SEC Filing | EPAM Systems

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epam-20220331

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 March 31, 2022


☐			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
(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 April 29, 2022
Common Stock, par value $0.001 per share						57,151,133 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 March 31, 2022 and December 31, 2021			3
Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2022 and 2021			4
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2022 and 2021			5
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2022 and 2021			6
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021			7
Notes to Condensed Consolidated Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
Item 3. Quantitative and Qualitative Disclosures About Market Risk			42
Item 4. Controls and Procedures			44
PART II. OTHER INFORMATION			44
Item 1. Legal Proceedings			45
Item 1A. Risk Factors			45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 3. Defaults Upon Senior Securities			46
Item 4. Mine Safety Disclosures			46
Item 5. Other Information			46
Item 6. Exhibits			46
SIGNATURES			48

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

EPAM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value)


	As of March 31, 2022		As of December 31, 2021
Assets
Current assets
Cash and cash equivalents	$	1,276,461	$	1,446,625
Trade receivables and contract assets, net of allowance of $14,229 and $5,521, respectively	901,260		768,928
Prepaid and other current assets	89,032		53,927
Total current assets	2,266,753		2,269,480
Property and equipment, net	219,639		236,214
Operating lease right-of-use assets, net	175,514		184,841
Intangible assets, net	97,569		101,143
Goodwill	534,136		530,723
Deferred tax assets	161,302		143,928
Other noncurrent assets	52,657		56,898
Total assets	$	3,507,570	$	3,523,227

Liabilities
Current liabilities
Accounts payable	$	19,406	$	24,847
Accrued compensation and benefits expenses	408,789		502,997
Accrued expenses and other current liabilities	177,872		142,014
Short-term debt	9,900		16,018
Income taxes payable, current	20,264		27,440
Operating lease liabilities, current	47,021		50,104
Total current liabilities	683,252		763,420
Long-term debt	30,550		30,234
Income taxes payable, noncurrent	44,103		42,454
Operating lease liabilities, noncurrent	140,814		142,802
Other noncurrent liabilities	55,095		48,480
Total liabilities	953,814		1,027,390
Commitments and contingencies (Note 13)
Stockholders’ equity
Common stock, $0.001 par value; 160,000 shares authorized; 57,153 and 56,868 shares issued, 57,133 and 56,849 shares outstanding at March 31, 2022 and December 31, 2021, respectively	57		57
Additional paid-in capital	719,122		711,912
Retained earnings	1,919,251		1,829,532
Treasury stock	(177)		(177)
Accumulated other comprehensive loss	(86,150)		(54,207)
Total EPAM Systems Inc. stockholders’ equity	2,552,103		2,487,117
Noncontrolling interest in consolidated subsidiaries	1,653		8,720
Total stockholders’ equity	2,553,756		2,495,837
Total liabilities and stockholders’ equity	$	3,507,570	$	3,523,227

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

(Unaudited)

(In thousands, except per share data)


	Three Months Ended March 31,
	2022		2021
Revenues	$	1,171,614	$	780,775
Operating expenses:
Cost of revenues (exclusive of depreciation and amortization)	780,836		519,328
Selling, general and administrative expenses	237,277		136,389
Depreciation and amortization expense	24,259		17,807
Income from operations	129,242		107,251
Interest and other (loss)/income, net	(165)		5,374
Foreign exchange (loss)/gain	(22,785)		2,299
Income before provision for income taxes	106,292		114,924
Provision for income taxes	16,573		5,878
Net income	$	89,719	$	109,046

Net income per share:
Basic	$	1.58	$	1.94
Diluted	$	1.52	$	1.86
Shares used in calculation of net income per share:
Basic	56,915		56,170
Diluted	58,941		58,778

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 COMPREHENSIVE INCOME

(Unaudited)

(In thousands)


