EPAM(EPAM) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for EPAM Systems, Inc. and its subsidiaries, including balance sheets, statements of income, comprehensive income, changes in equity, and cash flows, along with detailed notes explaining significant accounting policies, impacts of the Ukraine conflict, acquisitions, goodwill, fair value measurements, derivatives, leases, debt, cost optimization programs, revenues, R&D incentives, stockholders' equity, income taxes, earnings per share, commitments, contingencies, segment information, and accumulated other comprehensive income/(loss) Condensed Consolidated Balance Sheets Metric (in thousands) | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :----------------------------- | :------------------------------- | :-------------------- | :------- | | Total assets | $4,710,696 | $4,750,473 | $(39,777) | -0.84% | | Total liabilities | $1,042,334 | $1,119,322 | $(76,988) | -6.88% | | Total equity | $3,668,362 | $3,631,151 | $37,211 | 1.02% | | Cash and cash equivalents | $1,041,344 | $1,286,267 | $(244,923) | -19.04% | | Trade receivables & contract assets | $1,158,956 | $1,002,175 | $156,781 | 15.64% | Condensed Consolidated Statements of Income Metric (in thousands, except per share) | Metric (in thousands, except per share) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenues | $1,353,443 | $1,146,597 | $2,655,135 | $2,312,062 | | Income from operations | $126,476 | $120,561 | $225,806 | $231,093 | | Net income | $88,026 | $98,645 | $161,508 | $214,888 | | Basic EPS | $1.56 | $1.71 | $2.86 | $3.72 | | Diluted EPS | $1.56 | $1.70 | $2.84 | $3.67 | - For the three months ended June 30, 2025, revenues increased by 18.0% YoY, while net income decreased by 10.8% and diluted EPS decreased by 8.2% For the six months ended June 30, 2025, revenues increased by 14.8% YoY, while net income decreased by 24.9% and diluted EPS decreased by 22.7%[12] Condensed Consolidated Statements of Comprehensive Income Metric (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $88,026 | $98,645 | $161,508 | $214,888 | | Other comprehensive income/(loss) | $83,167 | $(8,071) | $138,178 | $(30,383) | | Comprehensive income | $171,193 | $90,574 | $299,686 | $184,505 | - Other comprehensive income significantly improved, moving from a loss of $8.071 million in Q2 2024 to a gain of $83.167 million in Q2 2025, primarily driven by foreign currency translation adjustments[14] Condensed Consolidated Statements of Changes in Equity - Total equity increased from $3.63 billion at January 1, 2025, to $3.67 billion at June 30, 2025 Key activities included $160.3 million in common stock repurchases in Q1 2025 and $196.6 million in Q2 2025, offset by net income and other comprehensive income[16] - Stock-based compensation expense contributed $46.9 million in Q1 2025 and $37.9 million in Q2 2025 to additional paid-in capital[16] Condensed Consolidated Statements of Cash Flows Cash Flow Activity (in thousands) | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $77,360 | $186,947 | | Net cash used in investing activities | $(23,522) | $(73,836) | | Net cash used in financing activities | $(353,569) | $(338,161) | | Effect of exchange rate changes | $55,820 | $(26,447) | | Net decrease in cash, cash equivalents and restricted cash | $(243,911) | $(251,497) | - Operating cash flow decreased significantly from $186.9 million in H1 2024 to $77.4 million in H1 2025, primarily due to a larger increase in days sales outstanding and higher variable compensation payments[21][167] - Investing activities used less cash in H1 2025 ($23.5 million) compared to H1 2024 ($73.8 million), mainly due to lower cash used for business acquisitions[21][168] Notes to Condensed Consolidated Financial Statements 1. Organization and Summary of Significant Accounting Policies - EPAM Systems, Inc. is a global provider of digital engineering, cloud, and AI-enabled transformation services, leveraging AI and GenAI to accelerate clients' digital innovation[26] - The company holds $39.1 million in cash and cash equivalents in Ukraine and $37.2 million in Belarus as of June 30, 2025, in banking sectors subject to instability and new restrictions on dividend distribution from Belarus[31] - The company uses foreign exchange forward contracts as cash