Company Quick10K Filing
Quick10K
Epam Systems
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$169.79 55 $9,270
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-05 Shareholder Vote
8-K 2019-05-09 Earnings, Exhibits
8-K 2019-02-14 Earnings, Exhibits
8-K 2018-11-01 Earnings, Exhibits
8-K 2018-09-22 Officers, Exhibits
8-K 2018-08-02 Earnings, Exhibits
8-K 2018-06-06 Shareholder Vote
8-K 2018-05-09 Earnings, Exhibits
8-K 2018-03-15 Regulation FD, Exhibits
8-K 2018-02-16 Earnings, Exhibits
GSKY Greensky 2,360
HONE Harborone Bancorp 613
ZIXI Zix 590
ASM Avino Silver & Gold Mines 30
MDCL Medicine Man Technologies 0
ETEK Eco Tek 360 0
SIAF Sino Agro Food 0
TLSRP Telos 0
GTHP Guided Therapeutics 0
EMITF Elbit Imaging 0
EPAM 2019-03-31
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 exhibit101q12019.htm
EX-31.1 exhibit311q12019.htm
EX-31.2 exhibit312q12019.htm
EX-32.1 exhibit321q12019.htm
EX-32.2 exhibit322q12019.htm

Epam Systems Earnings 2019-03-31

EPAM 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 epam-2019331x10q.htm 10-Q Document
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR
¨ 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
Newtown, Pennsylvania
18940
(Address of principal executive offices)
(Zip code)
267-759-9000
(Registrant’s telephone number, including area code)

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  x No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x 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. (Check one):
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
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   x
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 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 30, 2019
Common Stock, par value $0.001 per share
 
54,631,565 shares

 


EPAM SYSTEMS, INC.

TABLE OF CONTENTS

 
Page




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
EPAM SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data)

 
As of  
 March 31, 
 2019
 
As of  
 December 31, 
 2018
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
762,529

 
$
770,560

Accounts receivable, net of allowance of $1,415 and $1,557, respectively
307,202

 
297,685

Unbilled revenues
144,152

 
104,652

Prepaid and other current assets
30,864

 
26,171

Total current assets
1,244,747

 
1,199,068

Property and equipment, net
105,805

 
102,646

Operating lease right-of-use assets
173,091

 

Intangible assets, net
50,087

 
57,065

Goodwill
167,707

 
166,832

Deferred tax assets
69,345

 
69,983

Other noncurrent assets
20,653

 
16,208

Total assets
$
1,831,435

 
$
1,611,802

 
 
 
 
Liabilities
 

 
 

Current liabilities
 

 
 

Accounts payable
$
4,397

 
$
7,444

Accrued expenses and other current liabilities
72,793

 
127,937

Due to employees
86,012

 
49,683

Deferred compensation due to employees
9,673

 
9,920

Taxes payable, current
69,835

 
67,845

Operating lease liabilities, current
39,856

 

Total current liabilities
282,566

 
262,829

Long-term debt
25,000

 
25,031

Taxes payable, noncurrent
43,679

 
43,685

Operating lease liabilities, noncurrent
127,935

 

Other noncurrent liabilities
14,030

 
17,661

Total liabilities
493,210

 
349,206

Commitments and contingencies (Note 11)


 


Stockholders’ equity
 

 
 

Common stock, $0.001 par value; 160,000,000 authorized; 54,584,243 and 54,099,927 shares issued, 54,564,508 and 54,080,192 shares outstanding at March 31, 2019 and December 31, 2018, respectively
54

 
54

Additional paid-in capital
553,532

 
544,700

Retained earnings
820,287

 
759,533

Treasury stock
(177
)
 
(177
)
Accumulated other comprehensive loss
(35,471
)
 
(41,514
)
Total stockholders’ equity
1,338,225

 
1,262,596

Total liabilities and stockholders’ equity
$
1,831,435

 
$
1,611,802


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

3


EPAM SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)

 
Three Months Ended 
 March 31,
 
2019
 
2018
Revenues
$
521,333

 
$
424,148

Operating expenses:
 
 
 
Cost of revenues (exclusive of depreciation and amortization)
344,689

 
277,634

Selling, general and administrative expenses
101,786

 
89,641

Depreciation and amortization expense
10,200

 
8,176

Income from operations
64,658

 
48,697

Interest and other income/(loss), net
3,076

 
(551
)
Foreign exchange loss
(3,484
)
 
(247
)
Income before provision for/(benefit from) income taxes
64,250

 
47,899

Provision for/(benefit from) income taxes
3,496

 
(16,519
)
Net income
$
60,754

 
$
64,418

Foreign currency translation adjustments, net of tax
2,943

 
3,309

Unrealized gain on cash-flow hedging instruments, net of tax
3,100

 
69

Comprehensive income
$
66,797

 
$
67,796

 
 
 
 
Net income per share:
 
 
 
Basic
$
1.12

 
$
1.21

Diluted
$
1.06

 
$
1.15

Shares used in calculation of net income per share:
 
 
 
Basic
54,245

 
53,079

Diluted
57,236

 
56,241


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


4



EPAM SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except share data) 

 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Treasury Stock
 
Accumulated Other Comprehensive Loss
 
Total Stockholders’ Equity
 
Shares
 
Amount
 
 
 
 
 
Shares
 
Amount
 
 
 
 
Balance, January 1, 2019
54,080,192

 
$
54

 
$
544,700

 
$
759,533

 
19,735

 
$
(177
)
 
$
(41,514
)
 
$
1,262,596

Restricted stock units vested
242,414

 

 

 

 

 

 

 

Restricted stock units withheld for employee taxes
(81,562
)
 

 
(13,483
)
 

 

 

 

 
(13,483
)
Stock-based compensation expense

 

 
10,425

 

 

 

 

 
10,425

Proceeds from stock option exercises
323,464

 

 
11,890

 

 

 

 

 
11,890

Foreign currency translation adjustments, net of tax

 

 

 

 

 

 
2,943

 
2,943

Change in unrealized gains and losses on cash flow hedges, net of tax

 

 

 

 

 

 
3,100

 
3,100

Net income

 

 

 
60,754

 

 

 

 
60,754

Balance, March 31, 2019
54,564,508

 
$
54

 
$
553,532

 
$
820,287

 
19,735

 
$
(177
)
 
