1,194,861 100.0 %$ 881,366 100.0 %$ 2,366,475 100.0 %$ 1,662,141 100.0 %
Operating expenses:
Cost of revenues (exclusive of depreciation and amortization)(1) 846,323 70.8 % 583,728 66.2 % 1,627,159 68.8 % 1,103,056 66.4 % Selling, general and administrative expenses(2) 232,527 19.5 % 151,910 17.2 % 469,804 19.9 % 288,299 17.3 % Depreciation and amortization expense 22,991 1.9 % 20,454 2.4 % 47,250 1.9 % 38,261 2.3 % Income from operations 93,020 7.8 % 125,274 14.2 % 222,262 9.4 % 232,525 14.0 % Interest and other income, net 1,579 0.1 % 2,580 0.3 % 1,414 0.1 % 7,954 0.4 % Foreign exchange loss (85,941) (7.2) % (4,693) (0.5) % (108,726) (4.6) % (2,394) (0.1) % Income before provision for income taxes 8,658 0.7 % 123,161 14.0 % 114,950 4.9 % 238,085 14.3 % (Benefit from)/ provision for income taxes (9,946) (0.9) % 8,490 1.0 % 6,627 0.3 % 14,368 0.8 % Net income$ 18,604 1.6 %$ 114,671 13.0 %$ 108,323 4.6 %$ 223,717 13.5 % Effective tax rate (114.9) % 6.9 % 5.8 % 6.0 % Diluted earnings per share$ 0.32 $ 1.94 $ 1.84 $ 3.80 (1)Includes$14,732 and$11,261 of stock-based compensation expense for the three months endedJune 30, 2022 and 2021, respectively, and$14,308 and$22,378 of stock-based compensation expense for the six months endedJune 30, 2022 and 2021, respectively. (2)Includes$13,161 and$12,637 of stock-based compensation expense for the three months endedJune 30, 2022 and 2021, respectively, and$20,697 and$26,073 of stock-based compensation expense for the six months endedJune 30, 2022 and 2021, respectively.
Consolidated Results Review
Revenues
During the three months endedJune 30, 2022 , our total revenues grew to$1.195 billion or 35.6% compared to the corresponding period in 2021. Revenues have been positively impacted by acquisitions, which contributed 6.2% to our revenue growth, and negatively impacted by fluctuations in foreign currency exchange rates which decreased our revenue growth by 4.5% during the three months endedJune 30, 2022 as compared to the same period last year. During the six months endedJune 30, 2022 , our total revenues grew 42.4% over the corresponding period in 2021. The first six months of 2022 were positively impacted by acquisitions, which contributed 8.0% to our revenue growth, and negatively impacted by fluctuations in foreign currency exchange rates which decreased our revenue growth by$63.1 million or 3.8% due to changes in certain foreign currency exchange rates as compared to the corresponding period last year. 36
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Revenues by customer location for the three and six months ended
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(in thousands, except percentages) (in thousands, except percentages)
Americas(1) $ 721,612 60.4 % $ 527,398 59.8 % $ 1,408,405 59.5 % $ 997,719 60.0 %
EMEA(2) 422,986 35.4 % 291,281 33.0 % 844,936 35.7 % 550,653 33.1 %
APAC(3) 30,176 2.5 % 24,984 2.8 % 59,758 2.5 % 45,932 2.8 %
CEE(4) 20,087 1.7 % 37,703 4.4 % 53,376 2.3 % 67,837 4.1 %
Revenues $ 1,194,861 100.0 % $ 881,366 100.0 % $ 2,366,475 100.0 % $ 1,662,141 100.0 %
(1)
(2)EMEA includes revenues from customers in
(3)APAC, or
(4)CEE includes revenues from customers in
During the three and six months endedJune 30, 2022 ,the United States continued to be our largest customer location, with revenues increasing 36.7% to$687.0 million during the second quarter of 2022 from$502.5 million in the second quarter of 2021. During the six months endedJune 30, 2022 , revenues inthe United States grew 41.4% to$1.344 billion compared to$950.5 million in the same period of the prior year. The top three revenue contributing customer location countries in EMEA were theUnited Kingdom ,Switzerland andNetherlands , generating$149.7 million ,$79.2 million and$50.9 million in revenues, respectively, during the three months endedJune 30, 2022 . Revenues from customers in these three countries were$112.7 million ,$63.8 million , and$36.7 million , respectively, in the corresponding period last year. During the six months endedJune 30, 2022 , theUnited Kingdom ,Switzerland andNetherlands performed as EMEA's top revenue generating locations and contributed$302.9 million ,$161.1 million , and$101.1 million , respectively, compared to$206.2 