flow hedges for forecasted Polish zloty, Indian rupee, Hungarian forint, and Mexican peso transactions to manage foreign currency risk[33] 2. Impact of the Invasion of Ukraine - As of June 30, 2025, EPAM had $58.4 million in Property and equipment, net, and $2.6 million in Operating lease right-of-use assets in Ukraine, with no significant damage reported[38] - The company expensed $3.9 million and $8.2 million during the three and six months ended June 30, 2025, respectively, related to its $100.0 million humanitarian commitment for Ukraine, with $16.4 million remaining to be expensed[39] 3. Acquisitions - During the six months ended June 30, 2025, EPAM completed one acquisition for $8.8 million, expanding its AI-enabled business operations and adding $4.0 million in intangible assets[40] - In late 2024, EPAM acquired First Derivative for $300.7 million and NEORIS for $626.3 million (99.7% initially), significantly expanding capabilities in capital markets and Latin America/Europe, respectively[41][42] Acquired Company (in thousands) | Acquired Company | Goodwill (in thousands) | Intangible Assets (in thousands) | | :--------------- | :---------------------- | :------------------------------- | | First Derivative | $171,368 | $124,809 | | NEORIS | $400,883 | $259,000 | 4. Goodwill Segment (in thousands) | Segment | Balance as of Jan 1, 2025 (in thousands) | Balance as of June 30, 2025 (in thousands) | Change (in thousands) | | :------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Americas | $652,066 | $651,933 | $(133) | | Europe | $529,509 | $557,530 | $28,021 | | Total | $1,181,575 | $1,209,463 | $27,888 | - Goodwill increased by $27.9 million from January 1, 2025, to June 30, 2025, primarily due to the effect of net foreign currency exchange rate changes ($28.9 million) and the 2025 acquisition ($3.2 million), partially offset by purchase accounting adjustments for NEORIS[47] 5. Fair Value Measurements Financial Instrument (in thousands) | Financial Instrument | As of June 30, 2025 (in thousands) | As of December 31, 2024 (in thousands) | | :------------------- | :--------------------------------- | :----------------------------------- | | FX derivative assets | $17,908 | $0 | | FX derivative liabilities | $223 | $14,650 | | Contingent consideration liabilities | $22,881 | $32,978 | - Contingent consideration liabilities decreased from $33.0 million at January 1, 2025, to $22.9 million at June 30, 2025, due to payments for previously acquired businesses and changes in fair value[50] 6. Derivative Financial Instruments - EPAM uses foreign exchange forward contracts, designated as cash flow hedges, to manage risk from fluctuations in Polish zloty, Indian rupee, Hungarian forint, and Mexican peso transactions[53] Derivative Type (in thousands) | Derivative Type | Balance Sheet Classification | As of June 30, 2025 (in thousands) | As of December 31, 2024 (in thousands) | | :-------------- | :--------------------------- | :--------------------------------- | :----------------------------------- | | FX forward contracts (Asset) | Prepaid expenses and other current assets | $17,908 | $0 | | FX forward contracts (Liability) | Accrued expenses and other current liabilities | $223 | $14,650 | 7. Leases Lease Cost Component (in thousands) | Lease Cost Component (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :---------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating lease cost | $12,158 | $10,833 | $23,484 | $21,686 | | Variable lease cost | $2,938 | $2,439 | $6,175 | $5,068 | | Short-term lease cost | $1,170 | $947 | $2,208 | $1,906 | | Total lease cost | $16,266 | $14,219 | $31,867 | $28,660 | - The weighted average remaining lease term for operating leases was 4.1 years as of June 30, 2025, with a weighted average discount rate of 4.7%[57] 8. Debt - EPAM has a $700.0 million revolving credit facility (2021 Credit Agreement) maturing on October 21, 2026, with $25.0 million outstanding debt as of June 30, 2025, at an interest rate of 5.3%[58][61] - The company was in compliance with all covenants of the 2021 Credit Agreement as of June 30, 2025[60] 9. Cost Optimization Programs - EPAM initiated the 2025 Cost Optimization Program in Q2 2025, expecting to incur approximately $17.0 million in additional charges, primarily