EPAM Systems, Inc. (EPAM) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and the related notes included elsewhere in this annual report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections entitled “Forward-Looking Statements” and “Part I. Item 1A. Risk Factors.” We assume no obligation to update any of these forward-looking statements.

Executive Summary

We are a leading global provider of digital platform engineering and software development services to many of the world’s leading organizations. Our customers depend on us to solve their complex technical challenges and rely on our expertise in core engineering, advanced technology, digital design and intelligent enterprise development.

We continuously explore opportunities in new industries to expand our core industry client base in software and technology, financial services, business information and media, travel and consumer, and life sciences and healthcare. Our teams of developers, architects, consultants, strategists, engineers, designers, and product experts have the capabilities and skill sets to deliver business results. Through increased specialization in focused verticals and a continued emphasis on strategic partnerships, we are leveraging our roots in software engineering to grow as a recognized brand in software development and end-to-end digital transformation services for our customers.

26

Table of Contents

Our global delivery model and centralized support functions, combined with the benefits of scale from the shared use of fixed-cost resources, enhance our productivity levels and enable us to better manage the efficiency of our global operations. As a result, we have created a delivery base whereby our applications, tools, methodologies and infrastructure allow us to seamlessly deliver services and solutions from our delivery centers to global customers across all geographies, further strengthening our relationships with them. To ensure safety and business continuity in the environment introduced by the COVID-19 global pandemic, many of our personnel have worked and continue to work productively through secure remote working arrangements so they can respond to the rapidly changing needs and demands of our customers. For further information on the various risks posed by the disruptions to our business structure, please read “Part I. Item 1A. Risk Factors” included in this Annual Report on Form 10-K.

Business Update Regarding the War in Ukraine

On February 24, 2022, Russian forces attacked Ukraine and its people and EPAM has repeatedly called for an immediate end to this unlawful and unconscionable attack. EPAM’s highest priority is the safety and security of its employees and their families in Ukraine as well as the broader region, and we have continued to support relocating our employees to lower risk locations, both in Ukraine and to other countries where we operate. The vast majority of our Ukraine employees are in safe locations and operating at levels of productivity consistent with those achieved in 2021. As of December 31, 2022, Ukraine remains our largest delivery location with the most delivery professionals. Furthermore, we have maintained our $100 million humanitarian aid commitment to our people in Ukraine in addition to our other donations and volunteer efforts.

Prior to the attack in February 2022, Belarus and Russia were our second and third largest delivery locations by the number of delivery professionals, respectively. On April 7, 2022, the Company announced the beginning of a phased exit of our operations in Russia in close collaboration with our employees, contractors, and customers. We have discontinued services to certain customers located in Russia and on September 7, 2022, we executed an agreement to sell substantially all of our remaining holdings in Russia to a third party. As of December 31, 2022 and through the date of issuance of the financial statements, the long stop date of the agreement has passed and we are currently renegotiating the terms of that sale agreement as well as exploring other strategic alternatives. The timing and completion of a sale is uncertain and any sale would be subject to customary closing conditions, including regulatory approvals by the Russian government.

We expect to continue operating in Belarus while executing on our Belarus-specific business continuity plans. A significant number of our employees in Russia and Belarus have relocated, and we may assist in relocating employees to delivery locations in other countries in the future. Additionally, we continue to execute our business continuity plans and have sustained our hiring efforts across multiple locations in Eastern Europe, Central and Western Asia, India, and Latin America.

We own office buildings and lease office space in a number of cities in both Ukraine and in Belarus that we use for both internal functions and for delivering services to our customers. The impact of the war on our operations, personnel, and physical assets in Ukraine has had, and, along with any escalation of the war that includes Belarus’ territory or military, could continue to have, a material adverse effect on our operations. Actions taken by other countries, including new and stricter sanctions by Canada, the United Kingdom, the European Union, the U.S. and other companies and organizations against officials, individuals, regions, and industries in Russia and Belarus, and each of those country’s responses to such sanctions, including counter-sanctions and other actions, has had and could continue to have a material adverse effect on our operations. Customers have and may continue to seek altered terms, conditions, and delivery locations for the performance of services, delay planned work or seek services from alternate providers, or suspend, terminate, fail to renew, or reduce existing contracts or services, which could have a material adverse effect on our financial condition. Some of our customers have implemented steps to block internet communications with Russia, Ukraine, and Belarus to protect against potential cyberattacks or other information security threats, which has caused a material adverse effect on our ability to deliver our services to these customers from those locations. Such material adverse effects disrupt our delivery of services, cause us to shift all or portions of our work occurring in the region to other countries, restrict our ability to engage in certain projects in the region and serve certain customers in or from the region, and could negatively impact our personnel, operations, financial results and business outlook. Our Board of Directors continues its oversight of our strategic, geopolitical, and cybersecurity risks and the risks related to our geographic expansion. Our Board has received updates from management during both regular and special meetings, while also providing oversight of the risks associated with Russia’s invasion of Ukraine and other strategic areas of importance related to the war.

