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Syneos Health, Inc. - Quarter Report: 2020 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 

FORM 10-Q 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2020

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: 001-36730

 

SYNEOS HEALTH, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

27-3403111

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

1030 Sync Street, Morrisville, North Carolina 27560-5468

(Address of principal executive offices and Zip Code)

(919) 876-9300

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Stock, $0.01 par value per share

SYNH

The Nasdaq Stock Market LLC

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

 

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

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

As of October 26, 2020, there were approximately 103,997,108 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

 

SYNEOS HEALTH, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

Page

 

 

 

Item 1.

Financial Statements

3

 

 

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 (unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019 (unaudited)

4

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 (unaudited)

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited)

6

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2020 and 2019 (unaudited)

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

45

 

 

 

Item 4.

Controls and Procedures

45

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

46

 

 

 

Item 1A.

Risk Factors

46

 

 

 

Item 2.

Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

49

 

 

 

Item 5.

Other Information

50

 

 

 

Item 6.

Exhibits

51

 

 

 

 

Signature

52

 

 

2


Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.

 

SYNEOS HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(in thousands, except per share data)

 

Revenue

 

$

1,099,004

 

 

$

1,177,028

 

 

$

3,275,758

 

 

$

3,462,861

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct costs (exclusive of depreciation and amortization)

 

 

820,228

 

 

 

913,674

 

 

 

2,550,134

 

 

 

2,718,005

 

Selling, general, and administrative expenses

 

 

111,096

 

 

 

109,864

 

 

 

334,042

 

 

 

333,860

 

Restructuring and other costs

 

 

6,523

 

 

 

13,456

 

 

 

23,414

 

 

 

39,751

 

Transaction and integration-related expenses

 

 

6,955

 

 

 

10,454

 

 

 

17,900

 

 

 

34,766

 

Depreciation

 

 

17,301

 

 

 

18,844

 

 

 

51,830

 

 

 

57,663

 

Amortization

 

 

38,147

 

 

 

41,293

 

 

 

115,746

 

 

 

124,423

 

Total operating expenses

 

 

1,000,250

 

 

 

1,107,585

 

 

 

3,093,066

 

 

 

3,308,468

 

Income from operations

 

 

98,754

 

 

 

69,443

 

 

 

182,692

 

 

 

154,393

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other expense (income), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

20,442

 

 

 

30,181

 

 

 

68,126

 

 

 

95,439

 

Loss on extinguishment of debt

 

 

346

 

 

 

 

 

 

346

 

 

 

4,355

 

Other expense (income), net

 

 

10,596

 

 

 

(30,713

)

 

 

(2,573

)

 

 

(29,365

)

Total other expense (income), net

 

 

31,384

 

 

 

(532

)

 

 

65,899

 

 

 

70,429

 

Income before provision for income taxes

 

 

67,370

 

 

 

69,975

 

 

 

116,793

 

 

 

83,964

 

Income tax expense

 

 

3,954

 

 

 

11,055

 

 

 

15,892

 

 

 

43,756

 

Net income

 

$

63,416

 

 

$

58,920

 

 

$

100,901

 

 

$

40,208

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.61

 

 

$

0.57

 

 

$

0.97

 

 

$

0.39

 

Diluted

 

$

0.60

 

 

$

0.56

 

 

$

0.96

 

 

$

0.38

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

104,277

 

 

 

103,594

 

 

 

104,247

 

 

 

103,553

 

Diluted

 

 

105,588

 

 

 

105,021

 

 

 

105,483

 

 

 

104,881

 

 

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

3


Table of Contents

 

SYNEOS HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(in thousands)

 

Net income

 

$

63,416

 

 

$

58,920

 

 

$

100,901

 

 

$

40,208

 

Unrealized gain (loss) on derivative instruments, net of income tax expense (benefit) of $1,384; $0; $(5,203); and $(332), respectively

 

 

5,219

 

 

 

74

 

 

 

(6,642

)

 

 

(13,104

)

Foreign currency translation adjustments, net of income tax expense of $0 for all periods

 

 

33,832

 

 

 

(34,421

)

 

 

(12,086

)

 

 

(25,736

)

Comprehensive income

 

$

102,467

 

 

$

24,573

 

 

$

82,173

 

 

$

1,368

 

 

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

4


Table of Contents

 

SYNEOS HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

September 30, 2020

 

 

December 31, 2019

 

 

 

(in thousands, except par value)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash, cash equivalents, and restricted cash

 

$

248,896

 

 

$

163,689

 

Accounts receivable and unbilled services, net

 

 

1,264,502

 

 

 

1,303,641

 

Prepaid expenses and other current assets

 

 

82,315

 

 

 

94,834

 

Total current assets

 

 

1,595,713

 

 

 

1,562,164

 

Property and equipment, net

 

 

196,258

 

 

 

203,926

 

Operating lease right-of-use assets

 

 

213,056

 

 

 

218,531

 

Goodwill

 

 

4,343,354

 

 

 

4,350,380

 

Intangible assets, net

 

 

882,485

 

 

 

973,081

 

Deferred income tax assets

 

 

18,256

 

 

 

37,012

 

Other long-term assets

 

 

135,609

 

 

 

108,701

 

Total assets

 

$

7,384,731

 

 

$

7,453,795

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

104,936

 

 

$

136,686

 

Accrued expenses

 

 

583,015

 

 

 

568,911

 

Deferred revenue

 

 

710,170

 

 

 

696,907

 

Current portion of operating lease obligations

 

 

39,568

 

 

 

38,055

 

Current portion of finance lease obligations

 

 

16,689

 

 

 

17,777

 

Current portion of long-term debt

 

 

56,875

 

 

 

58,125

 

Total current liabilities

 

 

1,511,253

 

 

 

1,516,461

 

Long-term debt

 

 

2,465,358

 

 

 

2,550,395

 

Operating lease long-term obligations

 

 

209,809

 

 

 

218,343

 

Finance lease long-term obligations

 

 

28,300

 

 

 

36,914

 

Deferred income tax liabilities

 

 

7,931

 

 

 

11,101

 

Other long-term liabilities

 

 

65,602

 

 

 

90,927

 

Total liabilities

 

 

4,288,253

 

 

 

4,424,141

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 30,000 shares authorized, 0 shares issued and outstanding at September 30, 2020 and December 31, 2019

 

 

 

 

 

 

Common stock, $0.01 par value; 600,000 shares authorized, 103,994 and 103,866 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

 

 

1,040

 

 

 

1,039

 

Additional paid-in capital

 

 

3,454,381

 

 

 

3,441,471

 

Accumulated other comprehensive loss, net of taxes

 

 

(90,321

)

 

 

(71,593

)

Accumulated deficit

 

 

(268,622

)

 

 

(341,263

)

Total shareholders’ equity

 

 

3,096,478

 

 

 

3,029,654

 

Total liabilities and shareholders’ equity

 

$

7,384,731

 

 

$

7,453,795

 

 

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

5


Table of Contents

 

SYNEOS HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

100,901

 

 

$

40,208

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

167,576

 

 

 

182,086

 

Share-based compensation

 

 

47,266

 

 

 

40,864

 

Provision for doubtful accounts

 

 

1,357

 

 

 

948

 

Provision for deferred income taxes

 

 

21,306

 

 

 

13,091

 

Foreign currency transaction gains

 

 

(7,747

)

 

 

(6,090

)

Fair value adjustment of contingent obligations

 

 

(3,791

)

 

 

(571

)

Loss on extinguishment of debt

 

 

346

 

 

 

4,355

 

Other non-cash items

 

 

1,881

 

 

 

1,177

 

Changes in operating assets and liabilities, net of effect of business combinations:

 

 

 

 

 

 

 

 

Accounts receivable, unbilled services, and deferred revenue

 

 

15,542

 

 

 

(110,083

)

Accounts payable and accrued expenses

 

 

(2,226

)

 

 

12,337

 

Other assets and liabilities

 

 

(31,244

)

 

 

(20,389

)

Net cash provided by operating activities

 

 

311,167

 

 

 

157,933

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(38,493

)

 

 

(50,645

)

Investments in unconsolidated affiliates

 

 

(6,859

)

 

 

(9,227

)

Net cash used in investing activities

 

 

(45,352

)

 

 

(59,872

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt, net of discount

 

 

 

 

 

183,195

 

Payments of debt financing costs

 

 

(300

)

 

 

(2,593

)

Repayments of long-term debt

 

 

(113,750

)

 

 

(370,936

)

Proceeds from accounts receivable financing agreement

 

 

31,600

 

 

 

128,000

 

Repayments of accounts receivable financing agreement

 

 

(6,600

)

 

 

(22,400

)

Proceeds from revolving line of credit

 

 

300,000

 

 

 

 

Repayments of revolving line of credit

 

 

(300,000

)

 

 

 

Payments of contingent consideration related to business combinations

 

 

(26,634

)

 

 

(178

)

Payments of finance leases

 

 

(12,735

)

 

 

(9,429

)

Payments for repurchases of common stock

 

 

(62,029

)

 

 

(56,716

)

Proceeds from exercises of stock options

 

 

22,973

 

 

 

39,675

 

Payments related to tax withholdings for share-based compensation

 

 

(20,701

)

 

 

(12,503

)

Net cash used in financing activities

 

 

(188,176

)

 

 

(123,885

)

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

 

 

7,568

 

 

 

(904

)

Net change in cash, cash equivalents, and restricted cash

 

 

85,207

 

 

 

(26,728

)

Cash, cash equivalents, and restricted cash - beginning of period

 

 

163,689

 

 

 

155,932

 

Cash, cash equivalents, and restricted cash - end of period

 

$

248,896

 

 

$

129,204

 

 

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

6


Table of Contents

 

SYNEOS HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Shareholders’ equity, beginning balance

 

$

2,999,684

 

 

$

2,823,899

 

 

$

3,029,654

 

 

$

2,856,144

 

Impact from adoption of ASU 2016-13

 

 

 

 

 

 

 

 

(2,771

)

 

 

 

Shareholders’ equity, adjusted beginning balance

 

 

2,999,684

 

 

 

2,823,899

 

 

 

3,026,883

 

 

 

2,856,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

1,042

 

 

 

1,035

 

 

 

1,039

 

 

 

1,034

 

Repurchases of common stock

 

 

(5

)

 

 

(1

)

 

 

(11

)

 

 

(13

)

Issuances of common stock

 

 

3

 

 

 

4

 

 

 

12

 

 

 

17

 

Ending balance

 

 