for workforce reductions, to be completed by Q1 2026[62] Program (in thousands) | Program | Balance at Dec 31, 2024 (in thousands) | Charges (in thousands) | Payments Made (in thousands) | Balance at June 30, 2025 (in thousands) | | :------ | :------------------------------------- | :--------------------- | :--------------------------- | :-------------------------------------- | | 2025 Cost Optimization Program (Employee separation costs) | $0 | $15,698 | $(11,394) | $4,304 | | 2024 Cost Optimization Program (Employee separation costs) | $1,763 | $6,057 | $(6,731) | $1,089 | | Total | $1,763 | $21,755 | $(18,125) | $5,393 | 10. Revenues Client Location (in thousands) | Client Location | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :-------------- | :---------------------------------------------- | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Americas | $801,433 | $691,199 | $1,581,718 | $1,384,119 | | EMEA | $524,809 | $431,321 | $1,021,924 | $880,568 | | APAC | $27,201 | $24,077 | $51,493 | $47,375 | | Total Revenues | $1,353,443 | $1,146,597 | $2,655,135 | $2,312,062 | Industry Vertical (in thousands) | Industry Vertical | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :---------------- | :---------------------------------------------- | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Financial Services | $328,313 | $244,369 | $642,278 | $487,105 | | Consumer Goods, Retail & Travel | $268,050 | $252,327 | $523,562 | $511,457 | | Software & Hi-Tech | $204,671 | $168,822 | $394,744 | $342,254 | | Business Information & Media | $170,393 | $165,762 | $336,940 | $336,080 | | Life Sciences & Healthcare | $156,505 | $140,084 | $311,459 | $280,293 | | Emerging Verticals | $225,511 | $175,233 | $446,152 | $354,873 | | Total Revenues | $1,353,443 | $1,146,597 | $2,655,135 | $2,312,062 | - Contract assets increased from $52.897 million at December 31, 2024, to $75.599 million at June 30, 2025, primarily due to achieving contractual milestones Contract liabilities decreased from $59.321 million to $51.767 million in the same period due to lower advance collections[74] 11. Poland Research and Development Incentives - EPAM recognized $13.0 million and $25.0 million in R&D tax relief benefits in Poland during the three and six months ended June 30, 2025, respectively, recorded as a reduction to Cost of revenues[77] - As of June 30, 2025, $15.4 million of these benefits were classified as Prepaid and other current assets, and $59.9 million as Other noncurrent assets[77] 12. Stockholders' Equity - Stockholders approved the 2025 Long Term Incentive Plan, reserving up to 1,585,970 shares for equity grants[78] Stock-Based Compensation (in thousands) | Stock-Based Compensation (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of revenues | $18,161 | $16,937 | $42,084 | $39,294 | | Selling, general and administrative expenses | $20,397 | $18,747 | $44,930 | $41,181 | | Total | $38,558 | $35,684 | $87,014 | $80,475 | - EPAM repurchased 1,087 thousand shares for $194.9 million in Q2 2025 and 1,883 thousand shares for $354.9 million in H1 2025 A remaining balance of $82.1 million was available under the 2024 Repurchase Program as of June 30, 2025[90] 13. Income Taxes Metric | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Effective tax rate | 28.9% | 26.3% | 26.0% | 16.5% | - The effective tax rate increased significantly for the six months ended June 30, 2025, to 26.0% from 16.5% in the prior year, partly due to a tax shortfall from stock awards in 2025 compared to an excess tax benefit in 2024[92] 14. Earnings Per Share Metric | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic EPS | $1.56 | $1.71 | $2.86 | $3.72 | | Diluted EPS | $1.56 | $1.70 | $2.84 | $3.67 | | Weighted average common shares for diluted EPS (in thousands) | 56,536 | 58,149 | 56,898 | 58,540 | - The number of shares underlying anti-dilutive equity-based awards excluded from diluted EPS calculation was 1,409 thousand for Q2 2025 and 1,199 thousand for H1 2025[95] 15. Commitments and Contingencies - EPAM has a remaining $16.4 million commitment for humanitarian aid in Ukraine as of June 30, 2025[100] - Deferred consideration for asset acquisition totals $35.1 million, with $17.1 million due in the remainder of 2025 and $18.0 million in 2026[101] - A 