	Three Months Ended March 31,
	2022		2021
Net income	$	89,719	$	109,046
Other comprehensive loss:
Change in foreign currency translation adjustments, net of tax	(30,552)		(10,531)
Change in unrealized loss on hedging instruments, net of tax	(1,391)		(4,081)
Defined benefit pension plans - actuarial loss, net of tax	—		(626)
Other comprehensive loss	(31,943)		(15,238)
Comprehensive income	$	57,776	$	93,808

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)


	Common Stock			Additional Paid-in Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Loss		Non-controlling interest in consolidated subsidiaries		Total Stockholders’ Equity
	Shares	Amount						Shares	Amount
Balance, January 1, 2022	56,849	$	57	$	711,912	$	1,829,532	20	$	(177)	$	(54,207)	$	8,720	$	2,495,837
Restricted stock units vested	193	—		—		—		—	—		—		—		—
Equity withheld for employee taxes	(67)	—		(18,376)		—		—	—		—		—		(18,376)
Stock-based compensation expense	—	—		22,702		—		—	—		—		—		22,702
Exercise of stock options	158	—		2,884		—		—	—		—		—		2,884
Other comprehensive loss	—	—		—		—		—	—		(31,943)		—		(31,943)
Purchase of noncontrolling interest	—	—		—		—		—	—		—		(7,067)		(7,067)
Net income	—	—		—		89,719		—	—		—		—		89,719
Balance, March 31, 2022	57,133	$	57	$	719,122	$	1,919,251	20	$	(177)	$	(86,150)	$	1,653	$	2,553,756


	Common Stock			Additional Paid-in Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Loss		Non-controlling interest in consolidated subsidiaries		Total Stockholders’ Equity
	Shares	Amount						Shares	Amount
Balance, January 1, 2021	56,108	$	56	$	660,771	$	1,347,880	20	$	(177)	$	(25,512)	$	—	$	1,983,018
Restricted stock units vested	248	—		—		—		—	—		—		—		—
Equity withheld for employee taxes	(84)	—		(31,935)		—		—	—		—		—		(31,935)
Stock-based compensation expense	—	—		14,624		—		—	—		—		—		14,624
Exercise of stock options	109	—		4,424		—		—	—		—		—		4,424
Other comprehensive loss	—	—		—		—		—	—		(15,238)		—		(15,238)
Net income	—	—		—		109,046		—	—		—		—		109,046
Balance, March 31, 2021	56,381	$	56	$	647,884	$	1,456,926	20	$	(177)	$	(40,750)	$	—	$	2,063,939

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)


	Three Months Ended March 31,
	2022		2021
Cash flows from operating activities:
Net income	$	89,719	$	109,046
Adjustments to reconcile net income to net cash (used in)/provided by operating activities:
Depreciation and amortization expense	24,259		17,807
Operating lease right-of-use assets amortization expense	14,787		15,676
Bad debt expense	8,675		2,925
Deferred taxes	(10,830)		6,692
Stock-based compensation expense	7,112		24,553
Unrealized loss on derivative	41,369		—
Impairment charges	20,401		—
Other	3,361		(4,926)
Changes in assets and liabilities:
Trade receivables and contract assets	(144,783)		(89,395)
Prepaid and other assets	(9,515)		(8,581)
Accounts payable	(4,633)		(3,166)
Accrued expenses and other liabilities	(74,929)		(15,830)
Operating lease liabilities	(14,171)		(16,065)
Income taxes payable	(2,670)		(25,909)
Net cash (used in)/provided by operating activities	(51,848)		12,827
Cash flows from investing activities:
Purchases of property and equipment	(23,274)		(11,186)
Proceeds from short-term investments	—		60,000
Acquisition of business, net of cash acquired (Note 3)	(8,207)		—
Purchases of non-marketable securities	—		(1,044)
Other investing activities, net	(3,082)		691
Net cash (used in)/provided by investing activities	(34,563)		48,461
Cash flows from financing activities:
Proceeds from stock option exercises	3,395		4,373
Payments of withholding taxes related to net share settlements of restricted stock units	(3,876)		(3,304)
Proceeds from debt	1,931		—
Repayment of debt	(6,836)		—
Payment of contingent consideration for previously acquired business	(207)		—
Purchase of noncontrolling interest	(2,146)		—
Other financing activities, net	(1,865)		260
Net cash (used in)/provided by financing activities	(9,604)		1,329
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(45,407)		(11,856)
Net (decrease)/increase in cash, cash equivalents and restricted cash	(141,422)		50,761
Cash, cash equivalents and restricted cash, beginning of period	1,449,347		1,323,533
Cash, cash equivalents and restricted cash, end of period	$	1,307,925	$	1,374,294

