EPAM(EPAM) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited financial statements, management's discussion and analysis, and disclosures on market risks and controls Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, income statements, comprehensive income statements, statements of changes in stockholders' equity, and cash flow statements, along with detailed notes explaining significant accounting policies, the impact of the Ukraine invasion, acquisitions, and other financial disclosures Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity at specific reporting dates Condensed Consolidated Balance Sheet Highlights (in thousands): | Metric | June 30, 2022 | December 31, 2021 | | :----------------------- | :------------ | :---------------- | | Total Assets | $3,563,964 | $3,523,227 | | Total Liabilities | $939,958 | $1,027,390 | | Total Stockholders' Equity | $2,624,006 | $2,495,837 | Condensed Consolidated Statements of Income This section presents the company's revenues, expenses, and net income over specific periods, highlighting profitability trends Condensed Consolidated Statements of Income Highlights (in thousands, except per share data): | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Revenues | $1,194,861 | $881,366 | $2,366,475 | $1,662,141 | | Income from operations | $93,020 | $125,274 | $222,262 | $232,525 | | Net income | $18,604 | $114,671 | $108,323 | $223,717 | | Basic EPS | $0.33 | $2.03 | $1.90 | $3.97 | | Diluted EPS | $0.32 | $1.94 | $1.84 | $3.80 | Condensed Consolidated Statements of Comprehensive Income This section details the company's net income and other comprehensive income or loss components, reflecting total changes in equity from non-owner sources Condensed Consolidated Statements of Comprehensive Income Highlights (in thousands): | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income | $18,604 | $114,671 | $108,323 | $223,717 | | Other comprehensive income/(loss) | $9,793 | $11,677 | $(22,150) | $(3,561) | | Comprehensive income | $28,397 | $126,348 | $86,173 | $220,156 | Condensed Consolidated Statements of Changes in Stockholders' Equity This section outlines the changes in the company's equity accounts, including common stock, retained earnings, and accumulated other comprehensive loss Changes in Stockholders' Equity (in thousands): | Metric | Balance, January 1, 2022 | Balance, June 30, 2022 | | :----------------------------------- | :----------------------- | :--------------------- | | Common Stock | $57 | $57 | | Additional Paid-in Capital | $711,912 | $760,975 | | Retained Earnings | $1,829,532 | $1,937,855 | | Treasury Stock | $(177) | $(177) | | Accumulated Other Comprehensive Loss | $(54,207) | $(76,357) | | Noncontrolling interest | $8,720 | $1,653 | | Total Stockholders' Equity | $2,495,837 | $2,624,006 | - Net income for the six months ended June 30, 2022, contributed $108,323 thousand to retained earnings[16] Condensed Consolidated Statements of Cash Flows This section categorizes cash inflows and outflows from operating, investing, and financing activities, illustrating liquidity and solvency Condensed Consolidated Statements of Cash Flows Highlights (in thousands): | Activity | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :-------------------------------------------------- | :--------------------------- | :--------------------------- | | Net cash provided by operating activities | $25,667 | $81,663 | | Net cash used in investing activities | $(123,088) | $(97,390) | | Net cash used in financing activities | $(10,634) | $(18,996) | | Effect of exchange rate changes on cash | $(45,661) | $(3,761) | | Net decrease in cash, cash equivalents and restricted cash | $(153,716) | $(38,484) | | Cash, cash equivalents and restricted cash, end of period | $1,295,631 | $1,285,049 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the financial statements, covering accounting policies, significant events, and specific financial items 1. Business and Summary of Significant Accounting Policies This note describes the company's business operations, industry focus, and key accounting principles applied in preparing the financial statements - EPAM Systems, Inc. is a leading digital transformation services and product engineering company, providing digital platform engineering and software development services globally, primarily in North America, Europe, and Asia[26] - The company's industry expertise spans financial services, travel and consumer, software and hi-tech, business information and media, and life sciences and healthcare[26] - As of June 30, 2022, the company held $40.4 million in Belarus, $40.2 million in Ukraine, and $17.2 million in Russia in cash and cash equivalents, which are subject to banking sector instability and are not insured[31] 2. Impact of the Invasion of Ukraine This note details the financial and operational impacts of the Ukraine invasion, including humanitarian commitments, repositioning efforts, and asset impairments - EPAM announced a $100.0 million humanitarian commitment to support its employees and their families in and displaced from Ukraine[39] Expenses Related to Ukraine Invasion (in thousands): | Category | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2022 | | :-------------------------------- | :--------------------------- | :--------------------------- | | Humanitarian Commitment | $8,400 | $34,000 | | Geographic Repositioning Efforts | $14,400 | $33,100 | | Standby Resources | $9,300 | $11,800 | | Employee Separation Costs (Russia) | $16,200 | $16,200 | | Impairment Charges (Russia) | N/A | $19,600 | | Bad Debt Expense (Russia) | N/A | $8,200 | - The company announced a phased exit of its operations in Russia, leading to impairments of Property and equipment ($15.1 million), Operating lease right-of-use assets ($3.8 million), and Goodwill ($0.7 million) in Q1 2022[42][43] 3. Acquisitions This note provides information on recent acquisitions, including purchase prices, acquired intangible assets, and their financial impact Major Acquisitions in 2021 (Purchase Price in millions): | Acquisition | Date Acquired | Purchase Price | | :---------- | :------------ | :------------- | | PolSource | April 2, 2021 | $148.2 | | CORE | July 23, 2021 | $50.2 | | Emakina | Nov 3, 2021 | $143.4 | - During the six months ended June 30, 2022, the Company completed two acquisitions with a total purchase price of $13.6 million, adding $3.4 million of intangible assets, primarily customer relationships[56] Intangible Assets Acquired (Fair Values as of June 30, 2022, in thousands): | Intangible Asset | PolSource | CORE | Emakina | | :--------------- | :-------- | :------ | :------ | | Customer relationships | $14,790 | $7,779 | $27,822 | | Trade names | $1,000 | $589 | $2,666 | | Total | $15,790 | $8,368 | $30,488 | 4. Goodwill This note details the company's goodwill balances by segment, including impairment charges and the impact of foreign currency exchange rate changes Goodwill by Reportable Segment (in thousands): | Segment | Balance as of January 1, 2022 | Balance as of June 30, 2022 | | :------------ | :---------------------------- | :-------------------------- | | North America | $217,594 | $216,475 | | Europe | $312,413 | $304,792 | | Russia | $716 | $0 | | Total | $530,723 | $521,267 | - Goodwill impairment of $686 thousand was recorded in the Russia segment during the three months ended March 31, 2022, due to the impact of the invasion of Ukraine[58] - Net foreign currency exchange rate changes resulted in a negative impact of $18,940 thousand on goodwill[58] 5. Fair Value Measurements This note outlines the fair value measurements of financial assets and liabilities, categorized by valuation input levels Fair Values of Financial Assets and Liabilities (in thousands, as of June 30, 2022): | Item | Balance | Level 1 | Level 2 | Level 3 | | :--------------------------------------------------- | :------ | :------ | :------ | :------ | | Foreign exchange derivative assets | $25 | $0 | $25 | $0 | | Rights to acquire noncontrolling interest | $952 | $0 | $0 | $952 | | Foreign exchange derivative liabilities | $44,774 | $0 | $44,774 | $0 | | Contingent consideration | $30,556 | $0 | $0 | $30,556 | - Contingent consideration liabilities increased from $23,114 thousand as of January 1, 2022, to $30,556 thousand as of June 30, 2022, primarily due to new acquisitions and changes in fair value[67] - The carrying amount of non-marketable securities without readily determinable fair values was $27.5 million as of June 30, 2022, and December 31, 2021[71] 6. Derivative Financial Instruments This note describes the company's use of derivative financial instruments, primarily foreign exchange forward contracts, for hedging purposes and their financial impact - The company uses foreign exchange forward contracts with durations of twelve months or less, designated as cash flow hedges for forecasted Polish zloty, Hungarian forint, and Indian rupee transactions[72] - In Q1 2022, Russian ruble foreign exchange forward contracts were de-designated as hedges, and an accumulated loss of $43.9 million was reclassified into foreign exchange loss due to the unlikelihood of underlying transactions[74] Derivative Financial Instruments (in thousands, as of June 30, 2022): | Type | Balance Sheet Classification | Asset Derivatives | Liability Derivatives | | :--------------------------------------------------- | :----------------------------------- | :---------------- | :-------------------- | | Foreign exchange forward contracts - Designated as hedging instruments | Prepaid expenses and other current assets | $25 | N/A | | Foreign exchange forward contracts - Designated as hedging instruments | Accrued expenses and other current liabilities | N/A | $12,761 | | Foreign exchange forward contracts - Not designated as hedging instruments | Accrued expenses and other current liabilities | N/A | $32,013 | 7. Leases This note provides details on the company's lease costs, cash flows from operating leases, and the maturity schedule of operating lease liabilities Total Lease Cost (in thousands): | Period | 2022 | 2021 | | :--------------------------- | :----- | :----- | | Three Months Ended June 30 | $15,983 | $19,237 | | Six Months Ended June 30 | $36,093 | $38,931 | Operating Cash Flows Used for Operating Leases (in thousands): | Period | 2022 | 2021 | | :--------------------------- | :----- | :----- | | Six Months Ended June 30 | $30,466 | $35,419 | Operating Lease Liabilities Maturity (in thousands, as of June 30, 2022): | Year Ending December 