5-year cloud services agreement has $56.7 million remaining to be spent as of June 30, 2025, with a 20% cancellation penalty[102] 16. Segment Information - The 'North America' segment was renamed 'Americas' in 2025 to reflect evolving geographic footprint and growth, particularly in Latin America[104] Segment (in thousands) | Segment | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :------ | :---------------------------------------------- | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Americas Segment Revenues | $787,400 | $698,629 | $1,564,568 | $1,403,358 | | Americas Segment Operating Profit | $129,490 | $122,069 | $244,718 | $242,211 | | Europe Segment Revenues | $566,043 | $447,968 | $1,090,567 | $908,704 | | Europe Segment Operating Profit | $80,766 | $53,452 | $152,103 | $113,118 | - Europe segment operating profit as a percentage of revenues increased to 14.3% in Q2 2025 from 11.9% in Q2 2024, positively impacted by Poland R&D incentives, FX rates, and cost optimization[160] 17. Accumulated Other Comprehensive Income/(Loss) Component (in thousands) | Component (in thousands) | Beginning Balance (Jan 1, 2025) | Ending Balance (June 30, 2025) | | :----------------------- | :------------------------------ | :----------------------------- | | Foreign currency translation | $(103,975) | $8,796 | | Cash flow hedging instruments | $(11,265) | $13,600 | | Defined benefit plans | $(1,624) | $(1,082) | | Total | $(116,864) | $21,314 | - Accumulated other comprehensive income shifted from a loss of $116.864 million at January 1, 2025, to a gain of $21.314 million at June 30, 2025, primarily driven by positive foreign currency translation adjustments and unrealized gains on hedging instruments[112] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on EPAM's financial condition and operational results for the three and six months ended June 30, 2025, compared to the prior year, highlighting revenue growth driven by demand and acquisitions, discussing the impact of the Ukraine war, analyzing changes in operating expenses, interest income, and tax rates, and reviewing segment performance, while maintaining a focus on AI and GenAI, strategic partnerships, and global delivery amidst geopolitical risks and cost optimization programs - EPAM is a leading global provider of digital engineering, cloud, and AI-enabled transformation services, leveraging AI and GenAI to accelerate clients' digital innovation[115][116] - For the first six months of 2025, revenues increased by 14.8% to $2.655 billion, positively impacted by improving demand, 2024 acquisitions, and foreign exchange fluctuations However, diluted EPS decreased to $2.84 from $3.67, mainly due to lower income from operations and reduced excess tax benefits[125] - The war in Ukraine continues to impact operations, leading to increased expenses for business continuity, employee relocation, and humanitarian aid, with $16.4 million remaining from the $100 million commitment[120][123][124] Consolidated Results Summary (in thousands, except percentages and per share data) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenues | $1,353,443 (100.0%) | $1,146,597 (100.0%) | $2,655,135 (100.0%) | $2,312,062 (100.0%) | | Cost of revenues (excl. D&A) | $964,012 (71.2%) | $810,857 (70.7%) | $1,916,020 (72.2%) | $1,645,191 (71.2%) | | Selling, general and administrative expenses | $231,681 (17.1%) | $194,058 (16.9%) | $450,598 (16.9%) | $392,511 (16.9%) | | Depreciation and amortization expense | $31,274 (2.4%) | $21,121 (1.9%) | $62,711 (2.4%) | $43,267 (1.9%) | | Income from operations | $126,476 (9.3%) | $120,561 (10.5%) | $225,806 (8.5%) | $231,093 (10.0%) | | Net income | $88,026 (6.5%) | $98,645 (8.6%) | $161,508 (6.1%) | $214,888 (9.3%) | | Diluted earnings per share | $1.56 | $1.70 | $2.84 | $3.67 | Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details EPAM's exposure to market risks, including concentration of credit risk, interest rate risk, and foreign exchange risk, highlighting the company's cash holdings in Ukraine and Belarus, the impact of foreign currency fluctuations on revenues and operating expenses, and the use of hedging programs to mitigate these risks - EPAM holds $39.1 million in cash and cash equivalents in Ukraine and $37.2 million in Belarus as of June 30, 