$
(35,471
)
 
$
1,338,225


 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Treasury Stock
 
Accumulated Other Comprehensive Loss
 
Total Stockholders’ Equity
 
Shares
 
Amount
 
 
 
 
 
Shares
 
Amount
 
 
 
 
Balance, January 1, 2018
52,983,685

 
$
53

 
$
473,874

 
$
518,820

 
19,735

 
$
(177
)
 
$
(17,623
)
 
$
974,947

Restricted stock units vested
186,327

 

 

 

 

 

 

 

Restricted stock units withheld for employee taxes
(61,950
)
 

 
(6,986
)
 

 

 

 

 
(6,986
)
Stock-based compensation expense

 

 
11,485

 

 

 

 

 
11,485

Proceeds from stock option exercises
198,936

 

 
7,649

 

 

 

 

 
7,649

Foreign currency translation adjustments, net of tax

 

 

 

 

 

 
3,309

 
3,309

Change in unrealized gains and losses on cash flow hedges, net of tax

 

 

 

 

 

 
69

 
69

Cumulative effect of adoption of ASU 2014-09

 

 

 
457

 

 

 

 
457

Net income

 

 

 
64,418

 

 

 

 
64,418

Balance, March 31, 2018
53,306,998

 
$
53

 
$
486,022

 
$
583,695

 
19,735

 
$
(177
)
 
$
(14,245
)
 
$
1,055,348


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


5


EPAM SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

                                               
For the Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
60,754

 
$
64,418

Adjustments to reconcile net income to net cash (used in)/provided by operating activities:
 
 
 
Depreciation and amortization expense
10,200

 
8,176

Operating lease right-of-use assets amortization expense
12,187

 

Bad debt (recovery)/expense
(133
)
 
199

Deferred taxes
846

 
(23,290
)
Stock-based compensation expense
21,856

 
16,596

Other
520

 
(1,982
)
Changes in assets and liabilities:
 

 
 

Accounts receivable
(8,820
)
 
12,475

Unbilled revenues
(39,523
)
 
(48,193
)
Prepaid expenses and other assets
401

 
(7,623
)
Accounts payable
(2,488
)
 
2,520

Accrued expenses and other liabilities
(51,079
)
 
(31,470
)
Operating lease liabilities
(13,175
)
 

Due to employees
24,297

 
11,656

Taxes payable
(16,045
)
 
3,848

Net cash (used in)/provided by operating activities
(202
)
 
7,330

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(13,424
)
 
(10,711
)
Acquisition of businesses, net of cash acquired (Note 2)

 
(50,264
)
Other investing activities, net
(5,136
)
 
811

Net cash used in investing activities
(18,560
)
 
(60,164
)
Cash flows from financing activities:
 

 
 

Proceeds from stock option exercises
11,402

 
7,588

Payments of withholding taxes related to net share settlements of restricted stock units
(1,208
)
 
(106
)
Repayment of debt
(4
)
 
(3,466
)
Other financing activities, net
(9
)
 

Net cash provided by financing activities
10,181

 
4,016

Effect of exchange rate changes on cash, cash equivalents and restricted cash
548

 
3,040

Net decrease in cash, cash equivalents and restricted cash
(8,033
)
 
(45,778
)
Cash, cash equivalents and restricted cash, beginning of period
771,711

 
582,855

Cash, cash equivalents and restricted cash, end of period
$
763,678

 
$
537,077




6


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, 
 2019
 
As of
December 31,
2018
Balance sheet classification
 
 
 
    Cash and cash equivalents
$
762,529

 
$
770,560

   Restricted cash in Prepaid and other current assets
14

 
14

   Restricted cash in Other noncurrent assets
1,135

 
1,137

    Total restricted cash
1,149

 
1,151

        Total cash, cash equivalents and restricted cash
$
763,678

 
$
771,711


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

7


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share data)
 
1.
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES    
EPAM Systems, Inc. (the “Company” or “EPAM”) is a leading global provider of digital platform engineering and software development services to customers located around the world, primarily in North America, Europe, Asia and Australia. The Company’s industry expertise includes financial services, travel and consumer, software and hi-tech, business information and media, life sciences and healthcare, as well as other industries in which it is continuously growing. The Company is incorporated in Delaware with headquarters in Newtown, PA.
Basis of Presentation — The accompanying unaudited condensed consolidated financial statements of EPAM have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP” or “U.S. GAAP”) and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended. The condensed consolidated financial statements include the financial statements of EPAM Systems, Inc. and its subsidiaries with all intercompany balances and transactions eliminated.
These unaudited condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2018 included in its Annual Report on Form 10-K. The preparation of these condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates, and such differences may be material to the condensed consolidated financial statements. Operating results for the interim periods are not necessarily indicative of results that may be expected to occur for the entire year. In management’s opinion, all adjustments considered necessary for a fair presentation of the accompanying unaudited condensed consolidated financial statements have been included, and all adjustments are of a normal and recurring nature.
Adoption of New Accounting Standards
Unless otherwise discussed below, the adoption of new accounting standards did not have an impact on the Company’s consolidated financial position, results of operations, changes in stockholders’ equity and cash flows.
Leases — In February 2016, the FASB issued ASU 2016-02, Leases (“Topic 842”). The standard supersedes previously existing lease guidance (“Topic 840”) and requires entities to recognize all leases, with the exception of leases with a term of twelve months or less, on the balance sheet as right-of-use assets (“RoU Assets”) and lease liabilities. The guidance also changes disclosure requirements with a focus on providing information that will enable users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.
The Company adopted Topic 842, effective January 1, 2019, using the optional transition approach, which allows the Company to apply the provisions of the standard at the effective date without adjusting the comparable periods and carry forward disclosures under previously existing guidance for those periods presented within the Company’s financial statements.
The Company determines if an arrangement is a lease or contains a lease at inception. The Company performs an assessment and classifies the lease as either an operating lease or a financing lease at the lease commencement date with a right-of-use asset and a lease liability recognized in the statement of financial position under both classifications. The Company does not have finance leases that are material to the Company’s condensed consolidated financial statements.
Lease liabilities are initially measured at the present value of lease payments not yet paid. The present value is determined by applying the readily determinable rate implicit in the lease or, if not available, the incremental borrowing rate of the lessee. The Company determines the incremental borrowing rate of the lessee on a lease-by-lease basis by developing an estimated centralized U.S. dollar borrowing rate for a fully collateralized obligation with a term similar to the lease term, and adjusts the rate to reflect the incremental risk associated with the currency in which the lease is denominated. Lease agreements of the Company may include options to extend or terminate the lease and the Company includes such options in the lease term when it is reasonably certain that the Company will exercise that option. RoU Assets are recognized based on the initial measurement of the lease liabilities plus initial direct costs less lease incentives and RoU Assets are subject to periodic impairment tests. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