31 | Lease Payments | | :---------------------- | :------------- | | 2022 (remaining) | $23,589 | | 2023 | $39,699 | | 2024 | $33,070 | | 2025 | $25,625 | | 2026 | $20,470 | | Thereafter | $40,068 | | Total Lease Payments | $182,521 | | Less: Imputed Interest | $(10,505) | | Total | $172,016 | 8. Debt This note details the company's debt obligations, including its revolving credit facility, outstanding balances, interest rates, and borrowing capacity - The company has a $700.0 million revolving credit facility (2021 Credit Agreement) maturing on October 21, 2026, with a potential to increase to $1,000.0 million[81] Outstanding Debt and Borrowing Capacity (in thousands): | Metric | As of June 30, 2022 | As of December 31, 2021 | | :--------------------------- | :------------------ | :---------------------- | | Outstanding debt (2021 Credit Agreement) | $25,000 | $25,000 | | Interest rate (2021 Credit Agreement) | 2.5% | 1.0% | | Available borrowing capacity | $675,000 | $675,000 | | Maximum borrowing capacity | $700,000 | $700,000 | - As of June 30, 2022, other debt included $6.7 million in short-term bank loans (1.6% weighted-average interest rate) and $5.2 million in long-term bank loans (1.4% weighted-average interest rate), primarily assumed from the Emakina acquisition[85] 9. Revenues This note disaggregates the company's revenues by customer location, industry vertical, and contract type, providing insights into revenue streams Consolidated Revenues by Customer Location (in thousands): | Customer Location | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2022 | | :---------------- | :--------------------------- | :--------------------------- | | Americas | $721,612 | $1,408,405 | | EMEA | $422,986 | $844,936 | | APAC | $30,176 | $59,758 | | CEE | $20,087 | $53,376 | | Total Revenues | $1,194,861 | $2,366,475 | Consolidated Revenues by Industry Vertical (in thousands): | Industry Vertical | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2022 | | :------------------------- | :--------------------------- | :--------------------------- | | Travel & Consumer | $276,318 | $541,637 | | Financial Services | $250,983 | $511,046 | | Business Information & Media | $197,870 | $392,173 | | Software & Hi-Tech | $195,323 | $384,806 | | Life Sciences & Healthcare | $128,492 | $252,295 | | Emerging Verticals | $145,875 | $284,518 | | Total Revenues | $1,194,861 | $2,366,475 | Consolidated Revenues by Contract Type (in thousands): | Contract Type | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2022 | | :---------------- | :--------------------------- | :--------------------------- | | Time-and-material | $1,059,571 | $2,082,724 | | Fixed-price | $131,180 | $274,743 | | Licensing | $3,024 | $6,856 | | Other revenues | $1,086 | $2,152 | | Total Revenues | $1,194,861 | $2,366,475 | 10. Stock-Based Compensation This note details the company's stock-based compensation expense, outstanding awards, and unrecognized compensation costs for various equity plans Stock-Based Compensation Expense (in thousands): | Period | 2022 | 2021 | | :--------------------------- | :----- | :----- | | Three Months Ended June 30 | $27,893 | $23,898 | | Six Months Ended June 30 | $35,005 | $48,451 | - As of June 30, 2022, 2,134 thousand stock options were outstanding with a weighted-average exercise price of $95.65, and $28.8 million of unrecognized compensation cost is expected to be recognized over 3.0 years[102][103] - Unrecognized stock-based compensation cost for equity-classified restricted stock units (RSUs) was $223.7 million (over 3.1 years) and for cash-settled RSUs was $26.3 million (over 2.7 years) as of June 30, 2022[105][106] - Under the 2021 Employee Stock Purchase Plan (ESPP), 55 thousand shares of common stock were purchased during the six months ended June 30, 2022, with $6.5 million of unrecognized compensation cost remaining[111][112] 11. Income Taxes This note provides information on the company's worldwide effective tax rates and the factors influencing tax provisions and benefits Worldwide Effective Tax Rates: | Period | 2022 | 2021 | | :--------------------------- | :------- | :----- | | Three Months Ended June 30 | (114.9)% | 6.9% | | Six Months Ended June 30 | 5.8% | 6.0% | - The effective tax rates benefited from excess tax benefits of $7.4 million (3 months) and $20.5 million (6 months) from stock-based awards in 2022[116] - A one-time benefit of $7.2 million was recognized in Q2 2022 due to changing the tax status of certain foreign subsidiaries for U.S. income tax purposes[116] 12. Earnings Per Share This note presents the basic and diluted earnings per share calculations, including the impact of equity-based awards Earnings Per Share (EPS): | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Basic EPS | $0.33 | $2.03 | $1.90 | $3.97 | | Diluted EPS | $0.32 | $1.94 | $1.84 | $3.80 | - The number of shares underlying equity-based awards excluded from diluted EPS calculation due to anti-dilutive effect was 461 thousand (3 months) and 299 thousand (6 months) in 2022[119] 13. Commitments and Contingencies This note discloses the company's material commitments and potential contingencies, including humanitarian aid and legal matters - The company has a $100.0 million humanitarian commitment to support its