1,040

 

 

 

1,038

 

 

 

1,040

 

 

 

1,038

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional paid-in capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

3,446,852

 

 

 

3,404,389

 

 

 

3,441,471

 

 

 

3,402,638

 

Repurchases of common stock

 

 

(16,795

)

 

 

(4,648

)

 

 

(36,529

)

 

 

(43,515

)

Issuances of common stock

 

 

9,231

 

 

 

13,282

 

 

 

2,173

 

 

 

25,839

 

Share-based compensation

 

 

15,093

 

 

 

12,803

 

 

 

47,266

 

 

 

40,864

 

Ending balance

 

 

3,454,381

 

 

 

3,425,826

 

 

 

3,454,381

 

 

 

3,425,826

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

(129,372

)

 

 

(92,688

)

 

 

(71,593

)

 

 

(88,195

)

Unrealized gain (loss) on derivative instruments, net of taxes

 

 

5,219

 

 

 

74

 

 

 

(6,642

)

 

 

(13,104

)

Foreign currency translation adjustment, net of taxes

 

 

33,832

 

 

 

(34,421

)

 

 

(12,086

)

 

 

(25,736

)

Ending balance

 

 

(90,321

)

 

 

(127,035

)

 

 

(90,321

)

 

 

(127,035

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

(318,838

)

 

 

(488,837

)

 

 

(341,263

)

 

 

(459,333

)

Impact from adoption of ASU 2016-13

 

 

 

 

 

 

 

 

(2,771

)

 

 

 

Adjusted beginning balance

 

 

(318,838

)

 

 

(488,837

)

 

 

(344,034

)

 

 

(459,333

)

Repurchases of common stock

 

 

(13,200

)

 

 

(2,396

)

 

 

(25,489

)

 

 

(13,188

)

Net income

 

 

63,416

 

 

 

58,920

 

 

 

100,901

 

 

 

40,208

 

Ending balance

 

 

(268,622

)

 

 

(432,313

)

 

 

(268,622

)

 

 

(432,313

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity, ending balance

 

$

3,096,478

 

 

$

2,867,516

 

 

$

3,096,478

 

 

$

2,867,516

 

 

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

7


Table of Contents

 

SYNEOS HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of Presentation and Changes in Significant Accounting Policies

Nature of Operations

Syneos Health, Inc. (the “Company”) is a global provider of end-to-end biopharmaceutical outsourcing solutions. The Company operates under two reportable segments, Clinical Solutions and Commercial Solutions, and derives its revenue through a suite of services designed to enhance its customers’ ability to successfully develop, launch, and market their products. The Company offers its solutions on both a standalone and integrated basis with biopharmaceutical development and commercialization services ranging from Phase I-IV clinical trial services to services associated with the commercialization of biopharmaceutical products. The Company’s customers include small, mid-sized, and large companies in the pharmaceutical, biotechnology, and medical device industries.

Unaudited Interim Financial Information

The Company prepared the accompanying unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. The significant accounting policies followed by the Company for interim financial reporting are consistent with the accounting policies followed for annual financial reporting.

The unaudited condensed consolidated financial statements, in management’s opinion, include all adjustments of a normal recurring nature necessary for a fair presentation. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission on February 20, 2020. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the full year ending December 31, 2020 or any other future period. The unaudited condensed consolidated balance sheet at December 31, 2019 is derived from the amounts in the audited consolidated balance sheet included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

COVID-19 Pandemic

On March 11, 2020, the World Health Organization designated the outbreak of the novel strain of coronavirus that causes the disease known as COVID-19 as a global pandemic. Governments and businesses around the world have taken unprecedented actions to mitigate the spread of COVID-19, including, but not limited to, shelter-in-place orders, quarantines, significant restrictions on travel, social distancing practices as well as restrictions that prohibit many employees from going to work. The Company experienced significant impacts to its business and results of operations for the three and nine months ended September 30, 2020 due to COVID-19. While certain governments have eased restrictions, the pandemic continues to be disruptive to the Company’s business. The extent to which COVID-19 impacts the Company’s future results will depend on future developments. The pandemic and associated economic impacts could continue to significantly impact the Company’s future financial condition, results of operations and cash flows.

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Recently Adopted Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13 (“ASU 2016-13”), Financial Instruments - Credit Losses (Topic 326) to modify the impairment model to utilize an expected loss methodology in place of the previous incurred loss methodology and require consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company adopted ASU 2016-13 on January 1, 2020, and recorded the impact of the adoption through a cumulative-effect adjustment to accumulated deficit. Results for reporting periods beginning on January 1, 2020 are presented under ASU No. 2016-13, while prior period amounts continue to be reported and disclosed in accordance with the Company’s historical accounting treatment. Adoption of the new standard resulted in the recording of additional allowance for doubtful accounts of approximately $2.8 million as of January 1, 2020.

In March 2020, the FASB issued ASU No. 2020-04 (“ASU 2020-04”), Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients related to reference rate reform activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with the Company’s past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable.

2. Financial Statement Details

Cash, Cash Equivalents, and Restricted Cash

Certain of the Company’s subsidiaries participate in a notional cash pooling arrangement to manage global liquidity requirements. The participants combine their cash balances in pooling accounts at the same financial institution with the ability to offset bank overdrafts of one participant against positive cash account balances held by another participant. The net cash balance related to this pooling arrangement is included in cash, cash equivalents, and restricted cash in the unaudited condensed consolidated balance sheets. During the nine months ended September 30, 2020, the Company made a non-cash investment of $27.3 million to acquire certain intellectual property rights from a customer in lieu of cash payment for services rendered.

Accounts Receivable and Unbilled Services, net

Accounts receivable and unbilled services (including contract assets), net of allowance for doubtful accounts, consisted of the following (in thousands):

 

 

 

September 30, 2020

 

 

December 31, 2019

 

Accounts receivable billed

 

$

663,065

 

 

$

787,652

 

Unbilled services (including contract assets)

 

 

609,596

 

 

 

521,370

 

Less: Allowance for doubtful accounts

 

 

(8,159

)

 

 

(5,381

)

Accounts receivable and unbilled services, net

 

$

1,264,502

 

 

$

1,303,641

 

 

Unbilled services is comprised of approximately equal parts of unbilled accounts receivables and contract assets. Unbilled accounts receivables arise when the right to bill is contingent solely on the passage of time (e.g., in the following month) and contract assets arise in instances where the right to bill is associated with a contingency (e.g., achievement of a milestone).

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Accounts Receivable Factoring Arrangement

The Company has an accounts receivable factoring agreement to sell certain eligible unsecured trade accounts receivable, without recourse, to an unrelated third-party financial institution for cash. For the nine months ended September 30, 2020 and 2019, the Company factored $113.1 million and $162.0 million, respectively, of trade accounts receivable on a non-recourse basis and received $112.7 million and $160.8 million, respectively, in cash proceeds from the sale. The fees associated with these transactions were insignificant.

Goodwill

The changes in the carrying amount of goodwill by segment for the nine months ended September 30, 2020 were as follows (in thousands):

 

 

 

Clinical

Solutions (a)

 

 

Commercial

Solutions (b)

 

 

Total

 

Balance as of January 1, 2020

 

$

2,784,952

 

 

$

1,565,428

 

 

$

4,350,380

 

Impact of foreign currency translation

 

 

(6,858

)

 

 

(168

)

 

 

(7,026

)

Balance as of September 30, 2020

 

$

2,778,094

 

 

$

1,565,260

 

 

$

4,343,354

 

 

(a) Accumulated impairment losses of $8.1 million associated with the Clinical Solutions segment were recorded prior to 2016 and related to the former Phase I Services segment, now a component of the Clinical Solutions segment. No impairment of goodwill was recorded for the nine months ended September 30, 2020.

(b) Accumulated impairment losses of $8.0 million associated with the Commercial Solutions segment were recorded prior to 2015 and related to the former Global Consulting segment, now a component of the Commercial Solutions segment. No impairment of goodwill was recorded for the nine months ended September 30, 2020.

As of September 30, 2020, the Company evaluated whether a triggering event had occurred because of the broad impacts of the COVID-19 pandemic. The COVID-19 pandemic negatively impacted the Company’s results of operations during the three and nine months ended September 30, 2020 and the Company expects the pandemic to continue to negatively impact its full year 2020 results of operations. However, at this time, the Company does not believe there has been a significant change in the long-term fundamentals of its business. The Company has concluded a triggering event did not occur, and, as a result, no interim impairment testing was required during the three months ended September 30, 2020. The Company will continue to evaluate the impacts of the COVID-19 pandemic on its business.

Transaction and Integration-Related Expenses

Transaction and integration-related expenses consisted of the following (in thousands):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Professional fees

 

$

5,656

 

 

$

7,108

 

 

$

18,217

 

 

$

26,632

 

Debt modification and related expenses

 

 

4

 

 

 

1,582

 

 

 

75

 

 

 

5,555

 

Integration and personnel retention-related costs

 

 

1,143

 

 

 

1,394

 

 

 

3,399

 

 

 

3,150

 

Fair value adjustments to contingent obligations

 

 

152

 

 

 

370

 

 

 

(3,791

)

 

 

(571

)

Total transaction and integration-related expenses

 

$

6,955

 

 

$

10,454

 

 

$

17,900

 

 

$

34,766

 

 

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Accumulated Other Comprehensive Loss, Net of Taxes

Accumulated other comprehensive loss, net of taxes, consisted of the following (in thousands):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Beginning balance

 

$

(129,372

)

 

$

(92,688

)

 

$

(71,593

)

 

$

(88,195

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

(102,675

)

 

 

(72,270

)

 

 

(56,757

)

 

 

(80,955

)

Other comprehensive income (loss) before reclassifications

 

 

33,832

 

 

 

(34,421

)

 

 

(12,086

)

 

 

(25,736

)

Ending balance

 

 

(68,843

)

 

 

(106,691

)

 

 

(68,843

)

 

 

(106,691

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

(26,697

)

 

 

(20,418

)

 

 

(14,836

)

 

 

(7,240

)

Other comprehensive income (loss) before reclassifications

 

 

1

 

 

 

(1,105

)

 

 

(17,970

)

 

 

(15,351

)

Reclassification adjustments

 

 

5,218

 

 

 

1,179

 

 

 

11,328

 

 

 

2,247

 

Ending balance

 

 

(21,478

)

 

 

(20,344

)

 

 

(21,478

)

 

 

(20,344

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive loss, net of taxes

 

$

(90,321

)