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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 March 31, 2022		As of December 31, 2021
Balance sheet classification
Cash and cash equivalents	$	1,276,461	$	1,446,625
Restricted cash in Prepaid and other current assets	29,416		495
Restricted cash in Other noncurrent assets	2,048		2,227
Total restricted cash	31,464		2,722
Total cash, cash equivalents and restricted cash	$	1,307,925	$	1,449,347

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except per share data and as otherwise disclosed)

1.BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

EPAM Systems, Inc. (the “Company” or “EPAM”) is a leading digital transformation services and product engineering company, providing digital platform engineering and software development services to customers located around the world, primarily in North America, Europe, and Asia. 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 several other industries. The Company is incorporated in Delaware with headquarters in Newtown, Pennsylvania.

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 unaudited 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, 2021 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 unaudited 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, the accompanying unaudited condensed consolidated financial statements include all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position as of March 31, 2022 and the results of its operations and its cash flows for the periods presented.

Risks and Uncertainties — As a result of its global operations, the Company may be subject to certain inherent risks.

Concentration of Credit — Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash, cash equivalents, short-term investments and trade receivables. The Company maintains cash, cash equivalents and short-term investments with financial institutions. The Company believes its credit policies reflect normal industry terms and business risk and there is no expectation of non-performance by the counterparties.

The Company has cash in several countries, including Russia, Ukraine and Belarus, which could be impacted by the invasion of Ukraine (see Note 2, “Impact of the Invasion of Ukraine”) and where the banking sector remains subject to periodic instability, banking and other financial systems generally do not meet the banking standards of more developed markets, and bank deposits made by corporate entities are not insured. As of March 31, 2022, the Company had $59.5 million of cash and cash equivalents in banks in Russia, $51.0 million of cash and cash equivalents in banks in Belarus, and $28.3 million of cash and cash equivalents in banks in Ukraine. Also, as of March 31, 2022, the Company had an additional $28.9 million of cash in a bank in Belarus which could not be accessed due to an administrative review by the bank. Based on the inability to access this $28.9 million of cash on demand, the Company has classified this amount as restricted cash included in Prepaid and other current assets in its condensed consolidated balance sheets as of March 31, 2022. These funds were made available to EPAM in full during April and substantially all of these funds were transferred to another bank in the country. The Company places its cash and cash equivalents with financial institutions considered stable in the region, limits the amount of credit exposure with any one financial institution and conducts ongoing evaluations of the credit worthiness of the financial institutions with which it does business. A banking crisis, bankruptcy or insolvency of banks that process or hold the Company’s funds, or sanctions may result in the loss of deposits or adversely affect the Company’s ability to complete banking transactions, which could adversely affect the Company’s business and financial condition. Cash in these countries is used for the operational needs of the local entities and cash balances change with the expected operating needs of these entities. The Company regularly monitors cash held in these countries and, to the extent the cash held exceeds amounts required to support its operations in these countries, the Company distributes the excess funds into markets with more developed banking sectors.

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Trade receivables are generally dispersed across many customers operating in different industries; therefore, concentration of credit risk is limited. Historically, credit losses and write-offs of trade receivables have not been material to the consolidated financial statements. If any of our customers enter bankruptcy protection or otherwise take steps to alleviate their financial distress, the Company’s credit losses and write-offs of trade receivables could increase, which would negatively impact its results of operations. See Note 2 “Impact of the Invasion of Ukraine” for further discussion regarding trade receivables and contract assets from customers located in Russia.