27

Table of Contents

Moving Forward

We continue to execute our business continuity plans and adapt to developments as they occur to protect the safety of our people and address impacts on our delivery infrastructure, including reallocating work to other geographies within our global footprint. We have engaged both our personnel and our customers to meet their needs and to mitigate delivery challenges. EPAM continues to operate productively in more than 50 countries and provides consistent high-quality delivery to our customers. Our global delivery centers have sufficient resources, including infrastructure and capital, to support ongoing operations. EPAM continues to rapidly respond to the difficult conditions in Ukraine while maintaining a focus on customers and long-term growth.

Implementation and execution of our business continuity plans, relocation costs, our humanitarian commitment to our people in Ukraine, and the cost of our phased exit from Russia have resulted in materially increased expenses during 2022. We expect some of those expenses will continue to occur in subsequent quarters for some time in the future. In addition to the charges recorded during 2022 related to our exit from Russia, based on the information available through the date of issuance of the financial statements, we expect to record a loss upon the earlier of classification of the assets and liabilities to be sold as held for sale or closing of a sale, and such loss is not expected to be material. Fluctuations in foreign currency exchange rates could impact the gain or loss the Company could recognize in the future. If unable to complete a sale, the Company could recognize other charges including restructuring costs.

We have no way to predict the progress or outcome of the attack against Ukraine because the conflict and government reactions change quickly and are beyond our control. Prolonged military activities, broad-based sanctions and counter-sanctions could have a material adverse effect on our operations and financial condition and there is significant uncertainty for our business outlook for 2023. The information contained in this section is accurate as of the date hereof but may become outdated due to changing circumstances beyond our control or present awareness.

For additional information on the various risks posed by the attack against Ukraine and the impact in the region, please read “Part I. Item 1A. Risk Factors” included in this Annual Report on Form 10-K.

Overview of 2022 and Financial Highlights

The following table presents a summary of our results of operations for the years ended December 31, 2022, 2021 and 2020:

The key highlights of our consolidated results for 2022 were as follows:

•We recorded revenues of $4.825 billion, or a 28.4% increase from $3.758 billion in the previous year, negatively impacted by $151.1 million or 4.0% due to changes in certain foreign currency exchange rates as compared to the previous year.

•Income from operations grew 5.7% to $573.0 million in 2022 from $542.3 million in 2021. Expressed as a percentage of revenues, income from operations was 11.9% compared to 14.4%. During the year ended December 31, 2022, income from operations as a percentage of revenues was negatively impacted by incremental expenses associated with EPAM’s humanitarian efforts in Ukraine, the global repositioning of our workforce, unbilled business continuity resources, the costs associated with our phased exit from operations in Russia, and impairment of long-lived asset charges triggered by the decision to discontinue services to customers in Russia.

28

Table of Contents

•Our effective tax rate was 17.3% compared to 9.7% in the previous year. The increase in the effective tax rate for 2022 as compared to the prior year is primarily attributable to the decrease in excess tax benefits recorded upon vesting or exercise of stock-based awards and tax charges in 2022 resulting from changes to certain U.S. tax regulations, partially offset by one-time tax benefits in 2022 resulting from the Company’s decision to change the tax status and to classify certain of its foreign subsidiaries as disregarded entities for U.S. income tax.

•Net income decreased 12.9% to $419.4 million compared to $481.7 million in 2021. Expressed as a percentage of revenues, net income decreased 4.1% during 2022 compared to last year. Net income during 2022 was impacted by net foreign exchange losses, partially offset by the improvement in income from operations. Foreign exchange loss during 2022 was primarily driven by the impact of appreciation of the Russian ruble on the Company’s intercompany payables denominated in Russian rubles and U.S. dollar denominated assets held by our subsidiaries in Russia and losses from our foreign exchange forward contracts associated with the Russian ruble.

•Diluted earnings per share decreased 13.0% to $7.09 for the year ended December 31, 2022 from $8.15 in 2021.

•Cash provided by operations decreased $108.2 million, or 18.9%, to $464.1 million during 2022 as compared to last year. The decrease was largely driven by an increase in days sales outstanding during 2022, higher level of variable compensation payments made in 2022 based on 2021 performance, and cash outflows related to EPAM’s humanitarian support efforts in Ukraine and geographic repositioning.

The operating results in any period are not necessarily indicative of the results that may be expected for any future period.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”), which require us to make judgments, estimates and assumptions that affect: (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the end of each reporting period and (iii) the reported amounts of revenues and expenses during each reporting period. We evaluate these estimates and assumptions based on historical experience, knowledge and assessment of current business and other conditions, and expectations regarding the future based on available information and reasonable assumptions, which together form a basis for making judgments about matters not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. When reviewing our audited consolidated financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgment and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions. We consider the policies discussed below to be critical to an understanding of our consolidated financial statements as their application places significant demands on the judgment of our management.

An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe that the following critical accounting policies are the most sensitive and require more significant estimates and assumptions used in the preparation of our consolidated financial statements. You should read the following descriptions of critical accounting policies, judgments and estimates in conjunction with our audited consolidated financial statements and other disclosures included elsewhere in this annual report. Additional information on our policies is in Note 1 “Business and Summary of Significant Accounting Policies” in the notes to our consolidated financial statements in this Annual Report on Form 10-K.

