EPAM(US:EPAM)2022-05-09 16:00PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Q1 2022 and 2021, detailing the financial impact of the Ukraine invasion, recent acquisitions, and segment performance Condensed Consolidated Balance Sheets As of March 31, 2022, total assets were $3.51 billion, a slight decrease from year-end 2021, with cash and cash equivalents decreasing to $1.28 billion, while total liabilities decreased and stockholders' equity increased Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $1,276,461 | $1,446,625 | | Total current assets | $2,266,753 | $2,269,480 | | Goodwill | $534,136 | $530,723 | | Total assets | $3,507,570 | $3,523,227 | | Liabilities & Equity | | | | Total current liabilities | $683,252 | $763,420 | | Total liabilities | $953,814 | $1,027,390 | | Total stockholders' equity | $2,553,756 | $2,495,837 | Condensed Consolidated Statements of Income For Q1 2022, revenues increased by 50.1% year-over-year to $1.17 billion, but net income decreased to $89.7 million from $109.0 million, primarily due to a significant foreign exchange loss of $22.8 million and increased operating expenses Condensed Consolidated Statement of Income (in thousands, except per share data) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Revenues | $1,171,614 | $780,775 | | Income from operations | $129,242 | $107,251 | | Foreign exchange (loss)/gain | ($22,785) | $2,299 | | Net income | $89,719 | $109,046 | | Diluted EPS | $1.52 | $1.86 | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities for Q1 2022 was $51.8 million, a significant shift from the $12.8 million provided in the prior year, primarily due to working capital changes, with total cash, cash equivalents, and restricted cash ending at $1.31 billion Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net cash (used in)/provided by operating activities | ($51,848) | $12,827 | | Net cash (used in)/provided by investing activities | ($34,563) | $48,461 | | Net cash (used in)/provided by financing activities | ($9,604) | $1,329 | | Net (decrease)/increase in cash | ($141,422) | $50,761 | | Cash, cash equivalents and restricted cash, end of period | $1,307,925 | $1,374,294 | Note 2. Impact of the Invasion of Ukraine The company committed $100 million for humanitarian aid in Ukraine, expensing $25.7 million in Q1 2022, and discontinued services in Russia, incurring impairment charges of $19.6 million and bad debt expense of $8.4 million, with a full exit from Russia expected by Q2 2022 - Announced a $100.0 million humanitarian commitment for its employees and their families in Ukraine, with $25.7 million expensed in Q1 202241 - Discontinued services to customers in Russia, which triggered impairment tests on the Russia reporting unit's long-lived assets and goodwill42 Impairment and Related Charges in Q1 2022 (in millions) | Item | Amount | | :--- | :--- | | Property and equipment, net impairment | $15.1 | | Operating lease right-of-use assets, net impairment | $3.8 | | Goodwill impairment | $0.7 | | Bad debt expense (Russia customers) | $8.4 | - Subsequent to Q1, the company decided to fully exit its operations in Russia, with the phased exit expected to be completed near the end of Q2 202246 Note 9. Revenues Total revenues for Q1 2022 reached $1.17 billion, up from $780.8 million in Q1 2021, with North America as the largest segment contributor and Travel & Consumer and Financial Services as top industry verticals Revenues by Reportable Segment (in thousands) | Segment | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | North America | $687,711 | $474,853 | | Europe | $451,970 | $276,704 | | Russia | $31,933 | $29,218 | | Total | $1,171,614 | $780,775 | Revenues by Industry Vertical - Q1 2022 (in thousands) | Industry Vertical | Revenue | | :--- | :--- | | Travel & Consumer | $265,319 | | Financial Services | $260,063 | | Business Information & Media | $194,303 | | Software & Hi-Tech | $189,483 | | Life Sciences & Healthcare | $123,803 | | Emerging Verticals | $138,643 | Note 14. Segment Information Total segment operating profit for Q1 2022 was $164.0 million, with North America contributing the most profit, while the Russia segment recorded a $19.5 million operating loss due to the decision to exit the market Segment Operating Profit/(Loss) (in thousands) | Segment | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | North America | $126,734 | $94,103 | | Europe | $56,711 | $51,073 | | Russia | ($19,484) | $979 | | Total segment operating profit | $163,961 | $146,155 | - The company announced its decision to no longer serve customers in Russia and subsequently decided to exit its operations there125 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2022 financial performance, highlighting a 50.1% revenue increase to $1.172 billion, with significant focus on the Ukraine war's impact, including a $100 million humanitarian commitment, and strong liquidity with over $1.2 billion in cash Business Update Regarding the Attack Against Ukraine EPAM prioritizes employee safety in Ukraine, committing $100 million to humanitarian aid, discontinuing services to Russian customers with a phased exit by Q2 2022, and implementing business continuity plans including accelerated hiring in other regions - The company's highest priority is the