Foreign currency risk — The Company’s global operations are conducted predominantly in U.S. dollars. Other than U.S. dollars, the Company generates revenues in various currencies, principally, euros, British pounds, Russian rubles, Swiss francs, and Canadian dollars and incurs expenditures principally in Russian rubles, Polish zlotys, euros, Swiss francs, Hungarian forints, British pounds, Indian rupees, Chinese yuan renminbi and Mexican pesos.

The Company’s international operations expose it to foreign currency exchange rate changes that could impact translations of foreign denominated assets and liabilities into U.S. dollars and future earnings and cash flows from transactions denominated in different currencies. The Company is exposed to fluctuations in foreign currency exchange rates primarily related to trade receivables from sales in foreign currencies and cash outflows for expenditures in foreign currencies. The Company’s results of operations, primarily revenues and expenses denominated in foreign currencies, can be affected if any of the currencies which are used materially in the Company’s business, appreciate or depreciate against the U.S. dollar. The Company has a hedging program whereby it entered into a series of foreign exchange forward contracts with durations of twelve months or less that are designated as cash flow hedges of forecasted Russian ruble, Polish zloty, Indian rupee and Hungarian forint transactions. See Note 6, “Derivative Financial Instruments” for further discussion regarding the Company’s termination of the hedging program for the Russian ruble.

Interest rate risk — The Company’s exposure to market risk is influenced by the changes in interest rates received on cash and cash equivalent deposits and short-term investments and paid on any outstanding balance on the Company’s borrowings, mainly under the 2021 Credit Agreement, which is subject to a variety of rates depending on the type and timing of funds borrowed (See Note 8 “Debt”). The Company does not believe it is exposed to material direct risks associated with changes in interest rates related to these deposits and borrowings.

Adoption of New Accounting Standards

There were no recently adopted accounting standards which had a material impact on the Company’s consolidated financial position, results of operations, changes in stockholders’ equity and cash flows.

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. 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.

2. IMPACT OF THE INVASION OF UKRAINE

On February 24, 2022, Russian forces attacked Ukraine and its people and EPAM has called for an immediate end to this unlawful and unconscionable attack. As of March 31, 2022, the Company had $74.9 million of Property and equipment, net in Ukraine consisting of a building classified as construction-in-progress located in Kyiv with a net book value of $50.4 million, laptops with a net book value of $15.3 million, most of which are in the possession of employees, various office furniture, equipment and supplies with a net book value of $8.5 million, and leasehold improvements located throughout Ukraine with a net book value of $0.7 million. Additionally, the Company had Operating lease right-of-use assets located throughout Ukraine with a net book value of $18.8 million as of March 31, 2022. Through the issuance date of these interim financial statements, the Company is not aware of any damage to its long-lived assets in Ukraine and the Company expects to continue to use these assets as part of its global delivery model.

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On March 4, 2022, in addition to the Company’s donations, and the work of EPAM volunteers on the ground, the Company announced a $100.0 million humanitarian commitment to support its employees and their families in and displaced from Ukraine. During the three months ended March 31, 2022, the Company expensed $25.7 million related to this commitment including special cash payments to support impacted employees, financial and medical support for impacted families, travel, meals and lodging expenses, and donations to third-party humanitarian organizations. Of this expensed amount, $19.2 million is classified in Cost of revenues (exclusive of depreciation and amortization) and $6.5 million is classified in Selling, general and administrative expense on the condensed consolidated financial statements for the three months ended March 31, 2022.

In response to the attacks on Ukraine, EPAM announced on March 4, 2022, it would discontinue services to customers located in Russia. Based on this change in facts and circumstances, the long-term cash flow forecast for the Company’s operations in Russia and its Russia reporting unit were significantly reduced. The reduction in the long-term cash flow forecasts indicated that the carrying amounts of goodwill and long-lived assets associated with the Company’s Russia reporting unit and operations in Russia may not be recoverable, and the carrying value of these assets was tested for impairment. The Company relied on the income approach to estimate the fair values of the Russia reporting unit and long-lived assets and considered multiple scenarios including the continuing operation and exit of operations in Russia. Reflecting the negative long-term cash flow forecasts associated with these assets that each of these scenarios produced, during the three months ended March 31, 2022, the Company recorded impairments of Property and equipment, net of $15.1 million, Operating lease right-of-use assets, net of $3.8 million, and Goodwill of $0.7 million. These asset impairment charges are included in Selling, general and administrative expenses in the interim condensed consolidated financial statements.