Revenues — We recognize revenues when control of goods or services is passed to a customer in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Such control may be transferred over time or at a point in time depending on satisfaction of obligations stipulated by the contract. Consideration expected to be received may consist of both fixed and variable components and is allocated to each separately identifiable performance obligation based on the performance obligation’s relative standalone selling price. Variable consideration usually takes the form of volume-based discounts, service level credits, price concessions or incentives. Determining the estimated amount of such variable consideration involves assumptions and judgment that can have an impact on the amount of revenues reported.

29

Table of Contents

We derive revenues from a variety of service arrangements, which have been evolving to provide more customized and integrated solutions to customers by combining software engineering with customer experience design, business consulting and technology innovation services. Fees for these contracts may be in the form of time-and-materials or fixed-price arrangements. We generate the majority of our revenues under time-and-material contracts, which are billed using hourly, daily or monthly rates to determine the amounts to be charged directly to the customer. We apply a practical expedient and revenues related to time-and-material contracts are recognized based on the right to invoice for services performed.

Fixed-price contracts include maintenance and support arrangements, which may exceed one year in duration. Maintenance and support arrangements generally relate to the provision of ongoing services and revenues for such contracts are recognized ratably over the expected service period. Fixed-price contracts also include application development arrangements, where progress towards satisfaction of the performance obligation is measured using input or output methods and input methods are used only when there is a direct correlation between hours incurred and the end product delivered. Assumptions, risks and uncertainties inherent in the estimates used to measure progress could affect the amount of revenues, receivables and deferred revenues at each reporting period.

Revenues from licenses which have significant stand-alone functionality are recognized at a point in time when control of the license is transferred to the customer. Revenues from licenses which do not have stand-alone functionality are recognized over time. If there is an uncertainty about the receipt of payment for the services, revenue recognition is deferred until the uncertainty is sufficiently resolved. We apply a practical expedient and do not assess the existence of a significant financing component if the period between transfer of the service to a customer and when the customer pays for that service is one year or less.

We report gross reimbursable “out-of-pocket” expenses incurred as both revenues and cost of revenues in the consolidated statements of income.

Business Combinations — We account for business combinations using the acquisition method which requires us to estimate the fair value of identifiable assets acquired and liabilities assumed, including any contingent consideration, to properly allocate purchase price to the individual assets acquired and liabilities assumed. A substantial portion of the purchase price is typically allocated to goodwill and other intangible assets, which typically include customer relationships, software, trade names, non-competition agreements, and assembled workforce. The allocation of the purchase price utilizes significant estimates in determining the fair values of identifiable assets acquired and liabilities assumed, especially with respect to intangible assets. The significant estimates and assumptions used include the timing and amount of forecasted revenues and cash flows, anticipated growth rates, customer attrition rates, the discount rate reflecting the risk inherent in future cash flows, and the useful lives for finite-lived assets. There are different valuation models for each component, the selection of which requires considerable judgment. These determinations will affect the amount of amortization expense recognized in future periods. We base our fair value estimates on assumptions we believe are reasonable but recognize that the assumptions are inherently uncertain.

We determine the fair value of contingent consideration using Monte Carlo simulations (which involve a simulation of future revenues and earnings during the earn-out period using management's best estimates) or probability-weighted expected return methods. Changes in financial projections, market risk assumptions, discount rates or probability assumptions related to achieving the various earn-out criteria would result in a change in the fair value of contingent consideration. Such changes, if any, are recorded within Interest and other income/(loss), net in the Company’s consolidated statements of income.

If the initial accounting for the business combination has not been completed by the end of the reporting period in which the business combination occurs, provisional amounts are reported to present information about facts and circumstances that existed as of the acquisition date. Once the measurement period ends, which in no case extends beyond one year from the acquisition date, revisions to the accounting for the business combination are recorded in earnings.

Recent Accounting Pronouncements

See Note 1 “Business and Summary of Significant Accounting Policies” in the notes to our consolidated financial statements in this Annual Report on Form 10-K for information regarding recent accounting pronouncements.

30

Table of Contents

Results of Operations

The following table sets forth a summary of our consolidated results of operations for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.

(1) Includes $47,470, $51,580 and $32,785 of stock-based compensation expense for the years ended December 31, 2022, 2021 and 2020, respectively.

(2) Includes $52,439, $60,075 and $42,453 of stock-based compensation expense for the years ended December 31, 2022, 2021 and 2020, respectively.

Revenues

We continue to expand our presence across multiple geographies and verticals, both organically and through strategic acquisitions. During the year ended December 31, 2022, our total revenues grew 28.4% over the previous year to $4.825 billion. This growth resulted from our ability to retain existing customers and increase the level of services we provide to them and our ability to produce revenues from new customer relationships. During the year ended December 31, 2022 we experienced a decrease in customer concentration as compared to the previous year, with revenues from our top five, top ten and top twenty customer groups decreasing as a percentage of total revenues. Revenues have been positively impacted by our acquisitions, which contributed 5.1% to our revenue growth, and negatively impacted by our decision to exit Russia and discontinue services to customers there by 3.7% and fluctuations in foreign currency exchange rates which decreased our revenue growth by 4.0% during the year ended December 31, 2022 as compared to the previous year.

We discuss below the breakdown of our revenues by vertical, customer location, service arrangement type, and customer concentration.