million ,$131.4 million , and$69.7 million , respectively, in the corresponding period last year. Revenues in the EMEA region were negatively impacted by the weakening of the euro and the British pound relative to theU.S. dollar during the three and six months endedJune 30, 2022 as compared to the same period in the previous year. Revenues in the region during the three and six months endedJune 30, 2022 benefited from acquisitions which contributed$49.7 million and$108.3 million to revenue growth, respectively. During the three and six months endedJune 30, 2022 , revenues from customers in the APAC region increased by$5.2 million , or 20.8% and$13.8 million or 30.1% over the corresponding periods of 2021, mainly due to growth in the Financial Services vertical. During the three months endedJune 30, 2022 , revenues in the CEE geography included$18.0 million from customers inRussia , a decrease of$17.8 million as compared to the corresponding period of 2021. During the six months endedJune 30, 2022 , customers inRussia comprised$48.7 million of the revenues in the CEE geography, a decrease of$14.7 million from the corresponding period of 2021. OnMarch 4, 2022 , the Company announced that it will discontinue its services to customers located inRussia . EPAM is committed to providing transition support for customers in this market as the Company administers the transition. As a result of this announcement and our phased exit fromRussia , the revenues from this geography are expected to materially decline in the future.
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 resource, necessary for our continued success and
therefore we expect to continue hiring talented employees and providing them
with competitive compensation programs.
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During the three months endedJune 30, 2022 , cost of revenues (exclusive of depreciation and amortization) was$846.3 million representing an increase of 45.0% from$583.7 million in the corresponding period of 2021. The increase was primarily due to an increase in compensation costs largely driven by the 34.6% growth in the average number of production professionals during the three months endedJune 30, 2022 as compared to the same period in 2021 as well as$3.3 million of incremental costs associated with our humanitarian efforts inUkraine and$9.3 million of unbilled business continuity resources. Expressed as a percentage of revenues, cost of revenues (exclusive of depreciation and amortization) was 70.8% and 66.2% in the second quarter of 2022 and 2021, respectively. The year-over-year increase is primarily due to increased costs associated with our humanitarian efforts inUkraine , unbilled business continuity resources and the ongoing transition of customer work to higher cost geographies. During the six months endedJune 30, 2022 , cost of revenues (exclusive of depreciation and amortization) was$1,627.2 million representing an increase of 47.5% from$1,103.1 million in the corresponding period of 2021. The increase was primarily due to an increase in compensation costs other than stock-based compensation expense largely driven by the 35.1% growth in the average number of production professionals, a 4.1% unfavorable impact from changing foreign currency exchange rates, as well as$22.4 million of incremental costs associated with our humanitarian efforts inUkraine and$11.8 million of unbilled business continuity resources, partially offset by$8.1 million of lower stock-based compensation expenses and the reversal of$21.4 million of previously accrued discretionary compensation expenses during the first quarter of 2022. Expressed as a percentage of revenues, cost of revenues (exclusive of depreciation and amortization) was 68.8% and 66.4% for the six months endedJune 30, 2022 and 2021, respectively. The year-over-year increase is primarily due to increased costs associated with our humanitarian efforts inUkraine , unbilled business continuity resources, and the ongoing transition of customer work to higher cost geographies, partially offset by a lower level of stock-based compensation expense and the reversal of previously accrued discretionary compensation expenses in the first quarter of 2022.