2025, in banking sectors subject to instability and new restrictions on dividend distribution from Belarus[179] - Approximately 39.7% of consolidated revenues and 63.0% of consolidated operating expenses were denominated in non-U.S. dollar currencies during Q2 2025, exposing the company to foreign exchange rate fluctuations[183] - Foreign exchange loss was $6.2 million in Q2 2025, compared to a gain of $1.2 million in Q2 2024, primarily due to fluctuations impacting foreign currency-denominated assets and liabilities[185] - EPAM uses a hedging program with foreign exchange forward contracts to manage forecasted operating expenses in Polish zloty, Indian rupee, Hungarian forint, and Mexican peso[184] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that EPAM's disclosure controls and procedures were effective as of June 30, 2025, with no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were deemed effective as of June 30, 2025, providing reasonable assurance for timely and accurate reporting[188] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2025[189] PART II. OTHER INFORMATION Item 1. Legal Proceedings EPAM is not currently a party to any material legal proceedings, nor is it aware of any pending or contemplated material legal or governmental proceedings - The company is not involved in any material legal or governmental proceedings[191] Item 1A. Risk Factors This section refers readers to the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2024, particularly regarding significant operations in Belarus and Ukraine and the adverse effects of the invasion of Ukraine, also noting that additional, currently unknown or immaterial risks may emerge - Readers are directed to the Annual Report on Form 10-K for a discussion of potential risks and uncertainties, including those related to operations in Belarus and Ukraine and the impact of the invasion of Ukraine[192] - The company acknowledges that the listed risks are not exhaustive, and other unknown or currently immaterial risks could adversely affect the business[193] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds EPAM's Board of Directors authorized a new $500.0 million share repurchase program in August 2024, and during the three months ended June 30, 2025, the company repurchased 1,087 thousand shares for $194.9 million, with $82.1 million remaining available under the program - A new $500.0 million share repurchase program (2024 Repurchase Program) was authorized on August 1, 2024, with a 24-month term[194] Period (in thousands) | Period | Total Number of Shares Purchased (in thousands) | Average Price Paid per Share | Approximate Dollar Value of Shares that May Yet Be Purchased (in thousands) | | :----- | :-------------------------------------------- | :--------------------------- | :------------------------------------------------------------------------ | | April 1 to April 30, 2025 | — | $— | $277,045 | | May 1 to May 31, 2025 | 913 | $180.49 | $112,196 | | June 1 to June 30, 2025 | 174 | $172.65 | $82,104 | | Total | 1,087 | | | Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reported period - No defaults upon senior securities occurred[196] Item 4. Mine Safety Disclosures This item is not applicable to EPAM Systems, Inc - Mine Safety Disclosures are not applicable to the company[197] Item 5. Other Information No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended June 30, 2025 - No insider adoption or termination of Rule 10b5-1 or non-Rule 10b5-1 trading arrangements occurred during the quarter[198] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications from the CEO and CFO, XBRL instance documents, and other related taxonomy documents - The report includes certifications from the Chief Executive Officer and Chief Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2) and various XBRL taxonomy documents (Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[200] SIGNATURES Signatures The report is duly signed on behalf of EPAM Systems, Inc. by Arkadiy Dobkin, Chairman, Chief Executive Officer and President, and Jason Peterson, Senior Vice President, Chief Financial Officer and Treasurer, on August 7, 2025 - The report was signed by Arkadiy Dobkin (Chairman, CEO, and President) and Jason Peterson (SVP, CFO, and Treasurer) on August 7, 2025[203]