safety of its employees and their families in Ukraine, supported by a $100 million humanitarian commitment145 - EPAM has discontinued services to customers in Russia and expects to complete a phased exit of its Russian operations by the end of Q2 2022147 - Business continuity plans are being executed, including accelerating hiring in Central and Eastern Europe, Latin America, and India to mitigate delivery challenges145149 Summary of Results of Operations In Q1 2022, revenues grew 50.1% to $1.172 billion, but net income fell 17.7% to $89.7 million, impacted by war-related costs and a significant foreign exchange loss, leading to a decline in operating margin to 11.0% Q1 2022 vs Q1 2021 Performance Summary (in thousands) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Revenues | $1,171,614 | $780,775 | | Income from operations | $129,242 | $107,251 | | Net income | $89,719 | $109,046 | | Diluted EPS | $1.52 | $1.86 | - Revenue growth was 50.1%, with acquisitions contributing $77.6 million (9.9% of growth) and foreign currency changes having a negative impact of $22.7 million (2.9%)154166 - Operating margin declined to 11.0% from 13.7% due to incremental expenses from humanitarian efforts in Ukraine, global workforce repositioning, and asset impairments in Russia155 Results by Business Segment North America's revenue grew 44.8% to $687.7 million, Europe's revenue increased 63.3% to $452.0 million with a decreased operating margin, and Russia's revenue grew 9.3% to $31.9 million but posted a $19.5 million operating loss due to market exit decisions - North America: Revenue grew 44.8% to $687.7 million. Operating profit margin decreased to 18.4% from 19.8% due to higher personnel costs and lower utilization188 - Europe: Revenue grew 63.3% to $452.0 million, aided by acquisitions. Operating profit margin fell significantly to 12.5% from 18.5%, impacted by costs related to business continuity and lower-margin acquisitions190 - Russia: Revenue grew 9.3% to $31.9 million, but the segment recorded an operating loss of $19.5 million, compared to a $1.0 million profit in Q1 2021, due to increased bad debt and unrecognized revenue193 Liquidity and Capital Resources As of March 31, 2022, EPAM's liquidity included $1.277 billion in cash and cash equivalents and $675.0 million available under its credit facility, despite net cash used in operating activities being $51.8 million for the quarter due to increased compensation and humanitarian support costs - Primary liquidity sources as of March 31, 2022, include $1.277 billion in cash and cash equivalents and $675.0 million available under a revolving credit facility198 - Net cash used in operating activities was $51.8 million, a $64.7 million decrease from the prior year, mainly due to higher variable compensation payments and costs related to Ukraine support and employee repositioning200 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from credit concentration in Russia, Ukraine, and Belarus, and foreign currency exchange rates, with a $43.9 million loss reclassified from Russian ruble hedges contributing to a total foreign exchange loss of $22.8 million in Q1 2022 - The company faces significant credit risk with cash balances held in Russia, Ukraine, and Belarus. As of March 31, 2022, cash and cash equivalents in these countries totaled $59.5 million, $28.3 million, and $51.0 million, respectively215 - In response to the invasion of Ukraine, the company de-designated its Russian ruble foreign exchange forward contracts, reclassifying an accumulated loss of $43.9 million into the income statement as a foreign exchange loss221 - Total foreign exchange loss for Q1 2022 was $22.8 million, compared to a gain of $2.3 million in Q1 2021, largely driven by the loss on the Russian ruble hedges223 Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2022, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report226 - No material changes to the company's internal control over financial reporting occurred during the quarter ended March 31, 2022227 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company reports it is not currently a party to any material legal proceedings, nor is it aware of any pending or contemplated material legal or governmental proceedings against it - The company is not currently involved in any material legal proceedings229 Item 1A. Risk Factors This section highlights significant risks from the company's substantial operations and personnel in Ukraine, Belarus, and Russia, where the military conflict has had and is expected to continue to have a material adverse effect on the business, including asset damage, customer disruption, sanctions, and increased relocation expenses - As of December 31, 2021, more than half of the company's global delivery, administrative, and support personnel were located in Ukraine, Belarus, and Russia231 - The conflict and related sanctions have caused disruptions, including customers altering terms, delaying work, or blocking internet communications with the region, which has had a material adverse effect on service delivery232 - The company is exiting its operations in Russia and relocating a significant number of employees from Russia and Belarus, which is likely to increase expenses, particularly compensation costs232233