Revenues by Vertical

We assign our customers into one of our five main vertical markets or a group of various industries where we are increasing our presence, which we label as “Emerging Verticals.” Emerging Verticals include customers in multiple industries such as energy, utilities, manufacturing, automotive, telecommunications and several others.

31

Table of Contents

The following table presents our revenues by vertical and revenues as a percentage of total revenues by vertical for the periods indicated:

Travel & Consumer became our largest vertical during 2022, growing 47.4% as compared to 2021. Except for Software & Hi-Tech, which grew at a rate of 19.4% in 2022 over the prior year, all of our verticals grew over 20% in 2022 over the prior year.

Revenues by Customer Location

Our revenues are sourced from multiple countries, which we assign into four geographic markets and identify as Americas, EMEA, APAC and CEE. We present and discuss our revenues by customer location based on the location of the specific customer site that we serve, irrespective of the location of the headquarters of the customer or the location of the delivery center where the work is performed. Revenues by customer location is different from revenues by reportable segment in our consolidated financial statements included elsewhere in this annual report. Segments are not based on the geographic location of the customers, but instead they are based on the location of the Company’s management responsible for a particular customer or market.

The following table sets forth revenues by customer location by amount and as a percentage of our revenues for the periods indicated:

(1)Americas includes revenues from customers in North, Central and South America.

(2)EMEA includes revenues from customers in Western Europe and the Middle East.

(3)APAC, or Asia Pacific, includes revenues from customers in East Asia, Southeast Asia and Australia.

(4)CEE includes revenues from customers in Russia, Belarus, Kazakhstan, Ukraine, Uzbekistan and Georgia.

During the year ended December 31, 2022, revenues in the Americas, our largest geography, were $2.887 billion, growing $660.4 million, or 29.7%, from $2.227 billion reported for the year ended December 31, 2021. Revenues from this geography accounted for 59.9% of total revenues in 2022, an increase from 59.3% in the prior year. The United States continued to be our largest customer location contributing revenues of $2.761 billion in 2022 compared to $2.125 billion in 2021.

32

Table of Contents

Revenues in our EMEA geography were $1.738 billion, an increase of $478.2 million, or 38%, over $1.260 billion in the previous year. Revenues in this geography accounted for 36.0% of consolidated revenues in 2022 as compared to 33.4% in the previous year. The top three revenue contributing customer location countries in EMEA were the United Kingdom, Switzerland and the Netherlands generating revenues of $619.3 million, $323.4 million and $215.4 million in 2022, respectively, compared to $474.9 million, $271.2 million and $154.8 million in 2021, respectively. Fluctuations in foreign currency exchange rates with the U.S. dollar, particularly the euro and the British pound, during 2022 compared to the same period in the prior year negatively impacted revenue growth in the EMEA geography by 10.0%. Revenues in the region benefited from acquisitions which contributed $160.9 million to revenue growth in 2022.

During 2022, revenues in our CEE geography decreased $88.8 million, or 52.9%, from the previous year. The decrease in CEE revenues came primarily from customers in Russia, contributing a decrease of $90.4 million in 2022 compared to the previous year. On March 4, 2022, we announced that we will discontinue our services to customers located in Russia and have been providing transition support for customers in this market while administering the transition. On September 7, 2022, we executed an agreement to sell substantially all of our remaining holdings in Russia to a third party. As of December 31, 2022 and through the date of issuance of these financial statements, the long stop date of the agreement has passed and we are currently renegotiating the terms of that sale agreement as well as exploring other strategic alternatives. The timing and completion of a sale is uncertain and any sale would be subject to customary closing conditions, including regulatory approvals by the Russian government. As a result, the revenues from this geography are expected to continue to materially decline in the future.

Revenues from customers in locations in our APAC region comprised 2.5% of total revenues in 2022, a level consistent with the prior year.

Discussion of revenues from 2021 as compared to 2020 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2021.

Revenues by Customer Concentration

We have long-standing relationships with many of our customers and we seek to grow revenues from our existing customers by continually expanding the scope and size of our engagements. Revenues derived from these customers may fluctuate as these accounts mature, upon beginning or completion of multi-year projects or due to external economic environment trends. We believe there is a significant potential for future growth as we expand our capabilities and offerings within existing customers. In addition, we remain committed to diversifying our client base and adding more customers to our client mix through organic growth and strategic acquisitions, and over the long-term, we expect revenue concentration from our top customers to decrease.

The following table presents revenues contributed by our customers by amount and as a percentage of our revenues for the periods indicated:

The following table shows the number of customers grouped by revenues recognized by the Company for each year presented:

33

Table of Contents

Revenues by Service Offering

Our service arrangements have been evolving to provide more customized and integrated solutions to our customers where we combine software engineering with customer experience design, business consulting and technology innovation services. We are continually expanding our service capabilities, moving beyond traditional services into business consulting, design and physical product development.

The following table shows revenues by service offering as an amount and as a percentage of our revenues for the years indicated:

See Note 12 “Revenues” in the notes to our consolidated financial statements in this Annual Report on Form 10-K for more information regarding our contract types and related revenue recognition policies.