Additionally, the Company evaluated trade receivables and contract assets for estimated future credit losses from customers located in Russia and recorded a bad debt expense of $8.4 million, reflecting the deterioration of creditworthiness of its customers in Russia during the three months ended March 31, 2022. This expense is included in Selling, general and administrative expenses in the condensed consolidated financial statements.

Furthermore, in response to the invasion, the Company began executing its business continuity plans focused on relocating employees residing in Ukraine, Belarus and Russia to other countries as well as assigning delivery personnel in locations outside of the region to serve in unbilled standby or backup capacity to ensure the continuity of delivery for its customers who have substantial delivery exposure to Ukraine or other delivery concerns resulting from the invasion. In addition to costs incurred as part of EPAM’s humanitarian commitment to Ukraine, during the three months ended March 31, 2022, the Company incurred expenses of $18.7 million classified as Selling, general and administrative expenses related to its geographic repositioning efforts and $2.6 million classified as Cost of revenues (exclusive of depreciation and amortization) related to these standby resources. The Company also recorded an impairment charge of $1.3 million classified as Other income/(expense) related to a financial asset in Ukraine which the Company believes is unrealizable due to the events in Ukraine.

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Subsequent to March 31, 2022, upon revelations of the atrocities committed by Russia in Ukraine, EPAM decided to exit its operations in Russia. The Company is currently exploring strategic alternatives for its assets in Russia, including the potential sale or liquidation of its holdings in Russia. The Company expects to complete the phased exit at or near the end of the second quarter of 2022. The Company expects it could incur additional significant charges in the second quarter of 2022 related to the exit of its operations in Russia including, but not limited to, restructuring costs and loss on sale. As of March 31, 2022, the Company has the following assets and liabilities in Russia:


Cash and cash equivalents	$	59,456
Trade receivables and contract assets, net of allowance of $8.6 million	19,802
Prepaid and other current assets	3,400
Deferred tax assets	647
Other noncurrent assets	30
Total assets in Russia	$	83,335
Accounts payable	$	1,056
Accrued compensation and benefits expenses	48,964
Accrued expenses and other liabilities	4,761
Income taxes payable, current	195
Operating lease liabilities	3,199
Other noncurrent liabilities	994
Total liabilities in Russia	$	59,169

3.ACQUISITIONS

PolSource — On April 2, 2021, the Company acquired 100% of PolSource S.A. and its subsidiaries, a Salesforce Platinum Consulting Partner with more than 350 experienced Salesforce specialists for a purchase price of $148.2 million including contingent consideration with an acquisition-date fair value of $35.4 million. At the time of the acquisition, the Company committed to paying up to $45.0 million in contingent consideration, subject to attainment of certain revenue, earnings and operational targets.

CORE — On July 23, 2021, the Company acquired 100% of CORE SE and its subsidiaries (CORE), a professional service provider specializing in IT strategy and technology-driven transformations with office locations in Europe and the Middle East for a purchase price of $50.2 million including contingent consideration with an acquisition-date fair value of $4.0 million and deferred consideration of $7.8 million. The Company could pay up to $8.1 million in contingent consideration and the actual future payout is subject to attainment of certain revenue, earnings and operational targets.