8


The Company elected a practical expedient to account for lease and non-lease components together as a single lease component. The Company also elected the short-term lease recognition exemption for all classes of lease assets with an original term of twelve months or less. As part of the transition, the Company elected a package of practical expedients allowing it to carry forward historical accounting for any expired or existing contracts that are or contain lease contracts, including classification of such contracts and initial direct costs associated with them.
The adoption of Topic 842 on January 1, 2019 resulted in the recognition of RoU Assets for operating leases of $177,597 and operating lease liabilities of $173,863. The adoption of Topic 842 did not have an impact on the condensed consolidated statement of income and comprehensive income, condensed consolidated statement of changes in stockholders’ equity or the condensed consolidated statement of cash flows.
See Note 6 “Leases” in the condensed consolidated interim financial statements for additional information regarding leases.
Pending Accounting Standards
From time to time, new accounting pronouncements are issued by the FASB or other standards-setting bodies that the Company will adopt according to the various timetables the FASB specifies. Unless otherwise discussed below, the Company believes the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial position, results of operations and cash flows upon adoption.
Measurement of Credit Losses on Financial Instruments — Effective January 1, 2020, the Company will be required to adopt the amended guidance of FASB ASC Topic 326, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, (with early adoption permitted effective January 1, 2019.) The amendments in this update change how companies measure and recognize credit impairment for many financial assets. The new expected credit loss model will require companies to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets (including trade receivables) that are in the scope of the update. The update also made amendments to the current impairment model for held-to-maturity and available-for-sale debt securities and certain guarantees. Entities are required to adopt the standard using a modified-retrospective approach through a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The Company has not yet completed its assessment of the impact of the new guidance on its consolidated financial statements and expects to adopt the standard on January 1, 2020.
2.
ACQUISITIONS
Continuum — On March 15, 2018, the Company acquired all of the outstanding equity of Continuum Innovation LLC together with its subsidiaries (“Continuum”) to enhance the Company’s consulting capabilities as well as its digital and service design practices. Continuum, headquartered in Boston with offices located in Milan, Seoul, and Shanghai, focuses on four practices including strategy, physical and digital design, technology and its Made Real Lab. The acquisition of Continuum added approximately 125 design consultants to the Company’s headcount.
In connection with the Continuum acquisition, the Company paid $52,515 of cash. Furthermore, subject to attainment of specified performance targets in the 12 months after the acquisition, the Company will make a cash earnout payment with a maximum amount payable of $3,135. The Company recorded $2,400 related to this earnout payment as contingent consideration as of the acquisition date. During the third quarter of 2018, the Company recorded a $900 reduction to the fair value of the contingent consideration.
Think — On November 1, 2018, the Company acquired all of the equity interests of Think Limited (“Think”), a digital transformation agency headquartered in London, UK. This acquisition is intended to strengthen EPAM’s digital and organizational consulting capabilities in the UK and Western European markets and enhance the Company’s global product and design offerings.
In connection with the Think acquisition, the Company paid $26,254 of cash. Furthermore, subject to attainment of specified performance targets in the 12 months after the acquisition, the Company will make a cash earnout payment with a maximum amount payable of $8,156. The Company recorded $5,990 related to this earnout payment as contingent consideration as of the acquisition date.

9


The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the dates of acquisition as updated for any changes as of March 31, 2019:
 
Continuum
 
Think
 
As of
March 15, 2018
 
As of
November 1, 2018
Cash and cash equivalents
$
2,251

 
$
2,344

Accounts receivable
6,676

 
2,259

Unbilled revenues
2,463

 
284

Prepaid and other current assets
936

 
609

Goodwill
26,617

 
22,482

Intangible assets
14,450

 
6,882

Property and equipment and other noncurrent assets
8,902

 
642

Total assets acquired
$
62,295

 
$
35,502

Accounts payable, accrued expenses and other current liabilities
$
2,745

 
$
2,205

Due to employees
1,001

 
13

Long-term debt
3,220

 

Other noncurrent liabilities
490

 
1,040

Total liabilities assumed
$
7,456

 
$
3,258

Net assets acquired
$
54,839

 
$
32,244

During the first quarter of 2019, there were no adjustments recorded related to the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.
During the first quarter of 2019, the Company finalized the fair value of the assets acquired and liabilities assumed in the acquisition of Continuum. The Company adjusted initially recognized intangible assets and their useful lives as well as recognized an additional intangible asset in the form of a favorable lease and removed a noncurrent liability associated with an initially recognized unfavorable lease. The Company also finalized a working capital adjustment that resulted in cash collection in the amount of $76 reducing the original amount of the net assets acquired. These adjustments and a revaluation of contingent consideration resulted in a corresponding decrease to the originally recognized value of acquired goodwill.
For Think, estimated fair values of the assets acquired and liabilities assumed remain 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.
As of March 31, 2019, the following table presents the estimated fair values and useful lives of intangible assets acquired from Continuum and Think:
 
Continuum
 
Think
 
Weighted Average Useful Life (in years)
 
Amount
 
Weighted Average Useful Life (in years)
 
Amount
Customer relationships
6.5
 
$
5,800

 
7
 
$
6,117

Favorable lease
11.2
 
5,500

 
 

Contract royalties
8
 
1,900

 
 

Trade names
5
 
1,250

 
5
 
765

Total
 
 
$
14,450

 
 
 
$
6,882

In connection with the adoption of Topic 842, effective January 1, 2019, the Company reclassified the favorable lease intangible asset to Operating lease right-of-use assets.
The goodwill recognized as a result of the acquisitions is attributable primarily to strategic and synergistic opportunities related to the consulting and design businesses, the assembled workforces acquired and other factors. The goodwill acquired as a result of the Continuum acquisition is expected to be deductible for income tax purposes while the goodwill acquired as a result of the Think acquisition is not expected to be deductible for income tax purposes.

