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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________to________

Commission file number: 001-35418

EPAM SYSTEMS, INC.

(Exact name of registrant as specified in its charter)



Delaware		22-3536104
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

41 University Drive	Suite 202	18940
Newtown	Pennsylvania	18940
(Address of principal executive offices)		(Zip code)

267-759-9000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class	Trading Symbol	Name of Each Exchange on which Registered
Common Stock, par value $0.001 per share	EPAM	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Title of Each Class		Outstanding as of July 31, 2019
Common Stock, par value $0.001 per share		54,850,289 shares

EPAM SYSTEMS, INC.

TABLE OF CONTENTS



	Page
PART I. FINANCIAL INFORMATION	3
Item 1. Financial Statements (Unaudited)	3
Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018	3
Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018	4
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018	5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018	7
Notes to Condensed Consolidated Financial Statements	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3. Quantitative and Qualitative Disclosures About Market Risk	40
Item 4. Controls and Procedures	41
PART II. OTHER INFORMATION	42
Item 1. Legal Proceedings	42
Item 1A. Risk Factors	42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3. Defaults Upon Senior Securities	42
Item 4. Mine Safety Disclosures	42
Item 5. Other Information	42
Item 6. Exhibits	43
SIGNATURES	44

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

EPAM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)



	As of June 30, 2019			As of December 31, 2018
Assets
Current assets
Cash and cash equivalents	$	777,365		$	770,560
Accounts receivable, net of allowance of $1,882 and $1,557, respectively	343,864			297,685
Unbilled revenues	135,786			104,652
Prepaid expenses and other current assets	28,808			26,171
Total current assets	1,285,823			1,199,068
Property and equipment, net	111,175			102,646
Operating lease right-of-use assets	210,447			—
Intangible assets, net	53,821			57,065
Goodwill	179,214			166,832
Deferred tax assets	69,734			69,983
Other noncurrent assets	21,237			16,208
Total assets	$	1,931,451		$	1,611,802

Liabilities
Current liabilities
Accounts payable	$	6,043		$	7,444
Accrued expenses and other current liabilities	96,026			127,937
Due to employees	64,032			49,683
Deferred compensation due to employees	7,928			9,920
Taxes payable, current	50,156			67,845
Operating lease liabilities, current	48,429			—
Total current liabilities	272,614			262,829
Long-term debt	25,000			25,031
Taxes payable, noncurrent	43,650			43,685
Operating lease liabilities, noncurrent	158,137			—
Other noncurrent liabilities	9,803			17,661
Total liabilities	509,204			349,206
Commitments and contingencies (Note 12)
Stockholders’ equity
Common stock, $0.001 par value; 160,000,000 authorized; 54,799,024 and 54,099,927 shares issued, 54,779,289 and 54,080,192 shares outstanding at June 30, 2019 and December 31, 2018, respectively	55			54
Additional paid-in capital	574,619			544,700
Retained earnings	879,064			759,533
Treasury stock	(177		)	(177		)
Accumulated other comprehensive loss	(31,314		)	(41,514		)
Total stockholders’ equity	1,422,247			1,262,596
Total liabilities and stockholders’ equity	$	1,931,451		$	1,611,802

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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EPAM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except share and per share data)



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Revenues	$	551,587		$	445,647		$	1,072,920		$	869,795
Operating expenses:
Cost of revenues (exclusive of depreciation and amortization)	355,915			289,175			700,604			566,809
Selling, general and administrative expenses	111,762			93,273			213,548			182,914
Depreciation and amortization expense	11,028			8,962			21,228			17,138
Income from operations	72,882			54,237			137,540			102,934
Interest and other income, net	1,190			1,052			4,266			501
Foreign exchange (loss)/gain	(3,562		)	1,830			(7,046		)	1,583
Income before provision for/(benefit from) income taxes	70,510			57,119			134,760			105,018
Provision for/(benefit from) income taxes	11,733			6,864			15,229			(9,655		)
Net income	$	58,777		$	50,255		$	119,531		$	114,673
Foreign currency translation adjustments, net of tax	2,620			(15,834		)	5,563			(12,525		)
Unrealized gain/(loss) on cash-flow hedging instruments, net of tax	1,537			(2,076		)	4,637			(2,007		)
Comprehensive income	$	62,934		$	32,345		$	129,731		$	100,141