Emakina — On November 3, 2021, the Company completed the acquisition of 98.69% of Emakina Group SA and its subsidiaries (“Emakina”), a group of independent digital agencies, for a purchase price of $143.4 million in cash. On November 30, 2021, the Company completed the acquisition of the remaining 1.31% of Emakina Group SA’s outstanding shares for a purchase price of $1.7 million in 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 each respective acquisition and updated for any changes as of March 31, 2022:


	PolSource		CORE		Emakina
Cash and cash equivalents	$	2,565	$	11,283	$	5,142
Trade receivables and contract assets	12,734		10,266		34,389
Prepaid and other current assets	814		5,523		3,109
Goodwill	125,265		23,354		137,037
Intangible assets	15,790		8,368		30,488
Property and equipment and other noncurrent assets	461		4,585		17,024
Total assets acquired	$	157,629	$	63,379	$	227,189
Accounts payable, accrued expenses and other current liabilities	$	5,337	$	8,589	$	36,411
Short-term debt	—		—		13,657
Long-term debt	—		—		8,874
Operating lease liabilities, noncurrent	157		2,056		5,397
Other noncurrent liabilities	3,963		2,525		8,363
Total liabilities assumed	$	9,457	$	13,170	$	72,702
Noncontrolling interest in consolidated subsidiaries	—		—		10,469
Net assets acquired	$	148,172	$	50,209	$	144,018

As of March 31, 2022 the Company has substantially completed the purchase price allocation for the acquisition of PolSource and the estimated fair values of the assets acquired and liabilities assumed have been finalized with the exception of the accounting for income taxes. The effect of adjustments recorded during the three months ended March 31, 2022 that would have been recognized in a prior period if the adjustment to the preliminary amounts had been recognized as of the acquisition date of PolSource was not material. The Company expects to complete the purchase price allocations as soon as practicable but no later than one year from the acquisition date.

The effect of adjustments recorded during the three months ended March 31, 2022 that would have been recognized in a prior period if the adjustment to the preliminary amounts had been recognized as of the acquisition date of CORE was not material. For the acquisition of CORE, the estimated fair values of the assets acquired and liabilities assumed are provisional and based on the information that was available as of the acquisition date. The Company expects to complete the purchase price allocations as soon as practicable but no later than one year from the acquisition date.

During the three months ended March 31, 2022, the Company adjusted working capital accounts of Emakina resulting in a corresponding increase in the value of acquired goodwill of $0.4 million. For the acquisition of Emakina, the estimated fair values of the assets acquired, liabilities assumed and noncontrolling interest are provisional and based on the information that was available as of the acquisition date. The Company expects to complete the purchase price allocations as soon as practicable but no later than one year from the acquisition date. The effect of adjustments recorded during the three months ended March 31, 2022 that would have been recognized in a prior period if the adjustment to the preliminary amounts had been recognized as of the acquisition date of Emakina was not material.

Pro forma results of operations have not been presented because the effect of these acquisitions on the Company’s consolidated financial statements was not material individually or in the aggregate.

As of March 31, 2022, the following table presents the estimated fair values and useful lives of intangible assets acquired from PolSource, CORE and Emakina:


	PolSource			CORE			Emakina
	Weighted Average Useful Life (in years)	Amount		Weighted Average Useful Life (in years)	Amount		Weighted Average Useful Life (in years)	Amount
Customer relationships	6	$	14,790	6	$	7,779	7	$	27,822
Trade names	3	1,000		5	589		3	2,666
Total		$	15,790		$	8,368		$	30,488

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The goodwill recognized as a result of the PolSource acquisition is attributable to synergies expected to be achieved by combining the businesses of EPAM and PolSource, expected future contracts, the assembled workforce acquired and other factors. The goodwill recognized as a result of the CORE acquisition is attributable to synergies expected to be achieved by expanding the Company’s ability to support customers as a strategic consultant in Europe and the Middle East, expected future contracts, the assembled workforce acquired and other factors. The goodwill recognized as a result of the Emakina acquisition is attributable to synergies expected to be achieved by enhancing EPAM’s digital experience practice as well as augmenting offerings in digital design and engineering capabilities, expected future contracts, the assembled workforce and other factors.

The goodwill acquired as a result of the PolSource, CORE and Emakina acquisitions is not expected to be deductible for income tax purposes.