employees in Ukraine and their families[125] - Management is not aware of any material litigation or claims that would have a material effect on the company's financial statements[124] 14. Segment Information This note provides financial data disaggregated by reportable segments, including revenues, operating profit, and long-lived assets by geographic area Segment Revenues (in thousands): | Segment | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :------------ | :--------------------------- | :--------------------------- | | North America | $1,411,368 | $1,006,875 | | Europe | $903,914 | $588,653 | | Russia | $51,193 | $66,613 | | Total | $2,366,475 | $1,662,141 | Segment Operating Profit/(Loss) (in thousands): | Segment | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :------------ | :--------------------------- | :--------------------------- | | North America | $254,154 | $205,363 | | Europe | $92,107 | $101,525 | | Russia | $(17,822) | $7,008 | | Total | $328,439 | $313,896 | Long-Lived Assets by Geographic Area (in thousands, as of June 30, 2022): | Location | Amount | | :------------ | :----- | | Ukraine | $70,901 | | Belarus | $64,401 | | United States | $17,186 | | Russia | $0 | 15. Accumulated Other Comprehensive Loss This note details the components of accumulated other comprehensive loss, including foreign currency translation adjustments and cash flow hedging instruments Accumulated Other Comprehensive Loss (in thousands): | Component | Balance, January 1, 2022 | 6 Months Ended June 30, 2022 Change | Balance, June 30, 2022 | | :--------------------------------------------------- | :----------------------- | :---------------------------------- | :--------------------- | | Foreign currency translation | $(52,747) | $(15,722) | $(68,469) | | Cash flow hedging instruments | $(3,417) | $(6,428) | $(9,845) | | Defined benefit plans | $1,957 | $0 | $1,957 |\ | Total Accumulated Other Comprehensive Loss | $(54,207) | $(22,150) | $(76,357) | 16. Subsequent Events This note discloses significant events occurring after the balance sheet date, such as the company's exit from Russian operations - The company's decision to exit operations in Russia is discussed in Note 2, with no new material subsequent events reported[136] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, including an executive summary, business updates regarding the war in Ukraine, year-to-date developments, detailed analysis of consolidated and segment results, liquidity, and capital resources, along with forward-looking statements Executive Summary This section provides a high-level overview of the company's business, strategic focus, and operational model - EPAM Systems, Inc. is a leading global provider of digital platform engineering and software development services, focusing on core engineering, advanced technology, digital design, and intelligent enterprise development[140][141] - The company leverages a global delivery model and centralized support functions to enhance productivity and manage operational efficiency[142] Business Update Regarding the War in Ukraine This section details the ongoing impacts of the Ukraine conflict on the company's operations, personnel, and strategic decisions, including the Russia exit - EPAM has a $100 million humanitarian aid commitment to support its employees and their families in and displaced from Ukraine, with ongoing relocation efforts to lower-risk locations[145] - The company announced a phased exit of its operations in Russia on April 7, 2022, discontinuing services to customers located there, and continues to explore strategic alternatives[147] - The conflict has had and could continue to have a material adverse effect on operations, personnel, and physical assets in Ukraine, as well as on operations in Russia and Belarus due to sanctions and cyberattack concerns[149] Moving Forward This section outlines the company's business continuity plans, expected future expenses, and the inherent uncertainties in the business outlook due to geopolitical events - EPAM continues to execute business continuity plans, reallocating work to other geographies and maintaining high-quality delivery across more than 50 countries[150] - Implementation of business continuity plans, relocation costs, humanitarian commitments, and the Russia exit have resulted in materially increased expenses in the first six months of 2022, with elevated expenses expected in subsequent quarters[151] - There is significant uncertainty for the business outlook for Q3 2022 and the remainder of the year due to the unpredictable nature of the conflict and government reactions[151] Year-to-Date 2022 Developments and Trends This section summarizes key financial developments and trends for the first half of 2022, including revenue growth and changes in operating income - For the first six months of 2022, revenues were $2.366 billion, an increase of 42.4% year-over-year, with strong growth (above 25%) across all industry verticals[153] - Income from operations as a percentage of revenues decreased to 9.4% for the six months ended June 30, 2022, from 14.0% in the prior year, primarily due to incremental expenses related to humanitarian efforts, workforce repositioning, Russia exit costs, and asset impairments[153] Summary