Cost of Revenues (Exclusive of Depreciation and Amortization)

The principal components of our cost of revenues (exclusive of depreciation and amortization) are salaries, bonuses, fringe benefits, stock-based compensation, project-related travel costs and fees for subcontractors who are assigned to customer projects. Salaries and other compensation expenses of our delivery professionals are reported as cost of revenues regardless of whether the employees are actually performing customer services during a given period. Our employees are a critical asset, necessary for our continued success and therefore we expect to continue hiring talented employees and providing them with competitive compensation programs.

We manage the utilization levels of our delivery professionals through strategic hiring and efficient staffing of projects. Some of these professionals are hired and trained to work for specific customers or on specific projects and some of our offshore development centers are dedicated to specific customers or projects. Our staff utilization also depends on the general economy and its effect on our customers and their business decisions regarding the use of our services.

During the year ended December 31, 2022, cost of revenues (exclusive of depreciation and amortization) was $3,286.7 million, representing an increase of 32.3% from $2,483.7 million reported last year. The increase was primarily due to an increase in compensation costs as a result of an 18.0% growth in the average number of production professionals and the geographic repositioning of our professionals to higher cost geographies in response to the war in Ukraine, a 4.8% unfavorable impact from changes in foreign currency exchange rates, as well as $29.0 million of incremental costs associated with our humanitarian efforts in Ukraine and $14.7 million of unbilled business continuity resources, partially offset by the reversal of $21.4 million of previously accrued discretionary compensation expenses during the first quarter of 2022.

Expressed as a percentage of revenues, cost of revenues (exclusive of depreciation and amortization) was 68.1% and 66.1% during the years ended December 31, 2022 and 2021, respectively. The year-over-year increase is primarily due to higher personnel-related costs and the ongoing transition of customer work to higher cost geographies, increased costs associated with our humanitarian efforts in Ukraine, and unbilled business continuity resources, partially offset by the reversal of previously accrued discretionary compensation expenses in the first quarter of 2022.

Discussion of cost of revenues (exclusive of depreciation and amortization) from 2021 as compared to 2020 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2021.

Selling, General and Administrative Expenses

Selling, general and administrative expenses represent expenditures associated with promoting and selling our services and general and administrative functions of our business. These expenses include the costs of salaries, bonuses, fringe benefits, stock-based compensation, severance, bad debt, travel, legal and accounting services, insurance, facilities including operating leases, advertising, and other promotional activities. Additionally, selling, general and administrative expenses contain costs of relocating our employees and various one-time and unusual expenses such as impairment charges.

34

Table of Contents

Our selling, general and administrative expenses have increased due to our continuously expanding operations, strategic business acquisitions, and the hiring of necessary personnel to support our growth. During the year ended December 31, 2022, selling, general and administrative expenses were $872.8 million, representing an increase of 34.5% as compared to $648.7 million reported last year. The increase in selling, general and administrative expenses in 2022 was primarily due to a $105.4 million increase in personnel-related costs, which include stock-based compensation expense, primarily driven by an increase in headcount. Additionally, selling, general and administrative expenses for the year ended December 31, 2022 were impacted by $38.7 million of expenses associated with our geographic repositioning of our workforce, $15.8 million of expenses associated with our humanitarian efforts in Ukraine, $17.1 million of charges related to employee separation costs in Russia, $19.6 million of impairment charges related to our long-lived assets in Russia and $5.1 million of bad debt expense attributable to customers located in Russia.

Expressed as a percentage of revenues, selling, general and administrative expenses increased 0.8% to 18.1% for the year ended December 31, 2022. The increase was primarily driven by impairment charges related to our long-lived assets in Russia, higher bad debt expenses attributable to customers located in Russia, employee separation costs in Russia, increased costs associated with geographic repositioning of our workforce as well as our humanitarian efforts in Ukraine, partially offset by reduced facilities-related expenses.

Discussion of selling, general and administrative expenses from 2021 as compared to 2020 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2021.

Depreciation and Amortization Expense

Depreciation and amortization expense includes depreciation of physical assets used in the operation of our business such as computer equipment, software, buildings we purchased, leasehold improvements as well as various office furniture and equipment. Depreciation and amortization expense also includes amortization of acquired finite-lived intangible assets.

During the year ended December 31, 2022, depreciation and amortization expense was $92.3 million, representing an increase of $8.9 million from $83.4 million reported in the prior year. The increase in depreciation and amortization expense was primarily driven by an increased investment in computer equipment used by our employees and amortization of acquired finite-lived intangible assets, which contributed $4.6 million to the year over year increase in depreciation and amortization expense. Expressed as a percentage of revenues, depreciation and amortization expense decreased to 1.9% during the year ended December 31, 2022 as compared to 2.2% in 2021.

Discussion of depreciation and amortization expense from 2021 as compared to 2020 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2021.

Interest and Other Income/(Loss), Net

Interest and other income/(loss), net includes interest earned on cash and cash equivalents, short-term investments and employee loans, gains and losses from certain financial instruments, interest expense related to our borrowings, government grant income, and changes in the fair value of contingent consideration. Interest and other income/(loss), net increased from a loss of $1.7 million during the year ended December 31, 2021 to a gain of $10.0 million during the year ended December 31, 2022. This change was largely driven by a $6.5 million increase in government grant income and an increase in interest income from our cash and cash equivalents and short-term investments, partially offset by a $2.3 million increase in loss due to the change in fair value of contingent consideration, $0.8 million charge related to the impairment of an investment and a $1.3 million charge related to the impairment of a financial asset in Ukraine recorded during the year ended December 31, 2022.