Net income per share:
Basic	$	1.07		$	0.94		$	2.19		$	2.15
Diluted	$	1.02		$	0.89		$	2.08		$	2.03
Shares used in calculation of net income per share:
Basic	54,681,959			53,517,124			54,464,753			53,299,038
Diluted	57,614,284			56,587,009			57,426,563			56,414,986

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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EPAM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands, except share data)



	Six Months Ended June 30, 2019
	Common Stock				Additional Paid-in Capital			Retained Earnings		Treasury Stock				Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares		Amount							Shares	Amount
Balance, January 1, 2019	54,080,192		$	54	$	544,700		$	759,533	19,735	$	(177	)	$	(41,514	)	$	1,262,596
Restricted stock units vested	242,414		—		—			—		—	—			—			—
Restricted stock units withheld for employee taxes	(81,562	)	—		(13,483		)	—		—	—			—			(13,483		)
Stock-based compensation expense	—		—		10,425			—		—	—			—			10,425
Proceeds from stock option exercises	323,464		—		11,890			—		—	—			—			11,890
Foreign currency translation adjustments, net of tax	—		—		—			—		—	—			2,943			2,943
Change in unrealized gains and losses on cash flow hedges, net of tax	—		—		—			—		—	—			3,100			3,100
Net income	—		—		—			60,754		—	—			—			60,754
Balance, March 31, 2019	54,564,508		$	54	$	553,532		$	820,287	19,735	$	(177	)	$	(35,471	)	$	1,338,225
Restricted stock units vested	11,757		—		—			—		—	—			—			—
Restricted stock units withheld for employee taxes	(2,084	)	—		(363		)	—		—	—			—			(363		)
Stock-based compensation expense	—		—		10,867			—		—	—			—			10,867
Proceeds from stock option exercises	205,108		1		10,583			—		—	—			—			10,584
Foreign currency translation adjustments, net of tax	—		—		—			—		—	—			2,620			2,620
Change in unrealized gains and losses on cash flow hedges, net of tax	—		—		—			—		—	—			1,537			1,537
Net income	—		—		—			58,777		—	—			—			58,777
Balance, June 30, 2019	54,779,289		$	55	$	574,619		$	879,064	19,735	$	(177	)	$	(31,314	)	$	1,422,247

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	Six Months Ended June 30, 2018
	Common Stock				Additional Paid-in Capital			Retained Earnings		Treasury Stock				Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares		Amount							Shares	Amount
Balance, January 1, 2018	52,983,685		$	53	$	473,874		$	518,820	19,735	$	(177	)	$	(17,623	)	$	974,947
Restricted stock units vested	186,327		—		—			—		—	—			—			—
Restricted stock units withheld for employee taxes	(61,950	)	—		(6,986		)	—		—	—			—			(6,986		)
Stock-based compensation expense	—		—		11,485			—		—	—			—			11,485
Proceeds from stock option exercises	198,936		—		7,649			—		—	—			—			7,649
Foreign currency translation adjustments, net of tax	—		—		—			—		—	—			3,309			3,309
Change in unrealized gains and losses on cash flow hedges, net of tax	—		—		—			—		—	—			69			69
Cumulative effect of adoption of ASU 2014-09	—		—		—			457		—	—			—			457
Net income	—		—		—			64,418		—	—			—			64,418
Balance, March 31, 2018	53,306,998		$	53	$	486,022		$	583,695	19,735	$	(177	)	$	(14,245	)	$	1,055,348
Restricted stock units vested	12,348		—		—			—		—	—			—			—
Restricted stock units withheld for employee taxes	(1,942	)	—		(224		)	—		—	—			—			(224		)
Stock-based compensation expense	—		—		10,686			—		—	—			—			10,686
Proceeds from stock option exercises	367,863		1		14,647			—		—	—			—			14,648
Foreign currency translation adjustments, net of tax	—		—		—			—		—	—			(15,834		)	(15,834		)
Change in unrealized gains and losses on cash flow hedges, net of tax	—		—		—			—		—	—			(2,076		)	(2,076		)
Net income	—		—		—			50,255		—	—			—			50,255
Balance, June 30, 2018	53,685,267		$	54	$	511,131		$	633,950	19,735	$	(177	)	$	(32,155	)	$	1,112,803