Selling, General and Administrative Expenses
Selling, general and administrative expenses represent expenditures 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. Additionally, selling, general and administrative expenses contain costs of relocating our employees and various one-time and unusual expenses such as impairment charges. During the three months endedJune 30, 2022 , selling, general and administrative expenses were$232.5 million representing a 53.1% increase as compared to$151.9 million in the corresponding period of 2021. The increase in selling, general and administrative expenses was driven by a$39.8 million increase in personnel-related costs including stock-based compensation expense largely driven by the 34.4% growth in the average number of non-production professionals during the three months endedJune 30, 2022 compared to the same period in 2021. Additionally, we incurred$14.4 million of expenses associated with our geographic repositioning of our workforce,$16.2 million of charges related to employee separation costs inRussia , and$5.1 million of expenses associated with our humanitarian efforts inUkraine during the second quarter of 2022. Expressed as a percentage of revenues, selling, general and administrative expenses increased by 2.3% to 19.5% for the three months endedJune 30, 2022 as compared to the same period from the prior year, primarily driven by higher personnel-related costs, expenses related to the phased exit fromRussia , increased costs associated with geographic repositioning of our workforce and our humanitarian efforts inUkraine . During the six months endedJune 30, 2022 , selling, general and administrative expenses were$469.8 million representing an increase of 63.0% as compared to$288.3 million reported in the corresponding period of 2021. The increase in selling, general and administrative expenses was primarily driven by an$85.5 million increase in personnel-related costs other than stock-based compensation expense, which decreased$5.4 million during the six months endedJune 30, 2022 as compared to the same period in the prior year. Additionally, the six months endedJune 30, 2022 were impacted by$33.1 million of expenses associated with our geographic repositioning of our workforce,$11.6 million of expenses associated with our humanitarian efforts inUkraine ,$16.2 million of charges related to employee separation costs inRussia ,$19.6 million of impairment charges related to our long-lived assets inRussia and$8.2 million of bad debt expense attributable to customers located inRussia . Expressed as a percentage of revenues, selling, general and administrative expenses increased by 2.6% to 19.9% for the six months endedJune 30, 2022 as compared to the same period from the prior year primarily driven by higher personnel-related costs, impairment charges related to our long-lived assets inRussia and higher bad debt expenses attributable to customers located inRussia , increased costs associated with geographic repositioning of our workforce and employee separation costs inRussia as well as our humanitarian efforts inUkraine . 38
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Depreciation and Amortization Expense
During the three and six months endedJune 30, 2022 , depreciation and amortization expense was$23.0 million and$47.3 million , respectively, as compared to$20.5 million and$38.3 million , respectively, in the corresponding period last year. The increase in depreciation and amortization expense is primarily the result of increased investment in computer equipment used by our employees and amortization of acquired finite-lived intangible assets. Expressed as a percentage of revenues, depreciation and amortization expense decreased to 1.9% during both the three and six months endedJune 30, 2022 , as compared to 2.4% and 2.3% in the corresponding period of 2021.
Interest and Other Income, Net
Interest and other 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 income, net decreased from$2.6 million and$8.0 million during the three and six months endedJune 30, 2021 to$1.6 million and$1.4 million during the three and six months endedJune 30, 2022 . The six months of 2022 were mainly impacted by a$6.1 million loss due to the change in fair value of contingent consideration as compared to a$5.6 million gain in the corresponding period of 2021 reflecting revised expectations for the performance of certain acquisitions. Additionally, during the first six months of 2022, we recorded a$1.3 million charge related to the impairment of a financial asset inUkraine .
Foreign Exchange Loss
For discussion of the impact of foreign exchange fluctuations see "Item 3. Quantitative and Qualitative Disclosures About Market Risk."
(Benefit from)/ provision for Income Taxes
In determining the interim provision for income taxes, we historically have used an estimated annual effective tax rate, which is based on expected annual profit before tax, statutory tax rates and tax planning opportunities available in the various jurisdictions in which EPAM operates. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter. During the first quarter of 2022, we recorded the interim tax provision using the discrete method rather than using an estimated annual effective tax rate. The discrete method treats the year-to-date period as if it was the annual period and determines the income tax expense or benefit on that basis. The discrete method is applied when the application of the estimated annual effective tax rate is impractical because it is not possible to reliably estimate the annual effective tax rate. During the second quarter of 2022, the Company used an estimated annual effective tax rate. The change did not have a material impact on the condensed consolidated interim financial statements. In subsequent quarters, the Company expects to continue to utilize the annual effective tax rate method. 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 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. Our effective tax rate was (114.9)% and 5.8% for the three and six months endedJune 30, 2022 , respectively, and 6.9% and 6.0% for the three and six months endedJune 30, 2021 , respectively. The decrease in the effective tax rate in the three and six months endedJune 30, 2022 , as compared to the corresponding period in the prior year, is primarily attributable to higher excess tax benefits recorded upon vesting or exercise of stock-based awards as a percentage of pre-tax income and the impact of the Company's election to disregard certain foreign subsidiaries of the Company as separate entities forU.S. tax purposes. Our provision for income taxes was impacted by excess tax benefits recorded upon vesting or exercise of stock-based awards of$7.4 million and$20.5 million during the three and six months endedJune 30, 2022 , respectively, and$21.0 million and$42.5 million during the three and six months endedJune 30, 2021 , respectively. 39