of Results of Operations This section provides a concise overview of the company's consolidated financial performance, highlighting key metrics and their year-over-year changes Consolidated Financial Highlights (YoY Change): | Metric | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2022 | | :----------------------------- | :--------------------------- | :--------------------------- | | Revenues Growth | 35.6% | 42.4% | | Income from operations Change | -25.7% | -4.4% | | Net income Change | -83.8% | -51.6% | | Diluted EPS Change | -$1.62 | -$1.96 | | Cash from Operating Activities Change | N/A | -$56.0M | - Revenue growth was positively impacted by acquisitions (6.2% for Q2, 8.0% for H1) but negatively impacted by foreign currency exchange rates (4.5% for Q2, 3.8% for H1)[155] - Decreases in operating income and net income were primarily driven by incremental expenses related to humanitarian efforts, workforce repositioning, Russia exit costs, asset impairments, and foreign exchange losses[156][159] Critical Accounting Policies This section confirms that there have been no material changes to the company's critical accounting policies since the last annual report - There have been no material changes to the company's critical accounting policies as reported in its Annual Report on Form 10-K for the year ended December 31, 2021[164] Results of Operations This section provides a detailed analysis of the company's consolidated financial results, including revenues, expenses, and profitability metrics Consolidated Results Review This section presents a comprehensive review of the company's consolidated financial performance, detailing revenue, cost of revenues, and income metrics Consolidated Results of Operations (in thousands, except percentages and per share data): | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :-------------------------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Revenues | $1,194,861 (100.0%) | $881,366 (100.0%) | $2,366,475 (100.0%) | $1,662,141 (100.0%) | | Cost of revenues (exclusive of depreciation and amortization) | $846,323 (70.8%) | $583,728 (66.2%) | $1,627,159 (68.8%) | $1,103,056 (66.4%) | | Selling, general and administrative expenses | $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 | Revenues This section analyzes the company's revenue growth drivers, including acquisitions and foreign currency impacts, and disaggregates revenues by customer location - Total revenues grew 35.6% to $1.195 billion in Q2 2022 and 42.4% to $2.366 billion in H1 2022, driven by strong demand and acquisitions[168][169] - Acquisitions contributed 6.2% to revenue growth in Q2 2022 and 8.0% in H1 2022, while foreign currency fluctuations negatively impacted growth by 4.5% and 3.8% respectively[168][169] Revenues by Customer Location (in thousands): | Customer Location | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :---------------- | :--------------------------- | :--------------------------- | | Americas | $1,408,405 (59.5%) | $997,719 (60.0%) | | EMEA | $844,936 (35.7%) | $550,653 (33.1%) | | APAC | $59,758 (2.5%) | $45,932 (2.8%) | | CEE | $53,376 (2.3%) | $67,837 (4.1%) | Cost of Revenues (Exclusive of Depreciation and Amortization) This section explains the changes in cost of revenues, attributing them to personnel growth, humanitarian efforts, and unbilled resources - Cost of revenues increased 45.0% to $846.3 million in Q2 2022 (70.8% of revenues) and 47.5% to $1,627.2 million in H1 2022 (68.8% of revenues), compared to 66.2% and 66.4% in the prior year periods, respectively[179][180] - The increase was primarily due to a 34.6% (Q2) and 35.1% (H1) growth in the average number of production professionals, $3.3 million (Q2) and $22.4 million (H1) in humanitarian efforts, and $9.3 million (Q2) and $11.8 million (H1) for unbilled business continuity resources[179][180] - H1 2022 costs were also impacted by a 4.1% unfavorable foreign currency exchange rate impact, partially offset by $8.1 million lower stock-based compensation and a $21.4 million reversal of previously accrued discretionary compensation expenses[180] Selling, General and Administrative Expenses This section details the increase in SG&A expenses, driven by personnel costs, geographic repositioning, Russia exit costs, and asset impairments - Selling, general and administrative (SG&A) expenses increased 53.1% to $232.5 million in Q2 2022 (19.5% of revenues) and 63.0% to $469.8 million in H1 2022 (19.9% of revenues), compared to 17.2% and 17.3% in the prior year periods, respectively[182][183] - Key drivers for the increase in Q2 2022 included a $39.8 million rise in personnel-related costs, $14.4 million for geographic repositioning, $16.2 million for Russia employee separation, and $5.1 million for Ukraine humanitarian efforts[182] - H1 2022 increases also included $19.6 million in impairment charges related to long-lived assets in Russia and $8.2 million in bad debt expense attributable to Russian customers[183] Depreciation and Amortization Expense This section explains the changes in depreciation and amortization expenses, primarily due to investments in equipment and acquired intangible assets - Depreciation and amortization expense increased to $23.0 million in Q2 2022 and $47.3 million in H1 