Discussion of Interest and other income/(loss) from 2021 as compared to 2020 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2021.

Provision for Income Taxes

Determining the consolidated provision for income tax expense, deferred income tax assets and liabilities and any potential related valuation allowances involves judgment. We consider factors that may contribute, favorably or unfavorably, to the overall annual effective tax rate in the current year as well as the future. These factors include statutory tax rates and tax law changes in the countries where we operate and excess tax benefits upon vesting or exercise of equity awards as well as consideration of any significant or unusual items.

35

Table of Contents

As a global company, we are required to calculate and provide for income taxes in each of the jurisdictions in which we operate. During 2022, 2021 and 2020, we had $428.7 million, $404.9 million and $278.1 million, respectively, in income before provision for income taxes attributed to our foreign jurisdictions. Changes in the geographic mix or level of annual pre-tax income can also affect our overall effective income tax rate.

Our provision for income taxes includes the impact of provisions established for uncertain income tax positions, as well as the related net interest and penalty expense. Tax exposures can involve complex issues and may require an extended period to resolve. Although we believe we have adequately reserved for our uncertain tax positions, we cannot provide assurance that the final tax outcome of these matters will not be different from our current estimates. We adjust these reserves after consideration of changes in facts and circumstances, such as the closing of a tax audit, statute of limitation lapse or the refinement of an estimate. To the extent that the final tax outcome of these matters differs from the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made.

The provision for income taxes was $87.8 million in 2022 and $51.7 million in 2021. The increase was primarily driven by a significant decrease in excess tax benefits recorded upon vesting or exercise of stock-based awards which were $35.1 million in 2022 compared to $71.6 million in 2021. The effective tax rate increased from 9.7% in 2021 to 17.3% in 2022 primarily due to the decrease in excess tax benefits recorded upon vesting or exercise of stock-based awards and tax charges in 2022 resulting from changes to certain U.S. tax regulations, partially offset by one-time tax benefits in 2022 resulting from the Company’s decision to change the tax status and to classify certain of its foreign subsidiaries as disregarded entities for U.S. income tax purposes.

Discussion of the provision for income taxes from 2021 as compared to 2020 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2021.

Foreign Exchange Loss

For discussion of the impact of foreign exchange fluctuations see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk — Foreign Exchange Risk.”

Results by Business Segment

Our operations consist of three reportable segments: North America, Europe, and Russia. The segments represent components of EPAM for which separate financial information is available and used on a regular basis by our chief executive officer, who is also our chief operating decision maker (“CODM”), to determine how to allocate resources and evaluate performance. Our CODM makes business decisions based on segment revenues and segment operating profits. Segment operating profit is defined as income from operations before unallocated costs. Expenses included in segment operating profit consist principally of direct selling and delivery costs as well as an allocation of certain shared services expenses. Certain corporate expenses are not allocated to specific segments as these expenses are not controllable at the segment level. Such expenses include certain types of professional fees, certain taxes included in operating expenses, compensation to non-employee directors and certain other general and administrative expenses, including compensation of specific groups of non-production employees. In addition, the Company does not allocate stock-based compensation, amortization of intangible assets acquired through business combinations, goodwill and other asset impairment charges, acquisition-related costs and certain other one-time charges and benefits. These unallocated amounts are combined with total segment operating profit to arrive at consolidated income from operations.

We manage our business primarily based on the managerial responsibility for the client base and market. As managerial responsibility for a particular customer relationship generally correlates with the customer’s geographic location, there is a high degree of similarity between customer locations and the geographic boundaries of our reportable segments. In some cases, managerial responsibility for a particular customer is assigned to a management team in another region and is usually based on the strength of the relationship between customer executives and particular members of EPAM’s senior management team. In such cases, the customer’s activity would be reported through the respective management team member’s reportable segment. Our Europe segment includes our business in the APAC region, which is managed by the same management team.

36

Table of Contents

Segment revenues from external customers and segment operating profit, before unallocated expenses, for the North America, Europe and Russia segments for the years ended December 31, 2022, 2021 and 2020 were as follows:

North America Segment

During 2022, North America segment revenues increased $656.3 million, or 29.3%, over the previous year. Revenues from our North America segment represented 60.1% of total segment revenues, an increase from 59.7% reported in the corresponding period of 2021. During 2022 as compared to 2021, North America segment operating profits increased $126.6 million, or 27.4%, to $589.4 million. Expressed as a percentage of revenue, North America segment operating profit decreased to 20.3% in 2022 as compared to 20.6% in 2021. This decrease is primarily attributable to increased personnel-related costs in part attributable to supplementing delivery resources on certain projects with standby resources able to support projects if delivery resources impacted by the invasion of Ukraine become unable to work and lower utilization, partially offset by a decrease in variable compensation expense as a percentage of segment revenues during 2022 compared to 2021.