 

$

(127,035

)

 

$

(90,321

)

 

$

(127,035

)

 

Changes in accumulated other comprehensive loss consisted of the following (in thousands):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Foreign currency translation adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of taxes

 

$

33,832

 

 

$

(34,421

)

 

$

(12,086

)

 

$

(25,736

)

Unrealized loss on derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss during period, before taxes

 

 

(478

)

 

 

(1,144

)

 

 

(27,137

)

 

 

(15,760

)

Income tax benefit

 

 

(479

)

 

 

(39

)

 

 

(9,167

)

 

 

(409

)

Unrealized gain (loss) during period, net of taxes

 

 

1

 

 

 

(1,105

)

 

 

(17,970

)

 

 

(15,351

)

Reclassification adjustment, before taxes

 

 

7,081

 

 

 

1,218

 

 

 

15,292

 

 

 

2,324

 

Income tax expense

 

 

1,863

 

 

 

39

 

 

 

3,964

 

 

 

77

 

Reclassification adjustment, net of taxes

 

 

5,218

 

 

 

1,179

 

 

 

11,328

 

 

 

2,247

 

Total unrealized gain (loss) on derivative instruments, net of taxes

 

 

5,219

 

 

 

74

 

 

 

(6,642

)

 

 

(13,104

)

Total other comprehensive income (loss), net of taxes

 

$

39,051

 

 

$

(34,347

)

 

$

(18,728

)

 

$

(38,840

)

Other Expense (Income), Net

Other expense (income), net consisted of the following (in thousands):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net realized foreign currency loss (gain)

 

$

4,823

 

 

$

(26,762

)

 

$

2,772

 

 

$

(25,631

)

Net unrealized foreign currency loss (gain)

 

 

4,794

 

 

 

(5,131

)

 

 

(7,747

)

 

 

(6,090

)

Other, net

 

 

979

 

 

 

1,180

 

 

 

2,402

 

 

 

2,356

 

Total other expense (income), net

 

$

10,596

 

 

$

(30,713

)

 

$

(2,573

)

 

$

(29,365

)

 

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3. Long-Term Debt Obligations

The Company’s debt obligations consisted of the following (in thousands):

 

 

 

September 30, 2020

 

 

December 31, 2019

 

Term Loan A due March 2024

 

$

1,471,250

 

 

$

1,550,000

 

Term Loan B due August 2024

 

 

760,564

 

 

 

795,564

 

Accounts receivable financing agreement due October 2022

 

 

300,000

 

 

 

275,000

 

Total debt obligations

 

 

2,531,814

 

 

 

2,620,564

 

Less: Term loan original issuance discount

 

 

(3,883

)

 

 

(4,928

)

Less: Unamortized deferred issuance costs

 

 

(5,698

)

 

 

(7,116

)

Less: Current portion of debt

 

 

(56,875

)

 

 

(58,125

)

Total debt obligations, non-current portion

 

$

2,465,358

 

 

$

2,550,395

 

 

The Company is party to a credit agreement (as amended, the “Credit Agreement”) that includes a $1.55 billion Term Loan A facility that matures on March 26, 2024 (“Term Loan A”), a $1.60 billion Term Loan B facility that matures on August 1, 2024 (“Term Loan B”), and a $600.0 million revolving credit facility (the “Revolver”) that matures on March 26, 2024.

During the three months ended September 30, 2020, the Company made $40.0 million and $35.0 million of voluntary prepayments against Term Loan A and Term Loan B, respectively, and repaid the outstanding $150.0 million balance on the Revolver. The Term Loan A prepayments were applied to the mandatory principal payments due October 2020 and January 2021, and to a partial principal payment for April 2021. Additionally, during the three and nine months ended September 30, 2020, the Company made $19.4 million and $38.8 million of mandatory principal payments towards Term Loan A, respectively. As a result of previous voluntary prepayments, the Company is not required to make a mandatory payment against the Term Loan B principal balance until maturity in August 2024.

Revolver and Letters of Credit

The Revolver includes letters of credit (“LOCs”) with a sublimit of $150.0 million. As of September 30, 2020, there were $18.6 million of LOCs outstanding, leaving $581.4 million of available borrowings under the Revolver, including $131.4 million available for LOCs.

The lease agreement for the corporate headquarters in Morrisville, North Carolina includes a provision that may require the Company to issue LOCs in certain amounts to the landlord based on the debt rating of the Company issued by Moody’s Investors Service (or other nationally-recognized debt rating agency). As of September 30, 2020 (and through the date of this filing), the Company’s debt rating was such that no LOCs were required. Any required LOCs could be issued under the Company’s Revolver, and, if issued under the Revolver, would reduce its available borrowing capacity by the same amount accordingly.

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Accounts Receivable Financing Agreement

On September 25, 2020, the Company amended its accounts receivable financing agreement to increase the amount it can borrow from $275.0 million to $300.0 million and to extend the maturity to October 2022, unless terminated earlier pursuant to its terms, and drew down the additional $25.0 million. Under this agreement, certain of the Company’s consolidated subsidiaries sell accounts receivable and unbilled services (including contract assets) balances to a wholly-owned, bankruptcy-remote special purpose entity (“SPE”), which is the borrower under the facility. The facility is without recourse to the Company or any subsidiaries of the Company other than the SPE, other than with respect to limited indemnity obligations of the selling entities and the servicer of the receivables in respect of the character of the receivables sold by them and the performance of the servicing duties. The Company has guaranteed the performance of these obligations. The available borrowing capacity varies according to the levels of the Company’s eligible accounts receivable and unbilled services (including contract assets) sold to the SPE. Loans under this agreement will accrue interest at a reserve-adjusted LIBOR rate or a base rate equal to the higher of the overnight bank funding rate plus 0.50% and the applicable lender’s prime rate. The Company may prepay loans upon one business day’s prior notice and may terminate or reduce the facility limit of the accounts receivable financing agreement with 15 days’ prior notice.

As of September 30, 2020, the Company had $300.0 million of outstanding borrowings under the accounts receivable financing agreement, which are recorded in long-term debt on the accompanying unaudited condensed consolidated balance sheet. There was no remaining borrowing capacity available under this agreement as of September 30, 2020.

As of September 30, 2020, the contractual maturities of the Company’s debt obligations (excluding leases) were as follows (in thousands):

 

 

 

Principal

 

 

Interest (a)

 

2020

 

$

 

 

$

11,581

 

2021

 

 

85,937

 

 

 

45,234

 

2022

 

 

445,313

 

 

 

41,985

 

2023

 

 

155,000

 

 

 

36,233

 

2024

 

 

1,845,564

 

 

 

12,050

 

Less: Deferred issuance costs

 

 

(5,698

)

 

 

 

 

Less: Term loan original issuance discount

 

 

(3,883

)

 

 

 

 

Total

 

$

2,522,233

 

 

$

147,083

 

 

(a) The interest payments on long-term debt in the above table are based on interest rates in effect as of September 30, 2020.

4. Derivatives

The Company has entered into various interest rate swaps to mitigate its exposure to changes in interest rates on its term loans.

In May 2016, the Company entered into interest rate swaps that had an initial notional value of $300.0 million and became effective on June 30, 2016. A portion of the interest rate swaps expired on June 30, 2018, and the remainder expired on May 14, 2020.

In June 2018, the Company entered into an interest rate swap with multiple counterparties that had an initial aggregate notional value of $1.01 billion, an effective date of December 31, 2018, and will expire on June 30, 2021. As of September 30, 2020, the notional value of this interest rate swap was $917.1 million.

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In March 2020, the Company entered into interest rate swaps with multiple counterparties. The interest rate swaps had an initial aggregate notional value of $549.2 million, increasing to $1.42 billion in 2021, an effective date of March 31, 2020, and will expire on March 31, 2023. As of September 30, 2020, the notional value of these interest rate swaps was $573.5 million.

The fair values of the Company’s derivative financial instruments and the line items on the accompanying condensed consolidated balance sheets to which they were recorded were as follows (in thousands):

 

 

Balance Sheet Classification

 

September 30, 2020

 

 

December 31, 2019

 

Interest rate swaps - current

 

Prepaid expenses and other current assets

 

$

 

 

$

155

 

Fair value of derivative assets

 

$

 

 

$

155

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps - current

 

Accrued expenses

 

$

22,165

 

 

$

11,358

 

Interest rate swaps - non-current

 

Other long-term liabilities

 

 

6,979

 

 

 

6,095

 

Fair value of derivative liabilities

 

$

29,144

 

 

$

17,453

 

 

5. Fair Value Measurements

Assets and Liabilities Carried at Fair Value

As of September 30, 2020 and December 31, 2019, the Company’s financial assets and liabilities carried at fair value included cash and cash equivalents, restricted cash, trading securities, accounts receivable, unbilled services (including contract assets), accounts payable, accrued expenses, deferred revenue, contingent obligations, liabilities under the accounts receivable financing agreement, and derivative instruments.

The fair values of cash and cash equivalents, restricted cash, accounts receivable, unbilled services (including contract assets), accounts payable, accrued expenses, deferred revenue, and the liabilities under the accounts receivable financing agreement approximate their respective carrying amounts because of the liquidity and short-term nature of these financial instruments.

Financial Instruments Subject to Recurring Fair Value Measurements

As of September 30, 2020, the fair values of the major classes of the Company’s assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Investments

Measured

at Net

Asset Value

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities (a)

 

$

20,864

 

 

$

 

 

$

 

 

$

 

 

$

20,864

 

Partnership interest (b)

 

 

 

 

 

 

 

 

 

 

 

7,336

 

 

 

7,336

 

Total assets

 

$

20,864

 

 

$

 

 

$

 

 

$

7,336

 

 

$

28,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments (c)

 

$

 

 

$

29,144

 

 

$

 

 

$

 

 

$

29,144

 

Contingent obligations related to business combinations (d)

 

 

 

 

 

 

 

 

6,641

 

 

 

 

 

 

6,641

 

Total liabilities

 

$

 

 

$

29,144

 

 

$

6,641

 

 

$

 

 

$

35,785

 

 

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As of December 31, 2019, the fair values of the major classes of the Company’s assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Investments

Measured

at Net

Asset Value

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities (a)

 

$

21,552

 

 

$

 

 

$

 

 

$

 

 

$

21,552

 

Partnership interest (b)

 

 

 

 

 

 

 

 

 

 

 

7,226

 

 

 

7,226

 

Derivative instruments (c)

 

 

 

 

 

155

 

 

 

 

 

 

 

 

 

155

 

Total assets

 

$

21,552

 

 

$

155

 

 

$

 

 

$

7,226

 

 

$

28,933

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments (c)

 

$

 

 

$

17,453

 

 

$

 

 

$

 

 

$

17,453

 

Contingent obligations related to business combinations (d)

 

 

 

 

 

 

 

 

37,324

 

 

 

 

 

 

37,324

 

Total liabilities

 

$

 

 

$

17,453

 

 

$

37,324

 

 

$

 

 

$

54,777

 

 

(a) Represents fair value of investments in mutual funds based on quoted market prices that are used to fund the liability associated with the Company’s deferred compensation plan.