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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 operating profit. 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 its 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 management team's reportable segment. OnMarch 4, 2022 , the Company announced that it will discontinue its services to customers located inRussia and is committed to providing transition support for customers in this market. OnApril 7, 2022 , the Company announced that it would begin the process of a phased exit of its operations inRussia , to be completed in the months following the announcement and in close collaboration with the Company's employees, contractors, and customers. The timing of completing the exit is subject to completion of regulatory requirements in the country and the Company expects to complete its exit as soon as feasible. Segment revenues from external customers and segment operating profit, before unallocated expenses, for theNorth America ,Europe andRussia reportable segments for the three and six months endedJune 30, 2022 and 2021 were as follows: Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (in thousands) Segment revenues: North America$ 723,657 $ 532,022 $ 1,411,368 $ 1,006,875 Europe 451,944 311,949 903,914 588,653 Russia 19,260 37,395 51,193 66,613 Total segment revenues$ 1,194,861 $ 881,366 $ 2,366,475 $ 1,662,141 Segment operating profit/(loss): North America$ 127,420 $ 111,260 $ 254,154 $ 205,363 Europe 35,396 50,452 92,107 101,525 Russia 1,662 6,029 (17,822) 7,008
Total segment operating profit
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Table of Contents
North America Segment
During the three months endedJune 30, 2022 , revenues for theNorth America segment increased$191.6 million , or 36.0%, compared to the same period last year and segment operating profit increased$16.2 million , or 14.5%, compared to the same period last year. During the three months endedJune 30, 2022 , revenues from ourNorth America segment were 60.6% of total segment revenues, an increase from 60.4% reported in the corresponding period of 2021. TheNorth America segment's operating profit margin decreased to 17.6% during the second quarter of 2022 from 20.9% in the second quarter of 2021. Segment operating profit was negatively impacted by increased personnel-related costs in part attributable to supplementing delivery resources on certain projects with standby resources able to support projects if delivery resources impacted by the invasion ofUkraine become unable to work and lower utilization during the second quarter of 2022 compared to the second quarter of 2021. During the six months endedJune 30, 2022 , revenues for theNorth America segment increased$404.5 million , or 40.2%, compared to the same period last year and segment operating profit increased$48.8 million , or 23.8%, compared to the same period last year. During the six months endedJune 30, 2022 and 2021, revenues from ourNorth America segment were 59.6% and 60.6% of total segment revenues, respectively. As a percentage ofNorth America segment revenues, theNorth America segment's operating profit margin decreased to 18.0% during the six months endedJune 30, 2022 as compared to 20.4% in the corresponding period of 2021. Segment operating profit was negatively impacted by increased personnel-related costs in part attributable to supplementing delivery resources on certain projects with standby resources able to support projects if delivery resources impacted by the invasion ofUkraine become unable to work, lower utilization during the second quarter of 2022 compared to the second quarter of 2021, and lower profit margins from acquisitions completed in the last twelve months.
The following table presents
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2022 2021 Dollars Percentage 2022 2021 Dollars Percentage
Industry Vertical (in thousands, except percentages)
Software & Hi-Tech $ 161,034 $ 134,638 $ 26,396 19.6 % $ 317,316 $ 260,224 $ 57,092 21.9 %
Travel & Consumer 130,932 85,075 45,857 53.9 % 253,179 154,504 98,675 63.9 %
Financial Services 126,879 83,342 43,537 52.2 % 247,214 153,082 94,132 61.5 %
Life Sciences & Healthcare 115,899 80,712 35,187 43.6 % 227,270 156,301 70,969 45.4 %
Business Information & Media 114,026 92,379 21,647 23.4 % 224,972 179,584 45,388 25.3 %
Emerging Verticals 74,887 55,876 19,011 34.0 % 141,417 103,180 38,237 37.1 %
Revenues $ 723,657 $ 532,022 $ 191,635 36.0 % $ 1,411,368 $ 1,006,875 $ 404,493 40.2 %
During the three and six months ended June 30, 2022 compared to the same period
in the prior year, revenues from each vertical in the North America segment grew
in excess of 19% and Software & Hi-Tech remained the largest industry vertical
in the North America segment, which was a result of the continued focus on
engaging with our technology customers. Travel and Consumer grew 53.9% and 63.9%
during the three and six months ended June 30, 2022 , respectively, primarily due
to growth from retail customers. Financial Services grew 52.2% and 61.5% during
the three and six months ended June 30, 2022 , respectively, largely due to
growth in a group of wealth management customers. Business Information & Media
grew 23.4% and 25.3% during the three and six months ended June 30, 2022 ,
respectively, primarily due to growth from existing customers in our top 20
customers. Life Sciences & Healthcare grew 43.6% and 45.4% during the three and
six months ended June 30, 2022 , respectively, primarily due to growth from
customers added in the last 24 months.