10


Revenues generated by Continuum and Think totaled $6,754 and $3,832, respectively during the three months ended March 31, 2019. Pro forma results of operations have not been presented because the effect of the Continuum and Think acquisition on the Company’s condensed consolidated financial statements was not material individually or in the aggregate.
3.
GOODWILL
Goodwill by reportable segment was as follows:
 
North America
 
Europe
 
Total
Balance as of January 1, 2019
$
103,542

 
$
63,290

 
$
166,832

Effect of net foreign currency exchange rate changes

 
875

 
875

Balance as of March 31, 2019
$
103,542

 
$
64,165

 
$
167,707

There were no accumulated impairment losses in the North America or Europe reportable segments as of March 31, 2019 or December 31, 2018.
4.
FAIR VALUE MEASUREMENTS
The Company carries certain assets and liabilities at fair value on a recurring basis on its 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, 2019 and December 31, 2018:
 
 
As of March 31, 2019
 
 
Balance
 
Level 1
 
Level 2
 
Level 3
Foreign exchange derivative assets
 
$
1,067

 
$

 
$
1,067

 
$

Total assets measured at fair value on a recurring basis
 
$
1,067

 
$

 
$
1,067

 
$

 
 
 
 
 
 
 
 
 
Foreign exchange derivative liabilities
 
$
362

 
$

 
$
362

 
$

Contingent consideration
 
7,625

 

 

 
7,625

Total liabilities measured at fair value on a recurring basis
 
$
7,987

 
$

 
$
362

 
$
7,625

 
 
As of December 31, 2018
 
 
Balance
 
Level 1
 
Level 2
 
Level 3
Foreign exchange derivative assets
 
$
181

 
$

 
$
181

 
$

Total assets measured at fair value on a recurring basis
 
$
181

 
$

 
$
181

 
$

 
 
 
 
 
 
 
 
 
Foreign exchange derivative liabilities
 
$
3,475

 
$

 
$
3,475

 
$

Contingent consideration
 
7,468

 

 

 
7,468

Total liabilities measured at fair value on a recurring basis
 
$
10,943

 
$

 
$
3,475

 
$
7,468

The Level 2 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 5 “Derivative Financial Instruments” for further information regarding the Company’s derivative financial instruments.

11


As of March 31, 2019, contingent consideration included amounts payable in cash in connection with the acquisitions of Continuum and Think (Note 2 “Acquisitions”). The fair value of the contingent consideration 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. 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 formulas and performance targets specified in the purchase agreements and adjusted those estimates to reflect the probability of their achievement. Those estimated future payments were then discounted to present value using a rate based on the weighted-average cost of capital of guideline companies. Although there is significant judgment involved, the Company believes its estimates and assumptions are reasonable. 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 consolidated statement of income and comprehensive income.
A reconciliation of the beginning and ending balances of acquisition-related contractual contingent liabilities using significant unobservable inputs (Level 3) for the three months ended March 31, 2019 is as follows:
 
 
Amount
Contractual contingent liabilities as of January 1, 2019
 
$
7,468

Effect of net foreign currency exchange rate changes
 
157

Contractual contingent liabilities at March 31, 2019
 
$
7,625

Estimates of fair value of financial instruments not carried at fair value on a recurring basis on the Company’s 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 Company uses the following methods to estimate the fair values of its financial instruments:
for financial instruments that have quoted market prices, those quoted prices are used to estimate fair value;
for financial instruments for which no quoted market prices are available, fair value is estimated using information obtained from independent third parties, or by discounting the expected cash flows using an estimated current market interest rate for the financial instrument;
for financial instruments for which no quoted market prices are available and that have no defined maturity, have a remaining maturity of 360 days or less, or reprice frequently to a market rate, the Company assumes that the fair value of these instruments approximates their reported value, after taking into consideration any applicable credit risk.
The generally short duration of certain of the Company’s assets and liabilities results in a significant number of assets and liabilities for which fair value equals or closely approximates the amount recorded on the Company’s consolidated balance sheets. The Company’s financial assets and liabilities that are not carried at fair value on a recurring basis on the Company’s consolidated balance sheets are as follows:
cash and cash equivalents;
restricted cash and time deposits;
employee loans;
long-term debt (Note 7 “Long-Term Debt”).
The housing loans are measured using the Level 3 inputs within the fair value hierarchy under FASB ASC Topic 820, Fair Value Measurement because they are valued using significant unobservable inputs. The fair value of employee housing loans is estimated using information on the rates of return that market participants in Belarus would require when investing in unsecured U.S. dollar-denominated government bonds with similar maturities (a “risk-free rate”), after taking into consideration any applicable credit and liquidity risk.

12


The following tables present the reported amounts and estimated fair values of the financial assets and liabilities for which disclosure of fair value is required, as they would be categorized within the fair value hierarchy, as of the dates indicated:
 
 
 
 
 
 
Fair Value Hierarchy
 
 
Balance
 
Estimated Fair Value
 
Level 1
 
Level 2
 
Level 3
March 31, 2019
 
 
 
 
 
 
 
 
 
 
Financial Assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
762,529

 
$
762,529

 
$
762,529

 
$

 
$

Restricted cash
 
$
1,149

 
$
1,149

 
$
1,149

 
$

 
$

Employee loans
 
$
3,121

 
$
3,121

 
$

 
$

 
$
3,121

Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
Borrowings under the 2017 Credit Facility
 
$
25,017

 
$
25,017

 
$

 
$
25,017

 
$

 
 
 
 
 
 
Fair Value Hierarchy
 
 
Balance
 
Estimated Fair Value
 
Level 1
 
Level 2
 
Level 3
December 31, 2018
 
 
 
 
 
 
 
 
 
 
Financial Assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
770,560

 
$
770,560

 
$
770,560

 
$

 
$

Restricted cash
 
$
1,151

 
$
1,151

 
$
1,151

 
$

 
$

Employee loans
 
$
3,525

 
$
3,525

 
$

 
$

 
$
3,525

Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
Borrowings under the 2017 Credit Facility
 