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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EPAM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities:
Net income	$	119,531		$	114,673
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense	21,228			17,138
Operating lease right-of-use assets amortization expense	25,732			—
Bad debt expense	167			1,529
Deferred taxes	(1,193		)	(27,581		)
Stock-based compensation expense	37,553			31,406
Other	3,938			(2,099		)
Changes in assets and liabilities:
Accounts receivable	(44,582		)	(15,051		)
Unbilled revenues	(30,750		)	(35,334		)
Prepaid expenses and other assets	1,690			(4,495		)
Accounts payable	(2,069		)	1,008
Accrued expenses and other liabilities	(34,420		)	(15,861		)
Operating lease liabilities	(25,705		)	—
Due to employees	(4,781		)	1,351
Taxes payable	(22,512		)	105
Net cash provided by operating activities	43,827			66,789
Cash flows from investing activities:
Purchases of property and equipment	(25,025		)	(19,303		)
Acquisition of businesses, net of cash acquired (Note 2)	(16,240		)	(50,264		)
Other investing activities, net	(6,180		)	1,253
Net cash used in investing activities	(47,445		)	(68,314		)
Cash flows from financing activities:
Proceeds from stock option exercises	22,415			22,368
Payments of withholding taxes related to net share settlements of restricted stock units	(13,084		)	(6,696		)
Repayment of debt	(6		)	(3,478		)
Acquisition of businesses, contingent consideration	(1,104		)	—
Other financing activities, net	(13		)	(603		)
Net cash provided by financing activities	8,208			11,591
Effect of exchange rate changes on cash, cash equivalents and restricted cash	2,248			(7,645		)
Net increase in cash, cash equivalents and restricted cash	6,838			2,421
Cash, cash equivalents and restricted cash, beginning of period	771,711			582,855
Cash, cash equivalents and restricted cash, end of period	$	778,549		$	585,276

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EPAM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

(Continued)

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets:



	As of June 30, 2019		As of December 31, 2018
Balance sheet classification
Cash and cash equivalents	$	777,365	$	770,560
Restricted cash in Prepaid expenses and other current assets	14		14
Restricted cash in Other noncurrent assets	1,170		1,137
Total restricted cash	1,184		1,151
Total cash, cash equivalents and restricted cash	$	778,549	$	771,711

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except share and per share data)


1.	BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

EPAM Systems, Inc. (the “Company” or “EPAM”) is a leading global provider of digital platform engineering and software development services to customers located around the world, primarily in North America, Europe, Asia and Australia. The Company’s industry expertise includes financial services, travel and consumer, software and hi-tech, business information and media, life sciences and healthcare, as well as other emerging industries. The Company is incorporated in Delaware with headquarters in Newtown, PA.

Basis of Presentation — The accompanying unaudited condensed consolidated financial statements of EPAM have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP” or “U.S. GAAP”) and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended. The condensed consolidated financial statements include the financial statements of EPAM Systems, Inc. and its subsidiaries with all intercompany balances and transactions eliminated.

These unaudited condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2018 included in its Annual Report on Form 10-K. The preparation of these condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates, and such differences may be material to the condensed consolidated financial statements. Operating results for the interim periods are not necessarily indicative of results that may be expected to occur for the entire year. In management’s opinion, all adjustments considered necessary for a fair presentation of the accompanying unaudited condensed consolidated financial statements have been included, and all adjustments are of a normal and recurring nature.

Adoption of New Accounting Standards

Unless otherwise discussed below, the adoption of new accounting standards did not have an impact on the Company’s consolidated financial position, results of operations, changes in stockholders’ equity and cash flows.

Leases — In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (“Topic 842”). The standard supersedes previously existing lease guidance (“Topic 840”) and requires entities to recognize all leases, with the exception of leases with a term of twelve months or less, on the balance sheet as right-of-use assets (“RoU Assets”) and lease liabilities. The guidance also changes disclosure requirements with a focus on providing information that will enable users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

The Company adopted Topic 842, effective January 1, 2019, using the optional transition approach, which allows the Company to apply the provisions of the standard at the effective date without adjusting the comparable periods and carry forward disclosures under previously existing guidance for those periods presented within the Company’s financial statements.