The following table presents North America segment revenues by industry vertical for the periods indicated:

Software & Hi-Tech remained the largest industry vertical in the North America segment during the year ended December 31, 2022, growing 17.0% as compared to the prior year, which was a result of the continued focus on engaging with our technology customers. Financial services grew 44.6% in 2022 compared to the prior year primarily due to growth in a group of wealth management customers and growth from insurance customers added in the last 18 months. Travel and Consumer grew 40.6% during 2022 compared to the prior year primarily due to growth from retail customers. During the year ended December 31, 2022, revenues from the Business Information & Media vertical experienced growth of 20.0% and largely benefited from growth from existing customers in our top 20 customers. Life Sciences & Healthcare grew 33.3% during 2022 compared to the prior year primarily due to growth from an existing customer in our top 20 customers and growth from customers added in the last 24 months. Emerging Verticals experienced 26.9% growth during 2022 compared to the prior year largely due to an increase in services provided to several customers in various industries in the group.

37

Table of Contents

Europe Segment

During 2022, Europe segment revenues were $1,853.1 million, reflecting an increase of $502.6 million, or 37.2%, from last year. Acquisitions contributed $166.3 million to Europe segment revenues during 2022. Revenues were negatively impacted by changes in foreign currency exchange rates during 2022. Had our Europe segment revenues been expressed in constant currency terms using the exchange rates in effect during 2021, we would have reported revenue growth of 47.3%. Revenues from our Europe segment represent 38.4% and 35.9% of total segment revenues during 2022 and 2021, respectively. During 2022, this segment’s operating profits decreased $10.5 million, or 4.5% as compared to last year, to $223.3 million. Europe’s operating profit represented 12.0% of Europe segment revenues as compared to 17.3% in 2021. Europe’s segment operating profit was negatively impacted by changes in foreign currency exchanges rates, increased personnel-related costs partially attributable to supplementing delivery resources on certain projects with standby resources able to support projects if delivery resources impacted by the invasion of Ukraine become unable to work, lower utilization during 2022 compared to 2021, and lower profit margins from businesses acquired in the prior year, partially offset by a decrease in variable compensation expense as a percentage of segment revenues during 2022 compared to 2021.

The following table presents Europe segment revenues by industry vertical for the periods indicated:

Travel & Consumer became the largest industry vertical in the Europe segment during the year ended December 31, 2022. The Europe segment benefited from 61.4% growth in Travel & Consumer during the year ended December 31, 2022 as compared to 2021 primarily due to increased demand from customers in the retail and distribution industries and revenues from acquisitions which contributed $89.4 million to revenue growth during 2022. During the year ended December 31, 2022, revenues in Financial Services experienced 23.8% growth primarily driven by increased revenues from commercial and investment banking customers and revenues from recent acquisitions which contributed $18.3 million to revenue growth during 2022. For the year ended December 31, 2022 as compared to 2021, Business Information & Media vertical growth was largely attributable to the expansion of services provided to one of our top 5 customers compared to the prior year. Revenue growth in Software & Hi-Tech during the year ended December 31, 2022 as compared to 2021 was attributable to the expansion of services provided to one of our top 20 customers as well as growth in customers outside of our top 100 customers. Revenues in Emerging Verticals experienced higher growth primarily attributable to growth in existing customers in the energy and automotive industries, a new customer that we added in 2022 as well as revenues from recent acquisitions which contributed $32.3 million to revenue growth during 2022.

Russia Segment

During 2022, revenues from our Russia segment decreased $92.3 million relative to 2021 and represent 1.5% of total segment revenues during 2022 compared with 4.4% in 2021. The decrease in revenues was primarily attributable to decreased operations in Russia as we proceed with the phased exit from Russia while discontinuing services to customers there. Operating loss of our Russia segment was $13.5 million in 2022 compared to operating profit of $32.5 million in 2021. This decrease was largely driven by discontinuance of services to certain customers in Russia which led to reduced revenues, increased bad debt expense, and expenses incurred for services provided to those customers for which revenue was not recognized as collectability was not considered probable after announcing the discontinuance of services to customers in Russia.

38

Table of Contents

The following table presents Russia segment revenues by industry vertical for the periods indicated:

Revenues in the Russia segment are generally subject to fluctuations and are impacted by the timing of revenue recognition associated with the execution of contracts and the fluctuations in the foreign currency exchange rate of the Russian ruble to the U.S. dollar. On March 4, 2022, EPAM announced that it will discontinue services to customers located in Russia and will provide transition support for the customers in this market. On April 7, 2022, the Company announced that it would begin the process of a phased exit of its operations in Russia and on September 7, 2022, the Company executed an agreement to sell substantially all of its remaining holdings in Russia to a third party. As of December 31, 2022 and through the date of issuing this Annual Report, the long stop date of the agreement has passed and the Company is currently renegotiating the terms of that sale agreement as well as exploring other strategic alternatives. The timing and completion of a sale is uncertain and any sale would be subject to customary closing conditions, including regulatory approvals by the Russian government. As a result, the revenues from this segment are expected to dissipate in the future. See Note 2 “Impact of the Invasion of Ukraine” for more information regarding the Company’s decisions to exit its operations in Russia.

Discussion of segment results from 2021 as compared to 2020 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2021.