$
25,020

 
$
25,020

 
$

 
$
25,020

 
$

5.
DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the company uses derivative financial instruments to manage the risk of fluctuations in foreign currency exchange rates. The Company has a hedging program whereby it enters 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 and Indian rupee transactions. As of March 31, 2019, all of the Company’s foreign exchange forward contracts were designated as hedges and there is no financial collateral (including cash collateral) required to be posted by the Company related to the foreign exchange forward contracts.
The fair value of derivative instruments on the Company’s consolidated balance sheets as of March 31, 2019 and December 31, 2018 were as follows:
 
 
 
 
As of March 31, 2019
 
As of December 31, 2018
 
 
Balance Sheet Classification
 
Asset Derivatives
 
Liability Derivatives
 
Asset Derivatives
 
Liability Derivatives
Foreign exchange forward contracts -
Designated as hedging instruments
 
Prepaid and other current assets
 
$
1,067

 
 
 
$
181

 
 
 
 
Accrued expenses and other current liabilities
 
 
 
$
362

 
 
 
$
3,475

The Company records changes in the fair value of its cash flow hedges in accumulated other comprehensive loss in the consolidated balance sheet until the forecasted transaction occurs. When the forecasted transaction occurs, the Company reclassifies the related gain or loss on the cash flow hedge to cost of revenues (exclusive of depreciation and amortization). In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, the Company reclassifies the gain or loss on the related cash flow hedge into income. If the Company does not elect hedge accounting, or the contract does not qualify for hedge accounting treatment, the changes in fair value from period to period are recorded in income.

13


The changes in the fair value of foreign currency derivative instruments in our unaudited condensed consolidated statements of income and comprehensive income for the three months ended March 31, 2019 and 2018 were as follows:
 
Three Months Ended 
 March 31,
 
2019
 
2018
Foreign exchange forward contracts - Designated as hedging instruments:
 
 
 
Change in fair value recognized in accumulated other comprehensive loss 
$
3,999

 
$
90

Net loss reclassified from accumulated other comprehensive loss into cost of revenues (exclusive of depreciation and amortization)
$
(452
)
 
$

Foreign exchange forward contracts - Not designated as hedging instruments:
 
 
 
Net gain recognized in foreign exchange loss
$

 
$
44

6. LEASES
The Company leases office space, corporate apartments, office equipment, and vehicles. The Company leases office space in order to minimize risks associated with ownership such as fluctuations in real estate prices. The leasing of corporate apartments is used to minimize costs associated with business trips of Company personnel. Many of the Company’s leases contain charges for common area maintenance or other miscellaneous expenses that are variable. Due to this variability, the cash flows associated with these charges are not included in the minimum lease payments used in determining the RoU Assets and associated lease liabilities. The Company subleases a portion of its office space to third parties. The Company leases office equipment for those assets requiring extensive customer support including maintenance, repairs and replacement of obsolete parts. The Company leases vehicles in certain locations primarily as an employee benefit.
The Company’s leases have remaining lease terms ranging from 9 days to 11.8 years. Certain lease agreements, mainly for office space, include options to extend or terminate the lease before the expiration date. The Company considers such options when determining the lease term when it is reasonably certain that the Company will exercise that option.
A portion of the leases for office space are subject to annual changes in base rent rates. Changes in such rates are treated as variable lease payments and are recognized in the period in which the obligation of such payments is incurred. The Company does not remeasure its lease liabilities as a result of these annual changes in base rent rates.
During the three months ended March 31, 2019, the components of lease expense were as follows:
 
 
Income Statement Classification
 
Three Months Ended
March 31, 2019
Operating lease cost
 
Selling, general and administrative expenses
 
$
13,719

Variable lease cost
 
Selling, general and administrative expenses
 
2,097

Short-term lease cost
 
Selling, general and administrative expenses
 
898

Sublease income
 
Interest and other income, net
 
(455
)
Total lease cost
 
 
 
$
16,259

Supplemental cash flow information related to leases was as follows:
 
 
Three Months Ended
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows used for operating leases
 
$
14,696

Right-of-use assets obtained in exchange for lease obligations:
 
 
Operating leases
 
$
12,825

Non-cash net decrease due to lease modifications:
 
 
Operating lease right-of-use assets
 
$
5,174

Operating lease liabilities
 
$
5,106


14


Weighted average lease terms and discount rates as of March 31, 2019:
 
 
As of
March 31, 2019
Weighted average remaining lease term, in years:
 
 
Operating leases
 
5.9

Weighted average discount rate:
 
 
Operating leases
 
4.0
%
As of March 31, 2019, operating lease liabilities will mature as follows:
Year ending December 31,
 
Lease Payments
2019 (excluding three months ended March 31, 2019)
 
$
34,903

2020
 
39,415

2021
 
31,324

2022
 
20,199

2023
 
15,911

Thereafter
 
48,096

Total lease payments
 
189,848

Less: imputed interest
 
(22,057
)
Total
 
$
167,791

There were no lease agreements that contained material restrictive covenants or material residual value guarantees as of March 31, 2019. There were no lease agreements signed with related parties as of March 31, 2019.
As of March 31, 2019, the Company had committed to payments of $57,716 related to operating lease agreements that had not yet commenced. These operating leases will commence during various dates during 2019 through 2020 with lease terms ranging from 1.3 to 12.0 years. The Company did not have any material finance lease agreements that had not yet commenced.
7.
LONG-TERM DEBT
Revolving Line of Credit — On May 24, 2017, the Company entered into an unsecured credit facility (the “2017 Credit Facility”), as may be amended from time to time, with PNC Bank, National Association; PNC Capital Markets LLC; Citibank N.A.; Wells Fargo Bank, National Association; Fifth Third Bank and Santander Bank, N.A. (collectively the “Lenders”). The 2017 Credit Facility provides for a borrowing capacity of $300,000, with potential to increase the credit facility up to $400,000 if certain conditions are met. The 2017 Credit Facility matures on May 24, 2022.
Borrowings under the 2017 Credit Facility may be denominated in U.S. dollars or up to a maximum of $100,000 equivalent in British pounds sterling, Canadian dollars, euros or Swiss francs and other currencies as may be approved by the administrative agent and the Lenders. Borrowings under the 2017 Credit Facility bear interest at either a base rate or Euro-rate plus a margin based on the Company’s leverage ratio. The base rate is equal to the highest of (a) the Overnight Bank Funding Rate, plus 0.5%, (b) the Prime Rate, and (c) the Daily LIBOR Rate, plus 1.0%. As of March 31, 2019, the Company’s outstanding borrowings are subject to a LIBOR-based interest rate which resets regularly at issuance, based on lending terms.
The 2017 Credit Facility includes customary business and financial covenants that may restrict the Company’s ability to make or pay dividends (other than certain intercompany dividends) if a potential or an actual event of default has occurred or would be triggered. As of March 31, 2019, the Company was in compliance with all covenants contained in the 2017 Credit Facility.