Other 2021 Acquisitions — During the year ended December 31, 2021, the Company completed four additional acquisitions with an aggregate purchase price of $65.2 million including contingent consideration with an acquisition-date fair value of $17.6 million. The Company could pay up to $30.2 million in contingent consideration and the actual future payouts are subject to attainment of specified performance targets during the periods ranging from 12 months to 48 months after the respective acquisition dates. These acquisitions increased EPAM’s e-platform offerings and expanded the Company’s geographical reach as well as added $14.1 million in intangible assets, consisting mainly of customer relationships. Pro forma results of operations have not been presented because the effect of these acquisitions on the Company’s consolidated financial statements was not material individually or in the aggregate.

2022 Acquisition — During the three months ended March 31, 2022, the Company completed one acquisition with a purchase price of $10.6 million including contingent consideration with an acquisition-date fair value of $1.8 million. This acquisition expanded EPAM’s capabilities to deliver end-to-end solutions for designing and building sophisticated commerce platforms as well as added $2.3 million of intangible assets, consisting of customer relationships. Pro forma results of operations have not been presented because the effect of this acquisition on the Company’s condensed consolidated financial statements was not material.

4.GOODWILL

Goodwill by reportable segment was as follows:


	North America		Europe		Russia		Total
Balance as of January 1, 2022	$	217,594	$	312,413	$	716	$	530,723
Emakina acquisition purchase accounting adjustment	—		423		—		423
PolSource acquisition purchase accounting adjustment	(44)		(30)		—		(74)
CORE acquisition purchase accounting adjustment	—		120		—		120
Other 2021 acquisitions purchase accounting adjustment	(519)		142		—		(377)
2022 acquisition	—		8,467		—		8,467
Goodwill impairment	—		—		(686)		(686)
Effect of net foreign currency exchange rate changes	(80)		(4,350)		(30)		(4,460)
Balance as of March 31, 2022	$	216,951	$	317,185	$	—	$	534,136

See Note 2 “Impact of the Invasion of Ukraine” for more information regarding the goodwill impairment recorded in the Russia segment during the three months ended March 31, 2022.

The Russia segment had accumulated goodwill impairment losses of $2.9 million and $2.2 million as of March 31, 2022 and December 31, 2021, respectively. There were no accumulated impairment losses in the North America or Europe reportable segments as of March 31, 2022 or December 31, 2021.

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5.FAIR VALUE MEASUREMENTS

The Company carries certain assets and liabilities at fair value on a recurring basis on its condensed consolidated balance sheets. The following tables present the fair values of the Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021:


	As of March 31, 2022
	Balance		Level 1		Level 2		Level 3
Foreign exchange derivative assets	$	145	$	—	$	145	$	—
Rights to acquire noncontrolling interest in consolidated subsidiaries	1,066		—		—		1,066
Total assets measured at fair value on a recurring basis	$	1,211	$	—	$	145	$	1,066

Foreign exchange derivative liabilities	$	47,733	$	—	$	47,733	$	—
Contingent consideration	27,992		—		—		27,992
Total liabilities measured at fair value on a recurring basis	$	75,725	$	—	$	47,733	$	27,992


	As of December 31, 2021
	Balance		Level 1		Level 2		Level 3
Foreign exchange derivative assets	$	1,429	$	—	$	1,429	$	—
Rights to acquire noncontrolling interest in consolidated subsidiaries	6,093		—		—		6,093
Total assets measured at fair value on a recurring basis	$	7,522	$	—	$	1,429	$	6,093

Foreign exchange derivative liabilities	$	5,849	$	—	$	5,849	$	—
Contingent consideration	23,114		—		—		23,114
Total liabilities measured at fair value on a recurring basis	$	28,963	$	—	$	5,849	$	23,114

The foreign exchange derivatives are valued using pricing models and discounted cash flow methodologies based on observable foreign exchange data at the measurement date. See Note 6 “Derivative Financial Instruments” in the condensed consolidated interim financial statements for additional information regarding derivative financial instruments.