Effects of Inflation

Economies in many countries where we operate have periodically experienced high rates of inflation, including during 2022. Periods of higher inflation may affect various economic sectors in those countries and increase our cost of doing business there. We do not believe that inflation has had a material impact on our business, results of operations or financial condition to date. We continue to track the impact of inflation, particularly on wages, while attempting to minimize its effects through pricing and cost management strategies. A higher-than-normal rate of inflation in the future could adversely affect our operations and financial condition.

Liquidity and Capital Resources

Capital Resources

Our cash generated from operations has been our primary source of liquidity to fund operations and investments to support the growth of our business. As of December 31, 2022, our principal sources of liquidity were cash and cash equivalents totaling $1.681 billion, short-term investments totaling $60.3 million as well as $675.0 million of available borrowings under our revolving credit facility. See Note 10 “Debt” in the notes to our consolidated financial statements in this Annual Report on Form 10-K for information regarding the terms of our revolving credit facility and information about debt.

39

Table of Contents

Cash Flows

The following table summarizes our cash flows for the periods indicated:

Operating Activities

Net cash provided by operating activities during the year ended December 31, 2022 decreased $108.2 million, or 18.9%, to $464.1 million, as compared to 2021. This decrease was largely driven by an increase in days sales outstanding during 2022, higher level of variable compensation payments made in 2022 based on 2021 performance, and cash outflows related to EPAM’s humanitarian support efforts in Ukraine and geographic repositioning.

Investing Activities

Net cash used in investing activities during the year ended December 31, 2022 was $182.9 million compared to $368.9 million used in the same period in 2021. The cash used in investing activities was primarily attributable to $81.6 million used for capital expenditures and an investment of $60.0 million in time deposits in 2022 compared to cash used for capital expenditures of $111.5 million partially offset by the maturity of $60.0 million of time deposits during 2021. Additionally, during 2022 the cash used for the acquisitions of businesses, net of cash acquired was $10.6 million compared to $315.0 million used for the acquisitions of businesses, net of cash acquired, during 2021.

Financing Activities

During the year ended December 31, 2022, net cash used in financing activities was $2.0 million, compared to $59.6 million net cash used in financing activities in 2021. During 2022, we received cash from the exercises of stock options issued under our long-term incentive plans and proceeds from the purchases of shares under our ESPP of $50.7 million, compared to $26.3 million received in the corresponding period of 2021. These cash inflows were offset by cash used for the payments of withholding taxes related to net share settlements of restricted stock units of $26.6 million in 2022, compared to $41.6 million paid in 2021, and net cash repayments of debt of $13.8 million in 2022, compared to net borrowings of $0.1 million in 2021. Additionally, the year ended December 31, 2022 included payments of $6.6 million attributable to the acquisition-date fair value of contingent consideration compared to payments of $40.2 million attributable to acquisition-date fair value of contingent consideration during the year ended December 31, 2021.

Discussion of the comparison of the cash flows between 2021 and 2020 is included in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” of our Annual Report on Form 10-K for the year ended December 31, 2021.

Future Capital Requirements

We believe that our existing cash, cash equivalents and short-term investments, combined with our expected cash flow from operations will be sufficient to meet our projected operating and capital expenditure requirements for at least the next twelve months and that we possess the financial flexibility to execute our strategic objectives, including the ability to make acquisitions and strategic investments in the foreseeable future. However, the invasion of Ukraine, COVID-19 and the consequences and related measures to contain their impact have caused material disruptions in both national and global financial markets and economies. The future impact of the invasion of Ukraine and COVID-19 and responsive measures cannot be predicted with certainty and may increase our borrowing costs and other costs of capital and otherwise adversely affect our business, results of operations, financial condition and liquidity.

40

Table of Contents

Our ability to expand and grow our business in accordance with current plans and to meet our long-term capital requirements will depend on many factors, including the rate at which our cash flows increase or decrease and the availability of public and private debt and equity financing. We may require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. Our ability to generate cash is subject to our performance, general economic conditions, industry trends and other factors including the impact of the invasion of Ukraine and COVID-19 pandemic, each as described elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. To the extent that existing cash, cash equivalents, short-term investments, and operating cash flows are insufficient to fund our future activities and requirements, we may need to raise additional funds through public or private equity or debt financing. If we issue equity securities in order to raise additional funds, substantial dilution to existing stockholders may occur. If we raise cash through the issuance of additional indebtedness, we may be subject to additional contractual restrictions on our business. There is no assurance that we would be able to raise additional funds on favorable terms or at all.

See Note 9 “Leases”, Note 10 “Debt”, Note 16 “Commitments and Contingencies” in the notes to our consolidated financial statements in this Annual Report on Form 10-K for information regarding our various contractual obligations and capital expenditure requirements.

Off-Balance Sheet Commitments and Arrangements

We do not have any material obligations under guarantee contracts or other contractual arrangements other than as disclosed in Note 16 “Commitments and Contingencies” in the notes to our consolidated financial statements in this Annual Report on Form 10-K. We have not entered into any transactions with unconsolidated entities where we have financial guarantees, subordinated retained interests, derivative instruments, or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to us, or engages in leasing, hedging, or research and development services with us.