15


The following table presents the outstanding debt and borrowing capacity of the Company under the 2017 Credit Facility:
 
As of  
 March 31, 
 2019
 
As of  
 December 31, 
 2018
Outstanding debt
$
25,000

 
$
25,000

Interest rate
3.5
%
 
3.5
%
Irrevocable standby letters of credit
$
374

 
$
382

Available borrowing capacity
$
274,626

 
$
274,618

Current maximum borrowing capacity
$
300,000

 
$
300,000

8.
REVENUES
Disaggregation of Revenues
The Company’s revenues are sourced from four geographic markets: North America, Europe, CIS and APAC. CIS includes revenues from customers in Belarus, Kazakhstan, Russia and Ukraine and APAC, which stands for Asia Pacific, includes revenues from customers in Southeast Asia and Australia. The following tables present the disaggregation of the Company’s revenues by customer location, including a reconciliation of the disaggregated revenues with the reportable segments (Note 13 “Segment Information”) for the periods indicated:
 
Three Months Ended March 31, 2019
 
Reportable Segments
 
 
 
 
 
 
 
North America
 
Europe
 
Russia
 
Total Segment Revenues
 
Other Income Included in Segment Revenues
 
Consolidated Revenues
Customer Locations
 
 
 
 
 
 
 
 
 
 
 
North America
$
303,745

 
$
12,891

 
$
16

 
$
316,652

 
$

 
$
316,652

Europe
4,747

 
168,767

 
141

 
173,655

 
(147
)
 
173,508

CIS
1,739

 
13

 
16,423

 
18,175

 
(1
)
 
18,174

APAC
458

 
12,552

 

 
13,010

 
(11
)
 
12,999

        Revenues
$
310,689

 
$
194,223

 
$
16,580

 
$
521,492

 
$
(159
)
 
$
521,333

 
Three Months Ended March 31, 2018
 
Reportable Segments
 
 
 
 
 
 
 
North America
 
Europe
 
Russia
 
Total Segment Revenues
 
Other Income Included in Segment Revenues
 
Consolidated Revenues
Customer Locations
 
 
 
 
 
 
 
 
 
 
 
North America
$
226,070

 
$
13,361

 
$
15

 
$
239,446

 
$

 
$
239,446

Europe
2,740

 
150,480

 
42

 
153,262

 
(177
)
 
153,085

CIS
2,003

 
63

 
19,714

 
21,780

 

 
21,780

APAC
383

 
9,439

 
15

 
9,837

 

 
9,837

        Revenues
$
231,196

 
$
173,343

 
$
19,786

 
$
424,325

 
$
(177
)
 
$
424,148


16


The following tables present the disaggregation of the Company’s revenues by industry vertical, including a reconciliation of the disaggregated revenues with the reportable segments (Note 13 “Segment Information”) for the periods indicated:
 
Three Months Ended March 31, 2019
 
Reportable Segments
 
 
 
 
 
 
 
North America
 
Europe
 
Russia
 
Total Segment Revenues
 
Other Income Included in Segment Revenues
 
Consolidated Revenues
Industry Verticals
 
 
 
 
 
 
 
 
 
 
 
Financial Services
$
38,394

 
$
61,988

 
$
13,032

 
$
113,414

 
$
(153
)
 
$
113,261

Travel & Consumer
47,000

 
55,202

 
2,124

 
104,326

 

 
104,326

Software & Hi-Tech
79,121

 
20,370

 
440

 
99,931

 

 
99,931

Business Information & Media

62,361

 
32,536

 
140

 
95,037

 
(5
)
 
95,032

Life Sciences & Healthcare
50,156

 
4,556

 
62

 
54,774

 

 
54,774

Emerging Verticals
33,657

 
19,571

 
782

 
54,010

 
(1
)
 
54,009

        Revenues
$
310,689

 
$
194,223

 
$
16,580

 
$
521,492

 
$
(159
)
 
$
521,333

 
Three Months Ended March 31, 2018
 
Reportable Segments
 
 
 
 
 
 
 
North America
 
Europe
 
Russia
 
Total Segment Revenues
 
Other Income Included in Segment Revenues
 
Consolidated Revenues
Industry Verticals
 
 
 
 
 
 
 
 
 
 
 
Financial Services
$
21,956

 
$
65,818

 
$
16,225

 
$
103,999

 
$
(177
)
 
$
103,822

Travel & Consumer
40,687

 
49,454

 
1,673

 
91,814

 

 
91,814

Software & Hi-Tech
60,564

 
20,294

 
764

 
81,622

 

 
81,622

Business Information & Media

57,337

 
18,870

 

 
76,207

 

 
76,207

Life Sciences & Healthcare
27,467

 
4,823

 

 
32,290

 

 
32,290

Emerging Verticals
23,185

 
14,084

 
1,124

 
38,393

 

 
38,393

        Revenues
$
231,196

 
$
173,343

 
$
19,786

 
$
424,325

 
$
(177
)
 
$
424,148

The following tables present the disaggregation of the Company’s revenues by contract type including a reconciliation of the disaggregated revenues with the Company’s reportable segments (Note 13 “Segment Information”) for the periods indicated:
 
Three Months Ended March 31, 2019
 
Reportable Segments
 
 
 
 
 
 
 
North America
 
Europe
 
Russia
 
Total Segment Revenues
 
Other Income Included in Segment Revenues
 
Consolidated Revenues
Contract Types
 
 
 
 
 
 
 
 
 
 
 
Time-and-material
$
284,725

 
$
168,213

 
$
11,272

 
$
464,210

 
$

 
$
464,210

Fixed-price
24,740

 
25,246

 
5,287

 
55,273

 