2022, up from $20.5 million and $38.3 million in the corresponding prior year periods, respectively[185] - The increase is primarily due to increased investment in computer equipment and amortization of acquired finite-lived intangible assets[185] Interest and Other Income, Net This section analyzes the changes in interest and other income, net, including the impact of contingent consideration and financial asset impairments - Interest and other income, net, decreased from $2.6 million (Q2 2021) and $8.0 million (H1 2021) to $1.6 million (Q2 2022) and $1.4 million (H1 2022)[186] - The decrease in H1 2022 was mainly impacted by a $6.1 million loss from changes in the fair value of contingent consideration (compared to a $5.6 million gain in H1 2021) and a $1.3 million impairment charge on a financial asset in Ukraine[186] Foreign Exchange Loss This section details the significant foreign exchange loss, primarily attributed to the Russian ruble's appreciation on intercompany payables and U.S. dollar assets - A foreign exchange loss of $85.9 million was reported in Q2 2022, significantly higher than the $4.7 million loss in Q2 2021[236] - This loss was largely driven by the appreciation of the Russian ruble on the company's intercompany payables denominated in Rubles and U.S. dollar denominated assets held by subsidiaries in Russia[236] (Benefit from)/ provision for Income Taxes This section explains the effective tax rate fluctuations, influenced by stock-based awards and changes in foreign subsidiary tax status - The effective tax rate was (114.9)% for Q2 2022 and 5.8% for H1 2022, compared to 6.9% and 6.0% in the corresponding prior year periods[189] - The decrease in the effective tax rate was primarily due to higher excess tax benefits from stock-based awards ($7.4 million in Q2 2022, $20.5 million in H1 2022) and the impact of reclassifying certain foreign subsidiaries for U.S. tax purposes[189] Results by Business Segment This section provides a detailed breakdown of financial performance across the company's key business segments, including revenues and operating profit North America Segment This section analyzes the North America segment's revenue growth and operating profit margin, noting impacts from personnel costs and acquisitions North America Segment Performance (in thousands): | Metric | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2022 | | :-------------------- | :--------------------------- | :--------------------------- | | Revenues | $723,657 (36.0% YoY growth) | $1,411,368 (40.2% YoY growth) | | Operating Profit | $127,420 (14.5% YoY growth) | $254,154 (23.8% YoY growth) | | Operating Profit Margin | 17.6% (vs 20.9% in Q2 2021) | 18.0% (vs 20.4% in H1 2021) | - The decrease in operating profit margin was attributed to increased personnel-related costs, supplementing delivery resources with standby resources, lower utilization, and lower profit margins from recent acquisitions[195][196] - Software & Hi-Tech remained the largest industry vertical, while Travel & Consumer (63.9% growth) and Financial Services (61.5% growth) showed the strongest revenue increases in H1 2022[198] Europe Segment This section details the Europe segment's revenue growth and operating profit changes, influenced by acquisitions and operational costs Europe Segment Performance (in thousands): | Metric | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2022 | | :-------------------- | :--------------------------- | :--------------------------- | | Revenues | $451,944 (44.9% YoY growth) | $903,914 (53.6% YoY growth) | | Operating Profit | $35,396 (-29.8% YoY change) | $92,107 (-9.3% YoY change) | | Operating Profit Margin | 7.8% (vs 16.2% in Q2 2021) | 10.2% (vs 17.2% in H1 2021) | - Acquisitions contributed $50.7 million (Q2) and $109.3 million (H1) to revenue growth[200][201] - In constant currency, Q2 revenue growth was 57.8%[200] - Operating profit margin decreased due to increased personnel costs, standby resources, lower utilization, and lower profit margins from recent acquisitions[200][201] Russia Segment This section highlights the significant decline in the Russia segment's revenues and shift to an operating loss due to the exit from Russian operations Russia Segment Performance (in thousands): | Metric | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2022 | | :-------------------- | :--------------------------- | :--------------------------- | | Revenues | $19,260 (-48.5% YoY change) | $51,193 (-23.1% YoY change) | | Operating Profit/(Loss) | $1,662 (-$4.4M YoY change) | $(17,822) (vs $7.0M profit in H1 2021) | - The significant decrease in revenues and shift to an operating loss were primarily due to the discontinuance of services to customers in Russia and the phased exit from Russian operations[205][206] - Operating loss was also driven by increased bad debt expense and uncollectible revenue from services provided to Russian customers[206] Effects of Inflation This section assesses the impact of inflation on the company's operations, concluding that the effects are not currently significant - While inflation may increase expenses such as wages, the company believes the effects of inflation on its results of operations and financial condition are not significant[209] Liquidity and Capital Resources This section discusses the company's sources of liquidity, cash flow activities, and future capital requirements, considering geopolitical uncertainties Capital Resources This section identifies the company's principal sources of liquidity, including cash, short-term investments, and available credit facilities Principal Sources of Liquidity (in thousands, as of June 30, 2022): | Resource | Amount | | :------------------------------------------ | :------- | | Cash and cash equivalents | $1,294,000 | | Short-term investments | $60,100 | | Available borrowings under revolving credit facility | $675,000 | Cash Flows This section summarizes the company's cash flow activities from operations, investing, and financing for the reported periods Summary of Cash Flows (in thousands, for Six Months Ended June 30): | Activity | 2022 | 2021 | | :-------------------------------------------------- | :------- | :------- | | Net cash provided by operating activities | $25,667 | $81,663 | | Net cash used in investing activities | $(123,088) | $(97,390) | | Net cash used in financing activities | $(10,634) | $(18,996) | | Effect of exchange rate changes on cash | $(45,661) | $(3,761) | | Net decrease in cash, cash equivalents and restricted cash | $(153,716) | $(38,484) | Operating Activities This section analyzes the changes in net cash provided by operating activities, attributing them to compensation payments and humanitarian support - Net cash provided by operating activities decreased by $56.0 million to $25.7 million in H1 2022, compared to $81.7 million in H1 2021[213] - This decrease was largely driven by higher variable compensation payments based on 2021 performance and cash outflows related to Ukraine humanitarian support and geographic repositioning[213] Investing Activities This section details the cash used in investing activities, including capital expenditures, time deposits, and acquisitions - Net cash used in investing activities increased to $123.1 million in H1 2022, from $97.4 million in H1 2021[214] - This was primarily due to $41.4 million in capital expenditures and a $60.0 million investment in time deposits[214] - Cash used for acquisitions, net of cash acquired, decreased significantly to $10.6 million in H1 2022 from $121.3 million in H1 2021[214] Financing Activities This section explains the cash flows from financing activities, including employee incentive programs, tax withholdings, and debt repayments - Net cash used in financing activities decreased to $10.6 million in H1 2022, from $19.0 million in H1 2021[215] - Cash inflows of $22.2 million from employee incentive programs and ESPP were offset by $20.8 million in withholding taxes for restricted stock units and $10.8 million in debt repayments[215] Future Capital Requirements This section assesses the company's ability to meet future capital needs, considering existing resources and potential impacts from geopolitical events - The company believes existing cash, cash equivalents, short-term investments, and expected cash flow from operations will be sufficient to meet projected operating and capital expenditure requirements for at least the next twelve months[217] - The invasion of Ukraine and COVID-19 introduce uncertainties that may increase borrowing costs and adversely affect business, results of operations, financial condition, and liquidity[217] Off-Balance Sheet Commitments and Arrangements This section confirms the absence of material off-balance sheet obligations beyond those already disclosed - The company does not have any material obligations under guarantee contracts or other contractual arrangements other than those disclosed in Note 13[220] Recent Accounting Pronouncements This section refers to Note 1 for information on recent accounting pronouncements and their expected immaterial impact - Refer to Note 1 for additional information on recent accounting pronouncements; no material impact from recently adopted or pending standards is expected[221] Forward-Looking Statements This section cautions that the report contains forward-looking statements subject to risks and uncertainties, including those related to geopolitical events - The report contains forward-looking statements based on current expectations and estimates, which are subject to risks, uncertainties, and assumptions[222] - Important factors, including developments related to the Ukraine invasion and COVID-19 pandemic, may materially and adversely affect actual future results[222] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks, including concentration of credit risk, interest rate risk, and foreign exchange risk, and outlines strategies for managing these risks, such as hedging programs and monitoring cash balances in volatile regions Concentration of Credit and Other Credit Risks This section discusses the company's exposure to credit risks, particularly concerning cash holdings in geopolitically sensitive regions and bad debt expenses - The company holds cash and cash equivalents in Belarus ($40.4 million), Ukraine ($40.2 million), and Russia ($17.2 million) as of June 30, 2022, which are subject to banking sector instability and are not insured[228] - Bad debt expense of $8.2 million was recorded during the six months ended June 30, 2022, for trade receivables from customers located in Russia, reflecting a deterioration of creditworthiness[229] Interest Rate Risk This section describes the company's exposure to interest rate fluctuations on its cash, investments, and borrowings - The company's exposure to interest rate risk is influenced by changes in interest rates on cash, cash equivalent deposits, short-term investments, and borrowings under the 2021 Credit Agreement[230] - Management does not believe the company is exposed to material direct risks associated with changes in interest rates[230] Foreign Exchange Risk This section outlines the company's exposure to foreign currency fluctuations and its hedging strategies, including the impact of the Russian ruble - Approximately 33.5% of consolidated revenues and 53.0% of consolidated operating expenses were denominated in currencies other than the U.S. dollar during Q2 2022[232] - The company's hedging program for Russian ruble foreign exchange forward contracts was de-designated in Q1 2022, resulting in a reclassification of $43.9 million accumulated loss into foreign exchange loss[235] - A foreign exchange loss of $85.9 million was reported in Q2 2022, primarily due to the appreciation of the Russian ruble on intercompany payables and U.S. dollar-denominated assets held by subsidiaries in Russia[236] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of June 30, 2022, and states that there have been no material changes in internal control over financial reporting during the quarter Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures This section concludes on the effectiveness of the company's disclosure controls and procedures as of the reporting date - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2022, providing reasonable assurance for timely and accurate financial reporting[239] Changes in Internal Control Over Financial Reporting This section reports on any material changes in the company's internal control over financial reporting during the quarter - There has been no change in internal control over financial reporting during the quarter ended June 30, 2022, that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting[240] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings This section confirms that the company is not currently involved in any material legal proceedings and is unaware of any pending or contemplated material legal or governmental actions - The company is not currently a party to any material legal proceeding, nor is it aware of any material legal or governmental proceedings pending or contemplated against it[242] Item 1A. Risk Factors This section highlights significant risks, particularly those stemming from the conflict in Ukraine, Belarus, and Russia, which have materially impacted the company's business, service delivery, and financial results, including operational disruptions and the effects of sanctions - The conflict in Ukraine has had and could continue to have a material adverse effect on the company's business, customers, service delivery, and financial results, particularly given significant operations and personnel in Ukraine and Belarus, and previously Russia[244][246] - Actions by other countries, including new and stricter sanctions against Russia and Belarus, and customer-implemented blocks on internet communications, have materially affected the company's ability to deliver services from these locations[246] - Increased operations and hiring in existing or new geographies, especially in more developed economies, are likely to increase expenses and could reduce profitability[247] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities or use of proceeds to report during the period - There were no unregistered sales of equity securities or use of proceeds to report[251] Item 3. Defaults Upon Senior Securities This section confirms that there were no defaults upon senior securities to report during the period - There were no defaults upon senior securities to report[252] Item 4. Mine Safety Disclosures This section states that the disclosure requirements for mine safety are not applicable to the company's operations - Mine Safety Disclosures are not applicable to the company[253] Item 5. Other Information This section indicates that there is no other information required to be disclosed under this item - There is no other information to report under this item[254] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including certifications and XBRL documents Key Exhibits Filed: | Exhibit Number | Description | | :------------- | :---------- | | 31.1* | Certification of the Chief Executive Officer | | 31.2* | Certification of the Chief Financial Officer | | 32.1* | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 | | 32.2* | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 | | 101.INS | XBRL Instance Document | | 104 | Cover Page Interactive Data File | SIGNATURES This section contains the required signatures of the company's principal executive and financial officers, certifying the accuracy and completeness of the quarterly report - The report was signed by Arkadiy Dobkin, Chairman, Chief Executive Officer and President, and Jason Peterson, Senior Vice President, Chief Financial Officer and Treasurer, on August 4, 2022[260]