(b) The Company has committed to invest $21.5 million as a limited partner in two private equity funds. The private equity funds invest in opportunities in the healthcare and life sciences industry. As of September 30, 2020, the Company’s remaining unfunded commitment in the private equity funds was $14.4 million. The Company holds minor ownership interests (less than 3%) in each of the private equity funds and has determined that it does not exercise significant influence over the private equity funds’ operating and finance activities. As the private equity funds do not have readily determinable fair values, the Company has estimated the fair values using each fund’s Net Asset Value, the amount by which the value of all assets exceeds all debt and liabilities, in accordance with ASC Topic 946, Financial Services – Investment Companies.

(c) Represents the fair value of interest rate swap arrangements (see “Note 4 – Derivatives” for further information).

(d) Represents the fair value of contingent consideration obligations related to business combinations. The fair values of these liabilities are determined based on the Company’s best estimate of the probable timing and amount of settlement.

The following table presents a reconciliation of changes in the carrying amount of contingent obligations classified as Level 3 for the nine months ended September 30, 2020 (in thousands):

 

Balance as of December 31, 2019

 

$

37,324

 

Additions

 

 

 

Changes in fair value recognized in earnings

 

 

(4,049

)

Payments

 

 

(26,634

)

Balance as of September 30, 2020

 

$

6,641

 

 

During the nine months ended September 30, 2020, there were no transfers of assets or liabilities between Level 1, Level 2, or Level 3 fair value measurements.

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Financial Instruments Subject to Non-Recurring Fair Value Measurements

Certain assets, including goodwill and identifiable intangible assets, are carried on the accompanying condensed consolidated balance sheets at cost and, subsequent to initial recognition, are measured at fair value on a non-recurring basis when certain identified events or changes in circumstances that may have a significant adverse effect on the carrying values of these assets occur. These assets are classified as Level 3 fair value measurements within the fair value hierarchy. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate a triggering event has occurred. Intangible assets are tested for impairment upon the occurrence of certain triggering events. As of September 30, 2020 and December 31, 2019, assets carried on the condensed consolidated balance sheets and not remeasured to fair value on a recurring basis totaled $5.23 billion and $5.32 billion, respectively.

Fair Value Disclosures for Financial Instruments Not Carried at Fair Value

The estimated fair values of the outstanding term loans are determined based on quoted market prices. As these liabilities are not actively traded, they are classified as Level 2 fair value measurements. The estimated fair values of the Company’s outstanding term loans were as follows (in thousands):

 

 

 

September 30, 2020

 

 

December 31, 2019

 

 

 

Carrying

Value (a)

 

 

Estimated

Fair Value

 

 

Carrying

Value (a)

 

 

Estimated

Fair Value

 

Term Loan A due March 2024

 

$

1,467,892

 

 

$

1,452,859

 

 

$

1,545,721

 

 

$

1,550,000

 

Term Loan B due August 2024

 

 

760,039

 

 

 

751,536

 

 

 

794,915

 

 

 

795,564

 

 

(a) The carrying value of the term loan debt is shown net of original issue debt discounts.

6. Restructuring and Other Costs

Merger-Related Restructuring

During 2017, in connection with the merger (the “Merger”) with Double Eagle Parent, Inc. (“inVentiv”), the parent company of inVentiv Health, Inc., the Company established a restructuring plan to eliminate redundant positions and reduce its facility footprint worldwide. The Company expects to continue the ongoing evaluations of its workforce and facilities infrastructure needs in an effort to optimize its resources. During the nine months ended September 30, 2020, the Company recognized approximately $1.0 million of employee severance and benefits related costs and $1.2 million of facility closure and lease termination costs. The Company expects to continue to incur costs related to restructuring of its operations in order to achieve targeted synergies. However, the timing and the amount of these costs depend on various factors, including, but not limited to, identifying and realizing synergy opportunities and executing the integration of its combined operations.

Non Merger-Related Restructuring and Other Costs

During the nine months ended September 30, 2020, the Company recognized approximately $20.2 million of costs related to employee severance and benefits, $0.4 million of facility closure and lease termination costs, and $0.6 million of other costs in its continued efforts to optimize its resources worldwide. The costs incurred during the three months ended September 30, 2020 were primarily related to the Company’s cost management strategies in response to the COVID-19 pandemic as well as the Company’s ForwardBound initiative.

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Accrued Restructuring Liabilities

The following table summarizes activity related to the liabilities associated with restructuring and other costs during the nine months ended September 30, 2020 (in thousands):

 

 

 

Employee

Severance

Costs

 

 

Other

Costs

 

 

Total

 

Balance as of December 31, 2019

 

$

5,728

 

 

$

22

 

 

$

5,750

 

Expenses incurred (a)

 

 

21,214

 

 

 

595

 

 

 

21,809

 

Cash payments made

 

 

(22,245

)

 

 

(617

)

 

 

(22,862

)

Balance as of September 30, 2020

 

$

4,697

 

 

$

 

 

$

4,697

 

 

(a) The amount of expenses incurred for the nine months ended September 30, 2020 excludes $1.6 million of facility lease closure and lease termination costs that are reflected as a reduction of operating lease right-of-use assets on the unaudited condensed consolidated balance sheet under ASC 842.

The Company expects the employee severance costs accrued as of September 30, 2020 will be paid within the next twelve months. Certain facility costs will be paid over the remaining lease terms of the exited facilities that range from 2020 through 2027. Liabilities associated with these costs are included in accrued expenses and other long-term liabilities on the accompanying condensed consolidated balance sheets.

7. Shareholders’ Equity

Shares Outstanding

Shares of common stock outstanding were as follows (in thousands):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Common stock shares, beginning balance

 

 

104,236

 

 

 

103,460

 

 

 

103,866

 

 

 

103,372

 

Repurchases of common stock

 

 

(506

)

 

 

(141

)

 

 

(1,106

)

 

 

(1,323

)

Issuances of common stock

 

 

264

 

 

 

474

 

 

 

1,234

 

 

 

1,744

 

Common stock shares, ending balance

 

 

103,994

 

 

 

103,793

 

 

 

103,994

 

 

 

103,793

 

 

Stock Repurchase Program

On February 26, 2018, the Company’s Board of Directors (the “Board”) authorized the repurchase of up to an aggregate of $250.0 million of the Company’s common stock to be executed from time to time in open market transactions effected through a broker at prevailing market prices, in block trades, or through privately negotiated transactions (the “stock repurchase program”). On December 5, 2019, the Board increased the dollar amount authorized under the stock repurchase program to up to an aggregate of $300.0 million and extended the term of the stock repurchase program to December 31, 2020.

The stock repurchase program does not obligate the Company to repurchase any particular amount of the Company’s common stock and may be modified, extended, suspended, or discontinued at any time. The timing and amount of repurchases will be determined by the Company’s management based on a variety of factors such as the market price of the Company’s common stock, the Company’s corporate requirements for cash, and overall market conditions. The stock repurchase program is subject to applicable legal requirements, including federal and state securities laws and applicable Nasdaq rules.

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The Company may also repurchase shares of its common stock pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, which permits shares of the Company’s common stock to be repurchased when the Company might otherwise be precluded from doing so by law.

During the three months ended September 30, 2020, the Company repurchased 506,244 shares of its Class A common stock in a private transaction under the stock repurchase program described above, for a total purchase price of approximately $30.0 million.

The following table sets forth repurchase activity under the stock repurchase program from inception through September 30, 2020:

 

 

 

Total number of

shares purchased

 

 

Average price

paid per share

 

 

Approximate

value of

shares purchased

(in thousands)

 

March 2018

 

 

948,100

 

 

$

39.55

 

 

$

37,493

 

April 2018

 

 

1,024,400

 

 

 

36.60

 

 

 

37,492

 

January 2019

 

 

552,100

 

 

 

39.16

 

 

 

21,623

 

February 2019

 

 

120,600

 

 

 

41.40

 

 

 

4,993

 

June 2019

 

 

509,100

 

 

 

45.29

 

 

 

23,055

 

August 2019

 

 

141,100

 

 

 

49.93

 

 

 

7,045

 

March 2020

 

 

600,000

 

 

 

53.38

 

 

 

32,029

 

September 2020

 

 

506,244

 

 

 

59.26

 

 

 

30,000

 

Total

 

 

4,401,644

 

 

 

 

 

 

$

193,730

 

 

The Company immediately retired all of the repurchased common stock and charged the par value of the shares to common stock. The excess of the repurchase price over the par value was applied on a pro rata basis against additional paid-in capital, with the remainder applied to accumulated deficit.

As of September 30, 2020, the Company had remaining authorization to repurchase up to approximately $106.3 million of shares of its common stock under the stock repurchase program.

8. Earnings Per Share

The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations (in thousands, except per share data):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

63,416

 

 

$

58,920

 

 

$

100,901

 

 

$

40,208

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

 

104,277

 

 

 

103,594

 

 

 

104,247

 

 

 

103,553

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and other awards under deferred share-based compensation programs

 

 

1,311

 

 

 

1,427

 

 

 

1,236

 

 

 

1,328

 

Diluted weighted average common shares outstanding

 

 

105,588

 

 

 

105,021

 

 

 

105,483

 

 

 

104,881

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.61

 

 

$

0.57

 

 

$

0.97

 

 

$

0.39

 

Diluted

 

$

0.60

 

 

$

0.56

 

 

$

0.96

 

 

$

0.38

 

 

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Potential common shares outstanding that are considered anti-dilutive are excluded from the computation of diluted earnings per share. Potential common shares related to stock options and other awards under share-based compensation programs may be determined to be anti-dilutive based on the application of the treasury stock method. Potential common shares are also considered anti-dilutive in periods when the Company incurs a net loss.