 
55,273

Licensing
836

 
398

 
6

 
1,240

 

 
1,240

Other revenues
388

 
366

 
15

 
769

 
(159
)
 
610

        Revenues
$
310,689

 
$
194,223

 
$
16,580

 
$
521,492

 
$
(159
)
 
$
521,333


17


 
Three Months Ended March 31, 2018
 
Reportable Segments
 
 
 
 
 
 
 
North America
 
Europe
 
Russia
 
Total Segment Revenues
 
Other Income Included in Segment Revenues
 
Consolidated Revenues
Contract Types
 
 
 
 
 
 
 
 
 
 
 
Time-and-material
$
214,316

 
$
159,466

 
$
10,096

 
$
383,878

 
$

 
$
383,878

Fixed-price
15,992

 
12,953

 
9,672

 
38,617

 

 
38,617

Licensing
662

 
619

 
10

 
1,291

 

 
1,291

Other revenues
226

 
305

 
8

 
539

 
(177
)
 
362

        Revenues
$
231,196

 
$
173,343

 
$
19,786

 
$
424,325

 
$
(177
)
 
$
424,148


Timing of Revenue Recognition
The following tables present the timing of revenue recognition for the periods indicated:
 
Three Months Ended March 31, 2019
 
Reportable Segments
 
 
 
 
 
 
 
North America
 
Europe
 
Russia
 
Total Segment Revenues
 
Other Income Included in Segment Revenues
 
Consolidated Revenues
Timing of Revenue Recognition
 
 
 
 
 
 
 
 
 
 
 
Transferred at a point of time
$
404

 
$
205

 
$
1

 
$
610

 
$
(159
)
 
$
451

Transferred over time
310,285

 
194,018

 
16,579

 
520,882

 

 
520,882

        Revenues
$
310,689

 
$
194,223

 
$
16,580

 
$
521,492

 
$
(159
)
 
$
521,333

 
Three Months Ended March 31, 2018
 
Reportable Segments
 
 
 
 
 
 
 
North America
 
Europe
 
Russia
 
Total Segment Revenues
 
Other Income Included in Segment Revenues
 
Consolidated Revenues
Timing of Revenue Recognition
 
 
 
 
 
 
 
 
 
 
 
Transferred at a point of time
$
344

 
$
428

 
$
10

 
$
782

 
$
(177
)
 
$
605

Transferred over time
230,852

 
172,915

 
19,776

 
423,543

 

 
423,543

        Revenues
$
231,196

 
$
173,343

 
$
19,786

 
$
424,325

 
$
(177
)
 
$
424,148

During the three months ended March 31, 2019 and March 31, 2018, the Company recognized $1,704 and $5,404 of revenues, respectively, from performance obligations satisfied in previous periods.
The following table includes the estimated revenues expected to be recognized in the future related to performance obligations that are partially or fully unsatisfied as of March 31, 2019. The Company applies a practical expedient and does not disclose the value of unsatisfied performance obligations for contracts that (i) have an original expected duration of one year or less and (ii) contracts for which it recognizes revenues at the amount to which it has the right to invoice for services provided:
 
Less than 1 year
 
1 Year
 
2 Years
 
3 Years
 
Total
Contract Type
 
 
 
 
 
 
 
 
 
Fixed-price
$
8,962

 
$
530

 
$
310

 
$

 
$
9,802

The Company applies a practical expedient and does not disclose the amount of the transaction price allocated to the remaining performance obligations nor provide an explanation of when the Company expects to recognize that amount as revenue for certain variable consideration.

18


Contract Balances
The following table provides information on the classification of contract assets and liabilities in the condensed consolidated balance sheets:
 
As of  
 March 31, 
 2019
 
As of  
 December 31, 
 2018
Contract assets included in Unbilled revenues
$
17,827

 
$
13,522

Contract liabilities included in Accrued expenses and other current liabilities
$
8,696

 
$
4,558

Contract liabilities included in Other noncurrent liabilities
$
146

 
$
224

Contract assets included in unbilled revenues are recorded when services have been provided but the Company does not have an unconditional right to receive consideration. The Company recognizes an impairment loss when the contract carrying amount is greater than the remaining consideration receivable, less directly related costs to be incurred. Contract assets have increased from December 31, 2018 primarily due to new contracts entered into in 2019 where the Company’s right to bill is contingent upon achievement of contractual milestones.
Contract liabilities comprise amounts collected from the Company’s customers for revenues not yet earned. Such amounts are anticipated to be recorded as revenues when services are performed in subsequent periods. Contract liabilities have increased from December 31, 2018 primarily due to the seasonal increase in customer prepayments during the three months ended March 31, 2019. During the three months ended March 31, 2019, the Company recognized $3,051 of revenues that were included in Accrued expenses and other current liabilities at December 31, 2018.
9.
INCOME TAXES
In determining its interim provision for/(benefit from) income taxes, the Company uses an estimated annual effective tax rate, which is based on expected annual profit before tax, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter.
The Company’s worldwide effective tax rates for the three months ended March 31, 2019 and 2018 were 5.4% and (34.5)%, respectively.
The Company’s effective tax rates benefited from excess tax benefits recorded upon vesting or exercise of stock-based awards of $11,513 and $4,690 during the three months ended March 31, 2019 and 2018, respectively.
The interim benefit from income taxes in the three months ended March 31, 2018 was favorably impacted by the recognition of $24,634 of net deferred tax assets resulting from the Company’s decision to change the tax status and to classify most of its foreign subsidiaries as disregarded for U.S. income tax purposes. This was partially offset by a provisional $2,157 increase in income taxes payable associated with the one-time transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. income tax imposed by the Tax Cuts and Jobs Act (“U.S. Tax Act”).
10.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, unvested restricted stock and unvested equity-settled RSUs. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method.

19


The following table sets forth the computation of basic and diluted earnings per share of common stock as follows:
 
Three Months Ended 
 March 31,
 
2019
 
2018
Numerator for basic and diluted earnings per share:
 
 
 
Net income
$
60,754

 
$
64,418

Numerator for basic and diluted earnings per share
$
60,754

 
$
64,418

 
 
 
 
Denominator:
 

 
 

Weighted average common shares for basic earnings per share
54,245,133

 
53,078,529

Net effect of dilutive stock options, restricted stock units and restricted stock awards
2,991,294

 
3,162,010

Weighted average common shares for diluted earnings per share
57,236,427

 
56,240,539

 
 
 
 
Net income per share:
 

 
 

Basic
$
1.12

 
$
1.21

Diluted
$
1.06

 
$
1.15

The number of shares underlying equity–based awards that were excluded from the calculation of diluted earnings per share as their effect would be anti–dilutive was 26,203 and 53,230 during the three months ended March 31, 2019 and 2018, respectively.
11.
COMMITMENTS AND CONTINGENCIES
Indemnification Obligations  In the normal course of business, the Company is a party to a variety of agreements under which it may be obligated to indemnify the other party for certain matters. These obligations typically arise in contracts where the Company customarily agrees to hold the other party harmless against losses arising from a breach of representations or covenants for certain matters such as title to assets, intellectual property rights and data privacy matters associated with certain arrangements. The duration of these indemnifications varies, and in certain cases, is indefinite.
The Company is unable to reasonably estimate the maximum potential amount of future payments under these or similar agreements due to the unique facts and circumstances of each agreement and the fact that certain indemnifications provide for no limitation to the maximum potential future payments under the indemnification. Management is not aware of any such matters that would have a material effect on the condensed consolidated financial statements of the Company.
Litigation — From time to time, the Company is involved in litigation, claims or other contingencies arising in the ordinary course of business. The Company accrues a liability when a loss is considered probable and the amount can be reasonably estimated. When a material loss contingency is reasonably possible but not probable, the Company does not record a liability, but instead discloses the nature and the amount of the claim, and an estimate of the loss or range of loss, if such an estimate can be made. Legal fees are expensed as incurred. In the opinion of management, the outcome of any existing claims and legal or regulatory proceedings, if decided adversely, is not expected to have a material effect on the Company’s business, financial condition, results of operations or cash flows.
12.
STOCK-BASED COMPENSATION
The following table summarizes the components of stock-based compensation expense recognized in the Company’s condensed consolidated statements of income and comprehensive income for the periods indicated:
 
Three Months Ended 
 March 31,
 
2019
 
2018
Cost of revenues (exclusive of depreciation and amortization)
$
12,781

 
$
8,289

Selling, general and administrative expenses
9,075

 
8,307

Total
$
21,856

 
$
16,596


20


Stock Options
Stock option activity under the Company’s plans is set forth below:
 
Number of
Options 
 
Weighted Average
Exercise Price 
 
Aggregate
Intrinsic Value 
 
Weighted Average
Remaining Contractual Term (in years)
Options outstanding at January 1, 2019
4,082,944

 
$
44.54

 
 
 
 
Options granted
131,849

 
$
169.13

 
 
 
 
Options modified
17,871

 
$
163.55

 
 
 
 
Options exercised
(323,464
)
 
$
36.76

 
 
 
 
Options forfeited/cancelled
(2,624
)
 
$
61.38

 
 
 
 
Options outstanding at March 31, 2019
3,906,576

 
$
49.92

 
$
465,698

 
5.4
 
 
 
 
 
 
 
 
Options vested and exercisable at March 31, 2019
3,422,907

 
$
41.11

 
$
438,196

 
5.0
Options expected to vest at March 31, 2019
445,175

 
$
111.17

 
$
25,804

 
8.6
As of March 31, 2019, $17,097 of total remaining unrecognized stock-based compensation cost related to unvested stock options, net of estimated forfeitures, is expected to be recognized over the weighted-average remaining requisite service period of 3.1 years.
Restricted Stock and Restricted Stock Units
Service-Based Awards
The table below summarizes activity related to the Company’s equity-classified and liability-classified service-based awards for the three months ended March 31, 2019.
 
Equity-Classified
 Restricted Stock
 
Equity-Classified
Equity-Settled
Restricted Stock Units
 
Liability-Classified
Cash-Settled
Restricted Stock Units
 
Number of
Shares 
 
Weighted Average Grant Date
Fair Value Per Share 
 
Number of
Shares 
 
Weighted Average Grant Date
Fair Value Per Share 
 
Number of
Shares 
 
Weighted Average Grant Date
Fair Value Per Share 
Unvested service-based awards outstanding at January 1, 2019
793

 
$
63.10

 
797,903

 
$
92.13

 
302,967

 
$
83.99

Awards granted

 
$

 
242,783

 
$
168.95

 
48,632

 
$
169.13

Awards modified

 
$

 
6,897

 
$
170.74

 
668

 
$
168.36

Awards vested

 
$

 
(242,414
)
 
$
85.38

 
(102,902
)
 
$
80.55

Awards forfeited/cancelled

 
$

 
(9,769
)
 
$
91.07

 
(1,653
)
 
$
86.79

Unvested service-based awards outstanding at March 31, 2019
793

 
$
63.10

 
795,400

 
$
118.33

 
247,712

 
$
102.34

As of March 31, 2019, $32 of total remaining unrecognized stock-based compensation cost related to service-based equity-classified restricted stock is expected to be recognized over the weighted-average remaining requisite service period of 1.3 years.
As of March 31, 2019, $80,152 of total remaining unrecognized stock-based compensation cost related to service-based equity-classified restricted stock units (“RSUs”), net of estimated forfeitures, is expected to be recognized over the weighted-average remaining requisite service period of 3.1 years.
As of March 31, 2019, $33,762 of total remaining unrecognized stock-based compensation cost related to service-based liability-classified RSUs, net of estimated forfeitures, is expected to be recognized over the weighted-average remaining requisite service period of 2.5 years.

21


The liability associated with the service-based liability-classified RSUs as of March 31, 2019 and December 31, 2018, was $9,673 and $9,920, respectively, and was classified as Deferred compensation due to employees in the condensed consolidated balance sheets.
Performance-Based Awards
The table below summarizes activity related to the Company’s equity-classified performance-based awards for the three months ended March 31, 2019.
 
Equity-Classified
Equity-Settled
Restricted Stock Units
 
Number of
Shares 
 
Weighted Average Grant Date
Fair Value Per Share 
Unvested performance-based awards outstanding at January 1, 2019
29,592

 
$
121.75

Awards modified
(29,592
)
 
$