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Table of Contents
Europe Segment
During the three months endedJune 30, 2022 ,Europe's segment revenues were$451.9 million , representing an increase of$140.0 million , or 44.9%, from the same period last year. Acquisitions completed in the last 12 months contributed$50.7 million to revenues during the three months endedJune 30, 2022 . Revenues were negatively impacted by changes in foreign currency exchange rates during the second quarter of 2022. Had ourEurope segment revenues been expressed in constant currency terms using the exchange rates in effect during the second quarter of 2021, we would have reported revenue growth of 57.8%.Europe's segment revenues accounted for 37.8% and 35.4% of total segment revenues during the three months endedJune 30, 2022 and 2021, respectively. During the second quarter of 2022, the segment's operating profit decreased 29.8% to$35.4 million compared to the second quarter of 2021. Expressed as a percentage of revenues,Europe's segment operating profit decreased to 7.8% compared to 16.2% in the same period of the prior year. Segment operating profit was negatively impacted by increased personnel-related costs in part attributable to supplementing delivery resources on certain projects with standby resources able to support projects if delivery resources impacted by the invasion ofUkraine become unable to work, lower utilization during the second quarter of 2022 compared to the second quarter of 2021, and lower profit margins from acquisitions completed in the last twelve months. During the six months endedJune 30, 2022 , revenues for theEurope segment increased$315.3 million , or 53.6%, compared to the same period last year and segment operating profit decreased$9.4 million , or 9.3%, compared to the same period last year. During the six months endedJune 30, 2022 and 2021, revenues from ourEurope segment were 38.2% and 35.4% of total segment revenues, respectively. As a percentage ofEurope segment revenues, theEurope segment's operating profit decreased to 10.2% during the six months endedJune 30, 2022 from 17.2% in the corresponding period of 2021. Acquisitions completed in the last 12 months contributed$109.3 million to revenues during the six months endedJune 30, 2022 . During the first six months of 2022, segment operating profit was negatively impacted by increased personnel-related costs partially attributable to supplementing delivery resources on certain projects with standby resources able to support projects if delivery resources impacted by the invasion ofUkraine become unable to work, lower utilization during the first six months of 2022 compared to the first six months of 2021, and lower profit margins from acquisitions completed in the last twelve months. Additionally, during the first six months of 2021,Europe's 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$6.4 million in revenues from performance obligations satisfied in previous periods. The following table presentsEurope segment revenues by industry vertical for the periods indicated: Three Months Ended Six Months Ended June 30, Change June 30, Change 2022 2021 Dollars Percentage 2022 2021 Dollars Percentage Industry Vertical (in thousands, except percentages) Travel & Consumer$ 140,081 $ 79,731 $ 60,350 75.7 %$ 276,869 $ 144,355 $ 132,514 91.8 % Financial Services 112,766 85,965 26,801 31.2 % 230,096 164,005 66,091 40.3 % Business Information & Media 83,681 65,032 18,649 28.7 % 166,582 125,189 41,393 33.1 % Software & Hi-Tech 33,847 23,934 9,913 41.4 % 66,301 44,907 21,394 47.6 % Life Sciences & Healthcare 12,527 10,780 1,747 16.2 % 24,809 26,131 (1,322) (5.1) % Emerging Verticals 69,042 46,507 22,535 48.5 % 139,257 84,066 55,191 65.7 % Revenues$ 451,944 $ 311,949 $ 139,995 44.9 %$ 903,914 $ 588,653 $ 315,261 53.6 % Revenues in Travel & Consumer grew 75.7% and 91.8% during the three and six months endedJune 30, 2022 , respectively, as compared to the corresponding period in 2021 primarily due to increased demand from customers in the retail and distribution industries and revenues from acquisitions completed during the last twelve months which contributed$26.6 million and$55.9 million to revenue growth during the three and six months endedJune 30, 2022 , respectively. During the three and six months endedJune 30, 2022 , revenues in Financial Services experienced 31.2% and 40.3% growth, respectively, primarily driven by increased revenues from commercial and investment banking customers and revenues from recent acquisitions which contributed$7.0 million and$14.7 million to revenue growth during the three and six months endedJune 30, 2022 , respectively. During the three and six months endedJune 30, 2022 , the increase in revenues in Business