As part of the acquisition of Emakina, the Company acquired rights to purchase certain noncontrolling interests in consolidated subsidiaries of Emakina in exchange for future cash payments determined by the future profitability of certain subsidiaries. The Company determines the fair value of these rights by (i) estimating the fair value of the noncontrolling interests in consolidated subsidiaries by applying an EBITDA multiple adjusted for a lack of control and marketability, less (ii) the fair value of expected future payments to settle the related contractual obligations. The Company purchased the majority of the noncontrolling interest in consolidated subsidiaries during the first quarter of 2022.

The Company determines the fair value of the contingent consideration liabilities using Monte Carlo simulations or probability-weighted expected return methods. The fair value of the contingent consideration for the PolSource acquisition attributable to future revenues and earnings was measured utilizing a Monte Carlo simulation, based on future revenue and earnings projections of the business, revenue volatility and asset volatility of comparable companies, and a discount rate. The discount rate used to determine the fair value of this contingent consideration was 0.4% as of the acquisition date. The fair value of the contingent consideration for the PolSource acquisition attributable to future operating metrics was measured using a probability-weighted expected return method, based on the expected future payments using the earnout formula and performance targets specified in the purchase agreement and adjusting those estimates to reflect the probability of their achievement. The weighted-average estimated future payments were then discounted to present value using a rate based on EPAM’s cost of debt. The discount rate used to determine the fair value of this contingent consideration was 0.4% as of the acquisition date.

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The fair value of the contingent consideration for all other acquisitions was determined using a probability-weighted expected return method and is based on the expected future payments to be made to the sellers of the acquired businesses in accordance with the provisions outlined in the respective purchase agreements. Although there is significant judgment involved, the Company believes its estimates and assumptions are reasonable. In determining fair value, the Company considered a variety of factors, including future performance of the acquired businesses using financial projections developed by the Company and market risk assumptions that were derived for revenue growth and earnings before interest and taxes. The Company estimated future payments using the earnout formula and performance targets specified in the purchase agreements and adjusted those estimates to reflect the probability of their achievement. Those weighted-average estimated future payments were then discounted to present value using a rate based on the weighted-average cost of capital of guideline companies. The discount rate used to determine the fair value of contingent consideration for the 2022 Acquisition was 13.0%. The discount rate used to determine the fair value of contingent consideration for the CORE acquisition was 13.0%. The discount rates used to determine the fair value of contingent consideration for the Other 2021 Acquisitions ranged from a minimum of 15.0% to a maximum of 22.0%. Changes in financial projections, market risk assumptions, discount rates or probability assumptions related to achieving the various earnout criteria would result in a change in the fair value of the recorded contingent liabilities. Such changes, if any, are recorded within Interest and other income, net in the Company’s condensed consolidated statement of income.

A reconciliation of the beginning and ending balances of Level 3 acquisition-related contingent consideration using significant unobservable inputs for the three months ended March 31, 2022 is as follows:


	Amount
Contingent consideration liabilities as of January 1, 2022	$	23,114
Acquisition date fair value of contractual contingent liabilities - 2022 Acquisition	1,784
Changes in fair value of contingent consideration included in Interest and other (loss)/income, net	3,373
Effect of net foreign currency exchange rate changes	(279)
Contingent consideration liabilities as of March 31, 2022	$	27,992

See Note 2, “Impact of the Invasion of Ukraine” for discussion of the nonrecurring level 3 fair value assessment used in the impairment tests of long-lived assets in Russia.

Financial Assets and Liabilities Not Measured at Fair Value on a Recurring Basis

Estimates of fair value of financial instruments not carried at fair value on a recurring basis on the Company’s condensed consolidated balance sheets are generally subjective in nature and are determined as of a specific point in time based on the characteristics of the financial instruments and relevant market information. The generally short maturities of certain assets and liabilities result in a number of assets and liabilities for which fair value equals or closely approximates the amount recorded on the Company’s condensed consolidated balance sheets. The following tables present the estimated fair values of the Company’s financial assets and liabilities not measured at fair value on a recurring basis as of the dates indicated: