EPAM Reports Results for Third Quarter 2019

EPAM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share data)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2019

2018

2019

2018

Revenues

$     588,103

$     468,186

$ 1,661,023

$ 1,337,981

Operating expenses:

Cost of revenues (exclusive of depreciation and

amortization)

377,525

301,081

1,078,129

867,890

Selling, general and administrative expenses

118,886

93,226

332,434

276,140

Depreciation and amortization expense

11,127

9,319

32,355

26,457

Income from operations

80,565

64,560

218,105

167,494

Interest and other income, net

2,509

1,941

6,775

2,442

Foreign exchange (loss)/gain

(3,105)

(514)

(10,151)

1,069

Income before provision for/(benefit from) income taxes

79,969

65,987

214,729

171,005

Provision for/(benefit from) income taxes

12,967

369

28,196

(9,286)

Net income

$        67,002

$       65,618

$     186,533

$     180,291

Foreign currency translation adjustments, net of tax

(10,114)

(2,118)

(4,551)

(14,643)

Unrealized (loss)/gain on cash-flow hedging instruments, net of tax

(2,163)

(74)

2,474

(2,081)

Comprehensive income

$        54,725

$       63,426

$     184,456

$     163,567

Net income per share:

Basic

$            1.22

$            1.22

$            3.42

$            3.37

Diluted

$            1.16

$            1.15

$            3.24

$            3.19

 Shares used in calculation of net income per share:                                                                                                                         

Basic

54,878

53,852

54,604

53,485

Diluted

57,844

56,963

57,567

56,600

EPAM SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data)

As of
September 30,
2019

As of
December 31,
2018

Assets

Current assets

Cash and cash equivalents

$

853,241

$

770,560

Accounts receivable, net of allowance of $1,519 and $1,557, respectively

339,112

297,685

Unbilled revenues

142,949

104,652

Prepaid expenses and other current assets

29,390

26,171

Total current assets

1,364,692

1,199,068

Property and equipment, net

115,321

102,646

Operating lease right-of-use assets

207,145

—

Intangible assets, net

56,537

57,065

Goodwill

186,299

166,832

Deferred tax assets

75,071

69,983

Other noncurrent assets

35,098

16,208

Total assets

$

2,040,163

$

1,611,802

Liabilities

Current liabilities

Accounts payable

$

6,896

$

7,444

Accrued expenses and other current liabilities

128,639

127,937

Due to employees

63,536

49,683

Deferred compensation due to employees

13,427

9,920

Taxes payable, current

47,548

67,845

Operating lease liabilities, current

51,424

—

Total current liabilities

311,470

262,829

Long-term debt

25,000

25,031

Taxes payable, noncurrent

43,738

43,685

Operating lease liabilities, noncurrent

153,980

—

Other noncurrent liabilities

13,858

17,661

Total liabilities

548,046

349,206

Commitments and contingencies

Stockholders' equity  

Common stock, $0.001 par value; 160,000,000 authorized; 54,968,833 and 54,099,927

shares issued, 54,949,098 and 54,080,192 shares outstanding at September 30, 2019
and December 31, 2018, respectively

55

54

Additional paid-in capital

589,764

544,700

Retained earnings

946,066

759,533

Treasury stock

(177)

(177)

Accumulated other comprehensive loss

(43,591)

(41,514)

Total stockholders' equity

1,492,117

1,262,596

Total liabilities and stockholders' equity

$

2,040,163

$

1,611,802

EPAM SYSTEMS, INC. AND SUBSIDIARIES

Reconciliations of Non-GAAP Financial Measures to Comparable GAAP Financial Measures (Unaudited)

(In thousands, except percent and per share amounts)

Reconciliation of revenue growth on a constant currency basis to revenue growth as reported under GAAP is presented in the table below:

Three Months Ended

Nine Months Ended

September 30, 2019

September 30, 2019

Revenue growth on a constant currency basis⁽¹⁾

27.2 %

26.2 %

Foreign exchange rates impact

(1.6)%

(2.1)%

Revenue growth as reported

25.6 %

24.1 %

 (1) Constant currency revenue results are calculated by translating current period revenues in local currency into U.S. dollars at the weighted average exchange rates of the comparable prior period.

Reconciliation of various income statement amounts from GAAP to non-GAAP for the three and nine months ended September 30, 2019 and 2018:

Three Months Ended
September 30, 2019

 Nine Months Ended
September 30, 2019

GAAP 

Adjustments

Non-GAAP

GAAP

Adjustments

Non-GAAP

Cost of revenues (exclusive of
     depreciation and amortization)⁽²⁾                

$

377,525

$

(7,580 )

$

369,945

$

1,078,129

$

(27,841)

$

1,050,288

Selling, general and administrative
     expenses⁽³⁾                                             

$

118,886

$

(9,037)

$

109,849

$

332,434

$

(28,264)

$

304,170

Income from operations⁽⁴⁾

$

80,565

$

19,171

$

99,736

$

218,105

$

63,398

$

281,503

Operating margin

13.7%

3.3%

17.0%

13.1%

3.8%

16.9%

Net income⁽⁵⁾

$

67,002

$

13,215

$

80,217

$

186,533

$

38,920

$

225,453

Diluted earnings per share

$

1.16

$

1.39

$

3.24

$

3.92

Three Months Ended
September 30, 2019

Nine Months Ended
September 30, 2019

GAAP 

Adjustments  

Non-GAAP

GAAP

Adjustments

Non-GAAP

Cost of revenues (exclusive of
     depreciation and amortization)⁽²⁾            

$

301,081

$

(7,492 )

$

293,589

$

867,890

$

(22,835)

$

845,055

Selling, general and administrative
     expenses⁽³⁾                                             

$

93,226

$

(7,993)

$

85,233

$

276,140

$

(25,917)

$

250,223

Income from operations⁽⁴⁾

$

64,560

$

17,493

$

82,053

$

167,494

$

54,552

$

222,046

Operating margin

13.8%

3.7%

17.5%

12.5%

4.1%

16.6%

Net income⁽⁵⁾

$

65,618

$

749

$

66,367

$

180,291

$

(4,605)

$

175,686

Diluted earnings per share

$

1.15

$

1.17

$

3.19

$

3.10

Items (2) through (5) above are detailed in the table below with the specific cross-reference noted in the appropriate item.

Three Months Ended
September 30,

Nine Months Ended
September 30,

2019

2018

2019

2018

Stock-based compensation expenses

$

7,580

$

7,492

$

27,841

$

22,835

Total adjustments to GAAP cost of revenues⁽²⁾

7,580

7,492

27,841

22,835

Stock-based compensation expenses

7,891

7,838

25,183

23,901

Other acquisition-related expenses

1,144

245

2,505

707

    One-time charges

2

(90)

576

1,309

Total adjustments to GAAP selling, general and
     administrative expenses⁽³⁾

9,037

7,993

28,264

25,917

Amortization of purchased intangible assets

2,554

2,008

7,293

5,800

Total adjustments to GAAP income from operations⁽⁴⁾

19,171

17,493

63,398

54,552

Change in fair value of contingent consideration included in

Interest and other income, net

—

(900)

1,356

(900)

Foreign exchange loss/(gain)

3,105

514

10,151

(1,069)

Provision for/(benefit from) income taxes:

Tax effect on non-GAAP adjustments

(4,833)

(3,490)

(15,503)

(11,007)

Net discrete benefit related to U.S. tax reform

—

(6,801)

—

(29,984)

Excess tax benefits related to stock-based compensation

(4,228)

(6,067)

(20,482)

(16,197)

Total adjustments to GAAP net income⁽⁵⁾

$

13,215

$

749

$

38,920

$

(4,605)

EPAM SYSTEMS, INC. AND SUBSIDIARIES

Reconciliations of Guidance Non-GAAP Financial Measures to Comparable GAAP Financial Measures
(Unaudited)

(In percent, except per share amounts)

The below guidance constitutes forward-looking statements within the meaning of the federal securities laws and is based on a number of assumptions that are subject to change and many of which are outside the control of the Company. Actual results may differ materially from the Company's expectations depending on factors discussed in the Company's filings with the Securities and Exchange Commission.

Reconciliation of projected revenue growth on a constant currency basis to projected revenue growth on a GAAP basis is presented in the table below:

Fourth Quarter 2019

Full Year 2019

Revenue growth on a constant currency basis (at least) ⁽⁶⁾

22%

24 %

Foreign exchange rates impact

0 %

(1)%

Revenue growth (at least)

22%

23 %

(6) Constant currency revenue results are calculated by translating current period projected revenues in local currency into U.S. dollars at the weighted average exchange rates of the comparable prior period.

Reconciliation of projected GAAP to non-GAAP income from operations as a percentage of revenues is presented in the table below:

Fourth Quarter 2019

Full Year 2019

GAAP income from operations as a percentage of revenues

13.5% to 14.5%

12.5% to 13.5%

Stock-based compensation expenses

2.4%

3.5%

Included in cost of revenues (exclusive of depreciation and amortization)

1.2 %

1.8 %

Included in selling, general and administrative expenses

1.2 %

1.7 %

Other acquisition-related expenses

0.1%

0.1%

Amortization of purchased intangible assets

0.5%

0.4%

Non-GAAP income from operations as a percentage of revenues

16.5% to 17.5%

16.5% to 17.5%

Reconciliation of projected GAAP to non-GAAP effective tax rate is presented in the table below:

Fourth Quarter 2019

Full Year 2019

GAAP effective tax rate (approximately)

21%

15%

Tax effect on non-GAAP adjustments

1.4 %

3.3 %

Excess tax benefits related to stock-based compensation

0.6 %

3.7 %

Non-GAAP effective tax rate (approximately)

23%

22%

Reconciliation of projected GAAP to non-GAAP diluted earnings per share is presented in the table below:

Fourth Quarter 2019

Full Year 2019

GAAP diluted earnings per share (at least)

$

1.19

$

4.43

Stock-based compensation expenses

0.25

1.19

Included in cost of revenues (exclusive of depreciation and amortization)

0.12

0.61

Included in selling, general and administrative expenses

0.13

0.58

Other acquisition-related expenses

0.02

0.06

Amortization of purchased intangible assets

0.05

0.17

One-time charges

—

0.01

Change in fair value of contingent consideration included in Interest
and other income, net                                                                                                                                                                              

—

0.02

Foreign exchange loss

0.03

0.21

Provision for income taxes:

Tax effect on non-GAAP adjustments

(0.08)

(0.35)

Excess tax benefits related to stock-based compensation

(0.03)

(0.39)

Non-GAAP diluted earnings per share (at least) 

$

1.43

$

5.35