Information & Media was largely attributable to the expansion of services provided to one of our top 5 customers. For the three and six months endedJune 30, 2022 , the increase in revenues in the Software & Hi-Tech vertical was attributable to the expansion of services provided to one of our top 20 customers as well as growth in customers outside of our top 100 customers. Revenues in Emerging Verticals experienced higher growth primarily attributable to growth in existing customers in the energy and automotive industries and revenues from acquisitions completed during the last twelve months which contributed$9.5 million and$20.8 million to revenue growth during the three and six months endedJune 30, 2022 , respectively. 42
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Table of Contents
Russia Segment
During the three months endedJune 30, 2022 , revenues from ourRussia segment accounted for 1.6% of total segment revenues and decreased$18.1 million , or 48.5%, as compared to the corresponding period in the prior year. The decrease in revenues was primarily attributable to decreased operations inRussia as the Company discontinues services to customers inRussia and proceeds with its phased exit fromRussia . During the three months endedJune 30, 2022 , operating profit from theRussia segment was$1.7 million , representing a decrease of$4.4 million , as compared to a$6.0 million operating profit in the corresponding period last year largely driven by reduced revenues attributable to the discontinuance of services to customers inRussia . During the six months endedJune 30, 2022 , revenues from ourRussia segment decreased$15.4 million , or 23.1%, as compared to the corresponding period of 2021 and accounted for 2.2% of total segment revenues. During the six months endedJune 30, 2022 , operating loss from theRussia segment was$17.8 million , representing a decrease of$24.8 million , as compared to a$7.0 million operating profit in the corresponding period last year largely driven by increased bad debt expense, expenses incurred for services provided to customers for which revenue was not recognized as collectability was not considered probable after announcing the discontinuance of services to customers inRussia , and reduced revenues attributable to the discontinuance of services to customers inRussia . The following table presentsRussia segment revenues by industry vertical for the periods indicated: Three Months Ended Six Months Ended June 30, Change June 30, Change 2022 2021 Dollars Percentage 2022 2021 Dollars Percentage Industry Vertical (in thousands, except percentages) Financial Services$ 11,338 $ 24,631 $ (13,293) (54.0) %$ 33,736 $ 45,709 $ (11,973) (26.2) % Travel & Consumer 5,305 6,739 (1,434) (21.3) % 11,589 11,697 (108) (0.9) % Software & Hi-Tech 442 590 (148) (25.1) % 1,189 1,095 94 8.6 % Business Information & Media 163 436 (273) (62.6) % 619 823 (204) (24.8) % Life Sciences & Healthcare 66 204 (138) (67.6) % 216 379 (163) (43.0) % Emerging Verticals 1,946 4,795 (2,849) (59.4) % 3,844 6,910 (3,066) (44.4) % Revenues$ 19,260 $ 37,395 $ (18,135) (48.5) %$ 51,193 $ 66,613 $ (15,420) (23.1) % 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 fluctuations in the foreign currency exchange rate of the Russian ruble to theU.S. dollar. OnMarch 4, 2022 , EPAM announced that it will discontinue services to customers located inRussia and is committed to providing transition support for customers in this market. OnApril 7, 2022 , the Company announced that it would begin the process of a phased exit of its operations inRussia , to be completed in the months following the announcement and in close collaboration with the Company's employees, contractors, and customers. The timing of completing the exit is subject to completion of regulatory requirements in the country and the Company expects to complete its exit as soon as feasible. As a result of t announcement, the revenues from this segment are expected to dissipate in the future. See Note 2 "Impact of the Invasion ofUkraine " for more information regarding the Company's decisions to no longer serve customers inRussia and exit our operations inRussia .
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.
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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 ofJune 30, 2022 , our principal sources of liquidity were cash and cash equivalents totaling$1.294 billion , short-term investments totaling$60.1 million as well as$675.0 million of available borrowings under our revolving credit facility. See Note 8 "Debt" of our condensed consolidated financial statements in "Part I. Item 1. Financial Statements (Unaudited)" for information regarding our debt.
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