The Company determines if an arrangement is a lease or contains a lease at inception. The Company performs an assessment and classifies the lease as either an operating lease or a financing lease at the lease commencement date with a right-of-use asset and a lease liability recognized in the statement of financial position under both classifications. The Company does not have finance leases that are material to the Company’s condensed consolidated financial statements.

Lease liabilities are initially measured at the present value of lease payments not yet paid. The present value is determined by applying the readily determinable rate implicit in the lease or, if not available, the incremental borrowing rate of the lessee. The Company determines the incremental borrowing rate of the lessee on a lease-by-lease basis by developing an estimated centralized U.S. dollar borrowing rate for a fully collateralized obligation with a term similar to the lease term, and adjusts the rate to reflect the incremental risk associated with the currency in which the lease is denominated. Lease agreements of the Company may include options to extend or terminate the lease and the Company includes such options in the lease term when it is reasonably certain that the Company will exercise that option. RoU Assets are recognized based on the initial measurement of the lease liabilities plus initial direct costs less lease incentives and, according to the guidance for long-lived assets, RoU Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

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The Company elected a practical expedient to account for lease and non-lease components together as a single lease component. The Company also elected the short-term lease recognition exemption for all classes of lease assets with an original term of twelve months or less. As part of the transition, the Company elected a package of practical expedients allowing it to carry forward historical accounting for any expired or existing contracts that are or contain lease contracts, including classification of such contracts and initial direct costs associated with them.

The adoption of Topic 842 on January 1, 2019 resulted in the recognition of RoU Assets for operating leases of $177,597 and operating lease liabilities of $173,863. The adoption of Topic 842 did not have an impact on the condensed consolidated statement of income and comprehensive income, condensed consolidated statement of changes in stockholders’ equity or the condensed consolidated statement of cash flows.

See Note 6 “Leases” in the condensed consolidated interim financial statements for additional information regarding leases.

Pending Accounting Standards

From time to time, new accounting pronouncements are issued by the FASB or other standards-setting bodies that the Company will adopt according to the various timetables the FASB specifies. Unless otherwise discussed below, the Company believes the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial position, results of operations and cash flows upon adoption.

Measurement of Credit Losses on Financial Instruments — Effective January 1, 2020, the Company will be required to adopt the amended guidance of FASB ASC Topic 326, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, (with early adoption permitted effective January 1, 2019.) The amendments in this update change how companies measure and recognize credit impairment for many financial assets. The new expected credit loss model will require companies to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets (including trade receivables) that are in the scope of the update. The update also made amendments to the current impairment model for held-to-maturity and available-for-sale debt securities and certain guarantees. Entities are required to adopt the standard using a modified-retrospective approach through a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The Company has not yet completed its assessment of the impact of the new guidance on its consolidated financial statements and will adopt the standard on January 1, 2020.


2.	ACQUISITIONS

Continuum — On March 15, 2018, the Company acquired all of the outstanding equity of Continuum Innovation LLC together with its subsidiaries (“Continuum”) to enhance the Company’s consulting capabilities as well as its digital and service design practices. Continuum, headquartered in Boston with offices located in Milan, Seoul, and Shanghai, focuses on four practices including strategy, physical and digital design, technology and its Made Real Lab. The acquisition of Continuum added approximately 125 design consultants to the Company’s headcount. In connection with the Continuum acquisition, the Company paid $52,515 of cash and committed to making a cash earnout payment with a maximum amount payable of $3,135, subject to attainment of specified performance targets in the 12 months after the acquisition date.

Think — On November 1, 2018, the Company acquired all of the equity interests of Think Limited (“Think”), a digital transformation agency headquartered in London, UK. This acquisition was intended to strengthen EPAM’s digital and organizational consulting capabilities in the UK and Western European markets and enhance the Company’s global product and design offerings. In connection with the Think acquisition, the Company paid $26,254 of cash and committed to making a cash earnout payment with a maximum amount payable of $8,156, subject to attainment of specified performance targets in the 12 months after the acquisition date.

test IO — On April 30, 2019, the Company acquired 100% of the equity interests of a crowdtesting company, test IO GmbH, and its subsidiary (“test IO”). In connection with the test IO acquisition, the Company paid $17,204 of cash.

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The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition and updated for any changes as of June 30, 2019 for each respective acquisition:



Continuum	Think	test IO
As of March 15, 2018