The number of potential shares outstanding that were anti-dilutive and therefore excluded from the computation of diluted earnings per share, weighted for the portion of the period they were outstanding, were 177,330 and 220,269 for the three months ended September 30, 2020 and 2019, respectively, and 713,269 and 295,706 for the nine months ended September 30, 2020 and 2019, respectively.

9. Income Taxes

Income Tax Expense

For the three and nine months ended September 30, 2020, the Company recorded income tax expense of $4.0 million and $15.9 million, respectively, compared to pre-tax income of $67.4 million and $116.8 million, respectively. Income tax expense for the three and nine months ended September 30, 2020 included a discrete tax benefit of $18.8 million and $24.3 million, respectively, primarily related to the recognition of United States federal unrecognized tax benefits, excess tax benefits from share-based compensation, and the tax benefit from foreign tax credits claimed on amended returns filed during the year. The effective tax rate for the three and nine months ended September 30, 2020, excluding discrete items, varied from the United States federal statutory income tax rate of 21.0% primarily due to foreign income inclusions such as the Global Intangible Low-Taxed Income provisions (“GILTI”), state and local taxes on United States income, and research and general business credits.

For the three and nine months ended September 30, 2019, the Company recorded income tax expense of $11.1 million and $43.8 million, respectively, compared to pre-tax income of $70.0 million and $84.0 million, respectively. Income tax expense for the three and nine months ended September 30, 2019 included a discrete tax benefit of $0.1 million and discrete tax expense of $10.3 million, respectively, primarily related to a reduction in deferred tax assets associated with the closing of a Canadian business unit and prior year adjustments. The effective tax rate for the three and nine months ended September 30, 2019, excluding discrete items, varied from the United States federal statutory income tax rate of 21.0% primarily due to base erosion and anti-abuse minimum tax (“BEAT”), foreign income inclusions such as GILTI, and a valuation allowance change on domestic deferred tax assets.

BEAT

The Tax Cuts and Jobs Act of 2017 introduced a tax on United States corporations that derive tax benefits from deductible payments to non-United States affiliates called BEAT. BEAT applies when base eroding payments are in excess of three percent of the Company’s total deductible payments and also where BEAT exceeds regular United States taxable income, similar to an alternate minimum tax. Changes to the Company’s contractual arrangements, operating structure, and/or final regulations that modify the application of this provision could have a significant impact on the Company’s tax provision.

The Company does not anticipate its base eroding payments to exceed the three percent threshold of its deductible payments in 2020; therefore, the Company has not recorded any associated BEAT liability for the three and nine months ended September 30, 2020.

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Unrecognized Tax Benefits

The Company’s gross unrecognized tax benefits, exclusive of associated interest and penalties, were $8.4 million and $23.2 million as of September 30, 2020 and December 31, 2019, respectively. The decrease of $14.8 million was primarily due to statute lapses related to domestic unrecognized tax benefits.

Tax Returns under Audit

The Company is not currently under any United States Federal income tax audit; however, income tax returns are currently under examination by tax authorities in several state and foreign jurisdictions. Management regularly assesses the potential outcomes of both ongoing and potential future examinations and has concluded that the provision for income taxes adequately reflects their impact.

Tax Legislation

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the United States to address the economic impacts of the COVID-19 pandemic. The CARES Act includes corporate income tax, payroll tax, and other provisions. The Company does not expect there to be a significant impact to its income tax provision as a result of the CARES Act and other global measures for the year ending December 31, 2020. The Company qualifies for certain employer payroll tax credits, which will be treated as government subsidies to offset related operating expenses, as well as the deferral of certain payroll and other tax payments into the future. The Company has deferred, and plans to continue deferring, the timing of certain income tax payments and other taxes as permitted by the CARES Act and other stimulus measures enacted globally.

Numerous final and proposed tax regulations were issued during the three months ended September 30, 2020, including additional guidance related to changes included in the Tax Cuts and Jobs Act. The regulations included updated guidance related to items such as interest expense limitations pursuant to Section 163(j), GILTI high-tax exclusion, and Foreign Tax Credits. These regulations included certain elective provisions and may be retroactively applied to the 2018 and 2019 tax years. The Company is continuing to evaluate these elective provisions.

10. Revenue from Contracts with Customers

Unsatisfied Performance Obligations

As of September 30, 2020, the total aggregate transaction price allocated to the unsatisfied performance obligations under contracts with contract terms greater than one year and that are not accounted for as a series pursuant to ASU No. 2014-09, Revenue from Contracts with Customers (“ASC 606”) was $5.76 billion. This amount includes revenue associated with reimbursable out-of-pocket expenses. The Company expects to recognize revenue over the remaining contract term of the individual projects, with contract terms generally ranging from one to five years. The amount of unsatisfied performance obligations is presented net of any constraints and, as a result, is lower than the potential contractual revenue. The contracts excluded due to constraints include contracts that do not commence within a certain period of time or that require the Company to undertake numerous activities to fulfill these performance obligations, including various activities that are outside of the Company’s control. Accordingly, such contracts have been excluded from the unsatisfied performance obligations balance presented above.

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Timing of Billing and Performance

During the three and nine months ended September 30, 2020, the Company recognized approximately $298.6 million and $485.0 million, respectively, of revenue that was included in the deferred revenue balance at the beginning of the periods. During the three and nine months ended September 30, 2020, approximately $32.8 million and $25.6 million of the Company’s revenue recognized was allocated to performance obligations partially satisfied in previous periods, respectively. The revenue from performance obligations partially satisfied in previous periods predominately related to changes in scope and estimates in full service clinical studies. Changes in unbilled services (including contract assets) and deferred revenue balances during the three and nine months ended September 30, 2020 were not significantly impacted by any other factors.

11. Segment Information

The Company is managed through two reportable segments: Clinical Solutions and Commercial Solutions. Each reportable segment consists of multiple service offerings that, when combined, create a fully integrated biopharmaceutical services organization. Clinical Solutions offers a variety of services spanning Phases I-IV of clinical development, including full-service global studies, as well as individual service offerings such as clinical monitoring, investigator recruitment, patient recruitment, data management, and study startup to assist customers with their drug development process. Commercial Solutions provides the pharmaceutical, biotechnology, and healthcare industries with commercialization services, including deployment solutions, communication solutions (public relations and advertising), and consulting services. 

The Company’s Chief Operating Decision Maker (“CODM”) reviews segment performance and allocates resources based upon segment revenue and income from operations. Inter-segment revenue is eliminated from the segment reporting presented to the CODM and is not included in the segment revenue presented in the table below. Certain costs are not allocated to the Company’s reportable segments and are reported as general corporate expenses. These costs primarily consist of share-based compensation and general operating expenses associated with the Board and the Company’s senior leadership, finance, investor relations, and internal audit functions. The Company does not allocate depreciation, amortization, asset impairment charges, restructuring and other costs, or transaction and integration-related expenses to its segments. Additionally, the CODM reviews the Company’s assets on a consolidated basis and does not allocate assets to its reportable segments for purposes of assessing segment performance or allocating resources.

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Information about reportable segment operating results was as follows (in thousands):  

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clinical Solutions

 

$

829,163

 

 

$

867,427

 

 

$

2,451,168

 

 

$

2,522,307

 

Commercial Solutions

 

 

269,841

 

 

 

309,601

 

 

 

824,590

 

 

 

940,554

 

Total revenue

 

 

1,099,004

 

 

 

1,177,028

 

 

 

3,275,758

 

 

 

3,462,861

 

Segment direct costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clinical Solutions

 

 

600,634

 

 

 

655,851

 

 

 

1,868,028

 

 

 

1,936,021

 

Commercial Solutions

 

 

211,894

 

 

 

250,904

 

 

 

658,118

 

 

 

759,591

 

Total segment direct costs

 

 

812,528

 

 

 

906,755

 

 

 

2,526,146

 

 

 

2,695,612

 

Segment selling, general, and administrative expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clinical Solutions

 

 

66,431

 

 

 

68,659

 

 

 

204,154

 

 

 

205,986

 

Commercial Solutions

 

 

21,171

 

 

 

21,416

 

 

 

65,997

 

 

 

69,671

 

Total segment selling, general, and administrative expenses

 

 

87,602

 

 

 

90,075

 

 

 

270,151

 

 

 

275,657

 

Segment operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clinical Solutions

 

 

162,098

 

 

 

142,917

 

 

 

378,986

 

 

 

380,300

 

Commercial Solutions

 

 

36,776

 

 

 

37,281

 

 

 

100,475

 

 

 

111,292

 

Total segment operating income

 

 

198,874

 

 

 

180,198

 

 

 

479,461

 

 

 

491,592

 

Direct costs and operating expenses not allocated to segments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation included in direct costs

 

 

7,700

 

 

 

6,919

 

 

 

23,988

 

 

 

22,393

 

Share-based compensation included in selling, general, and administrative expenses

 

 

7,393

 

 

 

5,884

 

 

 

23,278

 

 

 

18,471

 

Corporate selling, general, and administrative expenses

 

 

16,101

 

 

 

13,905

 

 

 

40,613

 

 

 

39,732

 

Restructuring and other costs

 

 

6,523

 

 

 

13,456

 

 

 

23,414

 

 

 

39,751

 

Transaction and integration-related expenses

 

 

6,955

 

 

 

10,454

 

 

 

17,900

 

 

 

34,766

 

Depreciation and amortization

 

 

55,448

 

 

 

60,137

 

 

 

167,576

 

 

 

182,086

 

Total income from operations

 

$

98,754

 

 

$

69,443

 

 

$

182,692

 

 

$

154,393

 

 

12. Operations by Geographic Location

The following table summarizes total revenue by geographic area (in thousands, all intercompany transactions have been eliminated):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America (a)

 

$

694,286

 

 

$

780,460

 

 

$

2,085,895

 

 

$

2,299,439

 

Europe, Middle East, and Africa

 

 

258,590

 

 

 

251,519

 

 

 

768,938

 

 

 

768,653

 

Asia-Pacific

 

 

121,155

 

 

 

119,268

 

 

 

348,394

 

 

 

325,129

 

Latin America

 

 

24,973

 

 

 

25,781

 

 

 

72,531

 

 

 

69,640

 

Total revenue

 

$

1,099,004

 

 

$

1,177,028

 

 

$

3,275,758

 

 

$

3,462,861

 

 

(a) Revenue for the North America region includes revenue attributable to the United States of $659.6 million and $745.6 million, or 60.0% and 63.3% of total revenue, for the three months ended September 30, 2020 and 2019, respectively. Revenue for the North America region includes revenue attributable to the United States of $1,981.7 million and $2,190.9 million, or 60.5% and 63.3% of total revenue, for the nine months ended September 30, 2020 and 2019, respectively. No other country represented more than 10% of total revenue for any period.

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The following table summarizes long-lived assets by geographic area (in thousands, all intercompany transactions have been eliminated):

 

 

 

September 30, 2020

 

 

December 31, 2019

 

Property and equipment, net:

 

 

 

 

 

 

 

 

North America (a)

 

$

149,485

 

 

$

159,709

 

Europe, Middle East, and Africa

 

 

31,095

 

 

 

28,514

 

Asia-Pacific

 

 

11,440

 

 

 

12,742

 

Latin America

 

 

4,238

 

 

 

2,961

 

Total property and equipment, net

 

$

196,258

 

 

$

203,926

 

 

(a) Long-lived assets for the North America region include property and equipment, net attributable to the United States of $143.9 million and $153.1 million as of September 30, 2020 and December 31, 2019, respectively.

13.  Concentration of Credit Risk

Financial assets that subject the Company to credit risk primarily consist of cash and cash equivalents, accounts receivable and unbilled services (including contract assets). The Company’s cash and cash equivalents consist principally of cash and are maintained at several financial institutions with reputable credit ratings. The Company maintains cash depository accounts with several financial institutions worldwide and is exposed to credit risk related to the potential inability to access liquidity in financial institutions where its cash and cash equivalents are concentrated. The Company has not historically incurred any losses with respect to these balances and believes that they bear minimal credit risk.

As of September 30, 2020 and December 31, 2019, the majority of the Company’s cash and cash equivalents were held within the United States.

No single customer accounted for greater than 10% of the Company’s revenue for the three and nine months ended September 30, 2020.

As of September 30, 2020 and December 31, 2019, no single customer accounted for greater than 10% of the Company’s accounts receivable and unbilled services (including contract assets) balances.

14. Related-Party Transactions

No related party expenses were recorded for the three months ended September 30, 2020. During the second quarter of 2020, the Company sold its contingent staffing business to a related party in exchange for potential future cash consideration not to exceed $4.0 million. The future cash consideration is contingent on the financial performance of the sold business over the next three years. The Company will recognize the contingent consideration in the consolidated statements of operations as it is resolved. No significant related-party revenue was recorded for the nine months ended September 30, 2020.

No related party expenses were recorded for the three months ended September 30, 2019. For the nine months ended September 30, 2019, the Company incurred reimbursable out-of-pocket expenses of $1.1 million for professional services obtained from a provider whose board of directors included a member who was also a member of the Company’s Board. This provider ceased to be a related party as of December 31, 2019. No significant related-party revenue was recorded for the nine months ended September 30, 2019.

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15. Commitments and Contingencies

Legal Proceedings

The Company is party to legal proceedings incidental to its business. While the Company’s management currently believes the ultimate outcome of these proceedings, individually and in the aggregate, will not have a significant adverse effect on the Company’s consolidated financial statements, litigation is subject to inherent uncertainties. Were an unfavorable ruling to occur, there exists the possibility of a significant adverse impact on the Company’s financial condition and results of operations.

On December 1, 2017, the first of two virtually identical actions alleging federal securities law claims was filed against the Company and certain of its officers on behalf of a putative class of its shareholders. The first action, captioned Bermudez v. INC Research, Inc., et al, No. 17-09457 (S.D.N.Y.) in the Southern District of New York, names as defendants the Company, Michael Bell, Alistair MacDonald, Michael Gilbertini, and Gregory S. Rush (the “Bermudez action”), and the second action, Vaitkuvienë v. Syneos Health, Inc., et al, No. 18-0029 (E.D.N.C.) in the Eastern District of North Carolina, filed on January 25, 2018 (the “Vaitkuvienë action”), names as defendants the Company, Alistair MacDonald, and Gregory S. Rush (the “Initial Defendants”). Both complaints allege similar claims under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of purchasers of the Company’s common stock between May 10, 2017 and November 8, 2017 and November 9, 2017. The complaints allege that the Company published inaccurate or incomplete information regarding, among other things, the financial performance and business outlook for inVentiv’s business prior to the Merger and with respect to the combined company following the Merger. On January 30, 2018, two alleged shareholders separately filed motions seeking to be appointed lead plaintiff and approving the selection of lead counsel. On March 30, 2018, Plaintiff in the Bermudez action filed a notice of voluntary dismissal of the Bermudez action, without prejudice, and as to all defendants. On May 29, 2018, the Court in the Vaitkuvienë action appointed the San Antonio Fire & Police Pension Fund and El Paso Firemen & Policemen’s Pension Fund as Lead Plaintiffs and, on June 7, 2018, the Court entered a schedule providing for, among other things, Lead Plaintiffs to file an amended complaint by July 23, 2018 (later extended to July 30, 2018). Lead Plaintiffs filed their amended complaint on July 30, 2018, which also includes a claim against the Initial Defendants, as well as each member of the board of directors at the time of the INC Research - inVentiv Health merger vote in July 2017 (the “Defendants”), contending that the inVentiv merger proxy was misleading under Section 14(a) of the Act. Lead Plaintiffs seek, among other things, orders (i) declaring that the lawsuit is a proper class action and (ii) awarding compensatory damages in an amount to be proven at trial, including interest thereon, and reasonable costs and expenses incurred in this action, including attorneys’ fees and expert fees, to Lead Plaintiffs and other class members. Defendants filed a Motion to Dismiss Plaintiffs’ Amended Complaint on September 20, 2018. Lead Plaintiffs filed a Response in Opposition to such motion on November 21, 2018, and Defendants filed a Reply to such response on December 5, 2018. The District Court referred the Motion to Dismiss to a magistrate judge for a report and recommendation. On September 26, 2019, the magistrate judge stayed the action and, on August 7, 2020, the magistrate judge lifted the stay. Also on August 7, 2020, the magistrate judge issued a report (the “Magistrate Report”) recommending to the District Court that Defendants’ Motion to Dismiss be denied. On September 4, 2020, Defendants filed written objections to the Magistrate Report, requesting that the District Court grant the Motion to Dismiss. The Company and the other defendants deny the allegations in these complaints and intend to defend vigorously against these claims.

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The Company is presently unable to predict the duration, scope, or result of the Vaitkuvienë action, or any other related lawsuit. As such, the Company is presently unable to develop a reasonable estimate of a possible loss or range of losses, if any, related to this matter. While the Company intends to defend the putative class action litigation vigorously, the outcome of such litigation or any other litigation is necessarily uncertain. The Company could be forced to expend significant resources in the defense of this lawsuit or future ones, and it may not prevail. As such, these matters could have a significant adverse effect on the Companys business, annual, or interim results of operations, cash flows, or its financial condition.

Assumed Contingent Tax-Sharing Obligations

As a result of the Merger, the Company assumed contingent tax-sharing obligations arising from inVentiv Health, Inc.’s 2016 merger with Double Eagle Parent, Inc. As of September 30, 2020 and December 31, 2019, the estimated fair value of the assumed contingent tax-sharing obligations was $6.6 million and $32.7 million, respectively.

Contingent Earn-out Liability

In connection with the acquisition of Kinapse Topco Limited (“Kinapse”) in August 2018, the Company recorded a contingent earn-out liability to be paid based on Kinapse meeting revenue targets as of March 31, 2021. The estimated fair value of the contingent earn-out liability was $4.6 million as of December 31, 2019 and was included in other long-term liabilities in the condensed consolidated balance sheet. During the three months ended March 31, 2020, the Company adjusted the fair value of the contingent earn-out liability to zero to reflect the updated probability of achievement of the revenue targets. The change in fair value of the earn-out liability was recorded in transaction and integration-related expenses in the condensed consolidated statement of operations.

16. Subsequent Event

On October 26, 2020, the Company entered into a stock purchase agreement for the purchase of 100% of the outstanding shares of SHCR Holdings Corporation (“Synteract”) for an aggregate purchase price of approximately $400 million in cash. Synteract is a contract research organization focused on the emerging biopharmaceutical industry. The transaction is expected to close in the fourth quarter of 2020, subject to the satisfaction or waiver of the closing conditions.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

In addition to historical condensed consolidated financial information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect, among other things, our current expectations and anticipated results of operations, all of which are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, performance or achievements, market trends, or industry results to differ materially from those expressed or implied by such forward-looking statements. Therefore, any statements contained herein that are not statements of historical fact may be forward-looking statements and should be evaluated as such, including statements regarding the closing of our acquisition of SHCR Holdings Corporation (“Synteract”) and the source of funding for such acquisition, our anticipated results of operations, our business strategy, possible impairment charges, the future impact of the COVID-19 pandemic on our business, financial results, and financial condition, and planned capital expenditures. Without limiting the foregoing, the words “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “projects,” “should,” “would,” “targets,” “will” and the negative thereof, and similar words and expressions are intended to identify forward-looking statements. Unless legally required, we assume no obligation to update any such forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information.

We caution you that any such forward-looking statements are further qualified by important factors that could cause our actual operating results to differ materially from those in the forward-looking statements, including without limitation, regional, national, or global political, economic, business, competitive, market, and regulatory conditions and the following: any inability to satisfy or any failure to waive the closing conditions related to our acquisition of Synteract; any failure to realize the anticipated benefits of the acquisition of Synteract; the need to hire, develop, and retain key personnel; the impact of unfavorable economic conditions, including the uncertain international economic environment, changes in exchange rates, and effective income tax rate fluctuations; risks associated with the COVID-19 pandemic; the impact of potentially underpricing our contracts, overrunning our cost estimates, or failing to receive approval for or experiencing delays with documentation of change orders; any adverse effects from customer or therapeutic area concentration; our potential failure to generate a large number of new business awards and the risk of delay, termination, reduction in scope, or failure to go to contract of our business awards; our potential failure to convert backlog to revenue; fluctuations in our operating results and effective income tax rate; the cyber-security and other risks associated with our information systems infrastructure; changes and costs of compliance with regulations related to data privacy; risks associated with acquired businesses, including the ability to integrate acquired operations, products, and technologies in our business; the risks associated with doing business internationally; risks related to the impact of the U.K.’s withdrawal from the European Union; impact of the Tax Cuts and Jobs Act; challenges by tax authorities of our intercompany transfer pricing policies; our potential failure to successfully increase our market share, grow our business, and execute our growth strategies; our ability to effectively upgrade our information systems; our failure to perform our services in accordance with contractual requirements, regulatory standards, and ethical considerations; the risk of litigation and personal injury claims; risks related to the management of clinical trials; failure of our insurance to cover our indemnification obligations and other liabilities; risks related to marketing drugs for biopharmaceutical companies; our ability to protect our intellectual property; the risks associated with potential future acquisitions or investments in our customers’ businesses or drugs; our relationships with customers who are in competition with each other; any failure to realize the full value of our goodwill and intangible

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assets; risks related to restructuring; our compliance with anti-corruption and anti-bribery laws; our dependence on third parties; potential employment liability; downgrades of our credit ratings; outsourcing trends and changes in aggregate spending and research and development budgets; the impact of, including changes in, government regulations and healthcare reform; our ability to keep pace with rapid technological change; the cost of and our ability to service our substantial indebtedness; and other risks related to ownership of our common stock. For a further discussion of the risks relating to our business, refer to “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Overview of Our Business and Services

Syneos Health, Inc. (the “Company,” “we,” “us,” and “our”) is a leading global biopharmaceutical solutions organization providing a full suite of clinical and commercial services to customers in the biopharmaceutical, biotechnology, and medical device industries. We offer both stand-alone and integrated biopharmaceutical product development solutions through our Contract Research Organization (“CRO”) and Contract Commercial Organization (“CCO”), ranging from Early Phase (Phase I) clinical trials to the full commercialization of biopharmaceutical products, with the goal of increasing the likelihood of regulatory approval and commercial success.

Our operations are divided into two reportable segments, Clinical Solutions and Commercial Solutions, to reflect the structure under which we operate, evaluate our performance, make strategic decisions, and allocate resources. Our Clinical Solutions segment offers a variety of services spanning Phases I-IV of clinical development, including full-service global studies, as well as individual service offerings such as clinical monitoring, investigator recruitment, patient recruitment, data management, and study startup to assist customers with their drug development process. Our Commercial Solutions segment provides the pharmaceutical, biotechnology, and healthcare industries with commercialization services, including deployment solutions, communication solutions (public relations and advertising), and consulting services. We integrate our clinical and commercial capabilities into customized solutions by sharing knowledge, data, and insights through our biopharmaceutical acceleration model (“BAM”). This collaboration across the development and commercialization continuum facilitates unique insights into patient populations, therapeutic environments, product timelines, and the competitive landscape. For further discussion, refer to “Note 11 - Segment Information” of our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

COVID-19 Pandemic

On March 11, 2020, the World Health Organization designated the outbreak of the novel strain of coronavirus that causes the disease known as COVID-19 as a global pandemic. Governments and businesses around the world have taken unprecedented actions to mitigate the spread of COVID-19, including, but not limited to, shelter-in-place orders, quarantines, significant restrictions on travel, social distancing practices as well as restrictions that prohibit many employees from going to work.

Since March 2020, we have implemented contingency planning to protect the health and well-being of our employees, with most employees working remotely where possible. We have global and regional crisis teams in place monitoring the rapidly evolving situation and recommending risk mitigation actions. We have implemented travel restrictions as well as visitor protocols and we are following social distancing practices. We have assessed and implemented continuity plans to provide customers with continued services.

We experienced significant impacts to our business and results of operations for the three and nine months ended September 30, 2020 due to COVID-19 and the mitigation actions taken to slow its spread.

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Since March 2020, the COVID-19 pandemic and its adverse effects have become more prevalent in the locations where we, our customers, suppliers, and partners conduct significant portions of our business, such as Europe and North America, and, as a result, we have experienced more pronounced disruptions in our operations during the second and third quarters of 2020. As a result of these conditions, we have taken steps to mitigate the revenue and cash flow impacts in the second and third quarters of 2020, including cost management strategies consisting of certain temporary compensation adjustments, our ForwardBound margin enhancement initiative, hiring restrictions, staffing reductions, voluntary and involuntary employee furloughs, reductions in third-party costs, and other initiatives. Some of these cost savings measures ended in the third quarter, including certain compensation adjustments.

In our Clinical Solutions segment, we continue to expect impacts to be temporary and relate to limitations on our ability to physically access investigative sites, delays in patient enrollment and trial start-up activities, as well as delayed decision making related to new business awards. Our full service studies and, to a lesser extent, our functional service provider offering have been impacted, and we expect them to continue to be impacted, by a switch from site-based monitoring visits to remote monitoring visits, and reduced capacity of businesses that utilize our services or facilities we use to conduct our business during the pandemic. As of September 30, 2020, a substantial number of our clinical trial sites have returned to allowing physical monitoring visits. In our Commercial Solutions segment, we continue to expect impacts to be temporary and relate to delayed decision making related to new business awards, delays or cancellations of existing projects, declines in field team visits to healthcare providers, and travel disruptions.

We remain confident in our liquidity position, which includes cash on hand of $248.9 million as of September 30, 2020, and access to our revolving credit facility. We have also implemented cash conservation initiatives, including reducing operating costs, deferring certain payroll taxes and other tax payments as permitted by various government stimulus packages in multiple jurisdictions, and entering into interest rate swaps to fix certain variable rate debt at lower interest rates.

While certain governments eased restrictions during the latter part of the second quarter and continued to do so during the third quarter, the pandemic continues to be disruptive to our business. The extent to which COVID-19 impacts our future results will depend on future developments. To the extent that the pandemic continues or worsens or if new waves of infection occur, national, state, and local governments may impose additional restrictions or extend the restrictions already in place. The continuing spread of COVID-19 and the related safety and business operating restrictions could result in a number of adverse impacts to our business, including, but not limited to, additional disruption to the economy and our customers, additional work restrictions, and supply chains being interrupted or slowed. Also, governments may impose other laws, regulations, or taxes that could adversely impact our business, financial condition, or results of operations. Further, depending on the extent to which our customers are affected, they could further delay or reduce purchases of services we provide. The effects of COVID-19 also could impact us in a number of other ways including, but not limited to, additional reductions to our profitability, fluctuations in foreign currency markets, the availability of future borrowings, the cost of borrowings, credit risks of our customers and counterparties, and potential impairment of the carrying amount of goodwill or other long-lived assets.

We will continue to actively monitor the situation and may take further precautionary and preemptive actions as may be required by national, state, or local authorities or that we determine are in the best interests of our employees, customers, partners, suppliers, and shareholders. To the extent the pandemic worsens, we cannot predict the effects it may have on our business, in particular with respect to demand for our services, our strategy, and our prospects, the effects on our customers, or the impact on our financial results. See Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q for further discussion of the potential impact of the pandemic on our business.

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New Business Awards and Backlog

We add new business awards to backlog when we enter into a contract or when we receive a written commitment from the customer selecting us as a service provider, provided that:

 

collection of the award value is probable;

 

the project or projects are expected to commence within a certain period of time from the end of the quarter in which the award was granted;

 

project contingencies such as the outcome of other clinical trials, funding approvals, or other events, are not anticipated to prevent the project or projects from commencing in accordance with the expected timeline;

 

the customer has entered or intends to enter into a comprehensive contract as soon as practicable; and

 

for awards related to deployment solutions and functional service provider offerings, a maximum of twelve months of services are included in the award value.

In addition, we continually evaluate our backlog to determine if any of the previously awarded work is no longer expected to be performed, regardless of whether we have received formal cancellation notice from the customer. If we determine that any previously awarded work is no longer probable of being performed, we remove the value from our backlog based on the risk of cancellation. We recognize revenue from these awards as services are performed, provided we have entered into a contract with the customer.

We report new business awards for our Clinical Solutions and Commercial Solutions segments on a trailing twelve months (“TTM”) basis. Our total backlog represents backlog for our Clinical Solutions segment and the deployment solutions offering within our Commercial Solutions segment. We do not report backlog for the remaining service offerings in the Commercial Solutions segment.

Backlog

Our backlog consists of anticipated future revenue from business awards that either have not started, or that are in process and have not been completed. Our backlog also reflects any cancellation or adjustment activity related to these awards. The average duration of our contracts will fluctuate from period to period based on the contracts comprising our backlog at any given time. The majority of our contracts contain early termination provisions that typically require notice periods ranging from 30 to 90 days depending on the service offering.

Our backlog was as follows as of September 30 (in millions):

 

 

 

2020

 

 

2019

 

 

Change

 

Clinical Solutions

 

$

9,196.3

 

 

$

7,781.8

 

 

$

1,414.5

 

 

 

18.2

%

Commercial Solutions - Deployment Solutions

 

 

586.7

 

 

 

597.5

 

 

 

(10.8

)

 

 

(1.8

)%

Total backlog

 

$

9,783.0

 

 

$

8,379.3

 

 

$

1,403.7

 

 

 

16.8

%

 

We expect approximately $0.96 billion of our backlog as of September 30, 2020 will be recognized as revenue during the remainder of 2020. We adjust the amount of our backlog each quarter for the effects of fluctuations in foreign currency exchange rates.

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Net New Business Awards

New business awards, net of cancellations, were as follows for the TTM periods ended September 30 (in millions):

 

 

 

2020

 

 

2019

 

Clinical Solutions

 

$

4,711.3

 

 

$

3,911.9

 

Commercial Solutions

 

 

1,180.8

 

 

 

1,260.1

 

Total net new business awards

 

$

5,892.1

 

 

$

5,172.0

 

 

New business awards have varied and may continue to vary significantly from quarter to quarter. Fluctuations in our net new business award levels often result from the fact that we may receive a small number of relatively large orders in any given reporting period. Because of these large orders, our backlog and net new business awards in a reporting period may reach levels that are not sustainable in subsequent reporting periods.

We believe that our backlog and net new business awards might not be consistent indicators of future revenue because they have been, and likely will continue to be, affected by a number of factors, including the variable size and duration of projects, many of which are performed over several years, and changes to the scope of work during the course of projects. Additionally, projects may be canceled or delayed by the customer or regulatory authorities. Net new business awards and backlog have been and we expect will continue to be affected by the broad effects of the COVID-19 pandemic on the global economy and major financial markets, as well as various other risks and uncertainties detailed in Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q. We generally do not have a contractual right to the full amount of the awards reflected in our backlog. If a customer cancels an award, we might be reimbursed for the costs we have incurred. As we increasingly compete for and enter into large contracts that are more global in nature, we expect that the rate at which our backlog and net new business awards convert into revenue is likely to decrease, and the duration of projects and the period over which related revenue is recognized to lengthen. For more information about risks related to our backlog see Part I, Item 1A “Risk Factors - Risks Related to Our Business - Our backlog might not be indicative of our future revenues, and we might not realize all of the anticipated future revenue reflected in our backlog” included in “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

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Results of Operations

The following table sets forth amounts from our unaudited condensed consolidated statements of operations along with dollar and percentage changes (in thousands, except percentages):

 

 

 

Three Months Ended

September 30,

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

Revenue

 

$

1,099,004

 

 

$

1,177,028

 

 

$

(78,024

)

 

 

(6.6

)%

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct costs (exclusive of depreciation and amortization)

 

 

820,228

 

 

 

913,674

 

 

 

(93,446

)

 

 

(10.2

)%

Selling, general, and administrative expenses

 

 

111,096

 

 

 

109,864

 

 

 

1,232

 

 

 

1.1

%

Restructuring and other costs

 

 

6,523

 

 

 

13,456

 

 

 

(6,933

)

 

 

(51.5

)%

Transaction and integration-related expenses

 

 

6,955

 

 

 

10,454

 

 

 

(3,499

)

 

 

(33.5

)%

Depreciation and amortization

 

 

55,448

 

 

 

60,137

 

 

 

(4,689

)

 

 

(7.8

)%

Total operating expenses

 

 

1,000,250

 

 

 

1,107,585

 

 

 

(107,335

)

 

 

(9.7

)%

Income from operations

 

 

98,754

 

 

 

69,443

 

 

 

29,311

 

 

 

42.2

%

Total other expense (income), net

 

 

31,384

 

 

 

(532

)

 

 

31,916

 

 

n/m

 

Income before provision for income taxes

 

 

67,370

 

 

 

69,975

 

 

 

(2,605

)

 

 

(3.7

)%

Income tax expense

 

 

3,954

 

 

 

11,055

 

 

 

(7,101

)

 

 

(64.2

)%

Net income

 

$

63,416

 

 

$

58,920

 

 

$

4,496

 

 

 

7.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

September 30,

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

Revenue

 

$

3,275,758

 

 

$

3,462,861

 

 

$

(187,103

)

 

 

(5.4

)%

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct costs (exclusive of depreciation and amortization)

 

 

2,550,134

 

 

 

2,718,005

 

 

 

(167,871

)

 

 

(6.2

)%

Selling, general, and administrative expenses

 

 

334,042

 

 

 

333,860

 

 

 

182

 

 

 

0.1

%

Restructuring and other costs

 

 

23,414

 

 

 

39,751

 

 

 

(16,337

)

 

 

(41.1

)%

Transaction and integration-related expenses

 

 

17,900

 

 

 

34,766

 

 

 

(16,866

)

 

 

(48.5

)%

Depreciation and amortization

 

 

167,576

 

 

 

182,086

 

 

 

(14,510

)

 

 

(8.0

)%

Total operating expenses

 

 

3,093,066

 

 

 

3,308,468

 

 

 

(215,402

)

 

 

(6.5

)%

Income from operations

 

 

182,692

 

 

 

154,393

 

 

 

28,299

 

 

 

18.3

%

Total other expense, net

 

 

65,899

 

 

 

70,429

 

 

 

(4,530

)

 

 

(6.4

)%

Income before provision for income taxes

 

 

116,793

 

 

 

83,964

 

 

 

32,829

 

 

 

39.1

%

Income tax expense

 

 

15,892

 

 

 

43,756

 

 

 

(27,864

)

 

 

(63.7

)%

Net income

 

$

100,901

 

 

$

40,208

 

 

$

60,693

 

 

 

150.9

%

 

Revenue

For the three months ended September 30, 2020, our revenue decreased by $78.0 million, or 6.6%, to $1,099.0 million from $1,177.0 million for the three months ended September 30, 2019. For the nine months ended September 30, 2020, our revenue decreased by $187.1 million, or 5.4%, to $3,275.8 million from $3,462.9 million for the nine months ended September 30, 2019. These decreases were primarily driven by the impact of the COVID-19 pandemic, including the related decline in reimbursable out-of-pocket expenses, in both our Clinical Solutions and Commercial Solutions segments, as discussed below.

No single customer accounted for greater than 10% of our revenue for the three and nine months ended September 30, 2020. Revenue from our top five customers accounted for approximately 23% and 22% of revenue for the three months ended September 30, 2020 and 2019, respectively, and 22% and 23% of revenue for the nine months ended September 30, 2020 and 2019, respectively.

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Revenue for each of our segments was as follows (dollars in thousands):

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

% of total

 

 

2019

 

 

% of total

 

 

Change

 

Clinical Solutions

 

$

829,163

 

 

 

75.4

%

 

$

867,427

 

 

 

73.7

%

 

$

(38,264

)

 

 

(4.4

)%

Commercial Solutions

 

 

269,841

 

 

 

24.6

%

 

 

309,601

 

 

 

26.3

%

 

 

(39,760

)

 

 

(12.8

)%

Total revenue

 

$

1,099,004

 

 

 

 

 

 

$

1,177,028

 

 

 

 

 

 

$

(78,024

)

 

 

(6.6

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

% of total

 

 

2019

 

 

% of total

 

 

Change

 

Clinical Solutions

 

$

2,451,168

 

 

 

74.8

%

 

$

2,522,307

 

 

 

72.8

%

 

$

(71,139

)

 

 

(2.8

)%

Commercial Solutions

 

 

824,590

 

 

 

25.2

%

 

 

940,554

 

 

 

27.2

%

 

 

(115,964

)

 

 

(12.3

)%

Total revenue

 

$

3,275,758

 

 

 

 

 

 

$

3,462,861

 

 

 

 

 

 

$

(187,103

)

 

 

(5.4

)%

 

Clinical Solutions

For the three and nine months ended September 30, 2020, revenue attributable to our Clinical Solutions segment decreased compared to the same periods in the prior year primarily due to the impacts of the COVID-19 pandemic, including the related decline in reimbursable out-of-pocket expenses, and the sale of the contingent staffing business during the second quarter. For the three months ended September 30, 2020, revenue was positively impacted by $7.5 million from foreign currency exchange rates fluctuations, whereas for the nine months ended September 30, 2020, revenue was negatively impacted by $4.0 million from foreign currency exchange rates fluctuations compared to the respective prior periods.

During the third quarter, the pandemic continued to impact our ability to physically access investigative sites and delayed patient enrollment and trial start-up activities. However, there were positive trends related to these activities. The negative impacts of the pandemic were partially mitigated by performing remote monitoring visits that had previously been converted from site-based monitoring. As a result, revenue for the third quarter was more comparable with the prior year period than it was in the second quarter, although the Company continues to experience lower reimbursable out-of-pocket expenses as a result of remote monitoring. The decrease in revenue for the nine months ended September 30, 2020 was partially offset by revenue growth during the first quarter.

Although we are aggressively managing our response to the COVID-19 pandemic, it is expected to continue to negatively impact our full year 2020 Clinical Solutions revenue. At this time, we believe that the most significant ongoing impacts to revenue in our Clinical Solutions segment will be temporary and relate to limitations on our ability to physically access investigative sites, delays in patient enrollment and trial start-up activities, as well as delayed decision making related to new business awards. Our full service studies and, to a lesser extent, our functional service provider offering have been impacted, and we expect them to continue to be impacted, by a switch from site-based monitoring visits to remote monitoring visits, and reduced capacity of businesses that utilize our services or facilities we use to conduct our business during the pandemic. The trend of more remote monitoring visits is expected to continue after the pandemic, resulting in lower reimbursable out-of-pocket expenses and related revenue in the future. As of September 30, 2020, a substantial number of our clinical trial sites have returned to allowing physical monitoring visits.

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Commercial Solutions

For the three and nine months ended September 30, 2020, revenue attributable to our Commercial Solutions segment decreased compared to the same periods in the prior year primarily due to the impacts of the COVID-19 pandemic, including the related decline in reimbursable out-of-pocket expenses as well as the negative impact of delays in new project starts.

Although we are aggressively managing our response to the COVID-19 pandemic, it is expected to continue to negatively impact our full year 2020 Commercial Solutions revenue. At this time, we believe that the most significant ongoing impacts to revenue in our Commercial Solutions segment will be temporary and relate to delayed decision making related to new business awards, delays or cancellations of existing projects, declines in field team visits to healthcare providers, and travel disruptions.

Direct Costs

Direct costs consist principally of compensation expense and benefits associated with our employees and other employee-related costs, and reimbursable out-of-pocket expenses directly related to delivering on our projects. While we have some ability to manage the majority of these costs relative to the amount of contracted services we have during any given period, direct costs as a percentage of revenue can vary from period to period. Such fluctuations are due to a variety of factors, including, among others: (i) the level of staff utilization on our projects; (ii) adjustments to the timing of work on specific customer contracts; (iii) the experience mix of personnel assigned to projects; (iv) the service mix and pricing of our contracts; and (v) the timing of the incurrence of reimbursable out-of-pocket expenses. As a result of the COVID-19 pandemic, we have experienced reduced travel and other reimbursable out-of-pocket expenses related to lower customer site visits for Clinical Solutions, as well as lower physician office visits and investigator meetings for Commercial Solutions. In addition, as global projects wind down or as delays and cancellations occur, staffing levels in certain countries or functional areas can become misaligned with the current business volume.

Direct costs consisted of the following (dollars in thousands):

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

Direct costs (exclusive of depreciation and amortization)

 

$

820,228

 

 

$

913,674

 

 

$

(93,446

)

 

 

(10.2

)%

% of revenue

 

 

74.6

%

 

 

77.6

%

 

 

 

 

 

 

 

 

Gross margin %

 

 

25.4

%

 

 

22.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

Direct costs (exclusive of depreciation and amortization)

 

$

2,550,134

 

 

$

2,718,005

 

 

$

(167,871

)

 

 

(6.2

)%

% of revenue

 

 

77.8

%

 

 

78.5

%

 

 

 

 

 

 

 

 

Gross margin %

 

 

22.2

%

 

 

21.5

%

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2020, our direct costs decreased by $93.4 million, or 10.2%, compared to the three months ended September 30, 2019. For the nine months ended September 30, 2020, our direct costs decreased by $167.9 million, or 6.2%, compared to the nine months ended September 30, 2019. These decreases were primarily driven by the impacts of the COVID-19 pandemic and our cost management strategies in both our Clinical Solutions and Commercial Solutions segments as discussed below.

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Clinical Solutions

Direct costs for our Clinical Solutions segment, excluding share-based compensation expense, were as follows (dollars in thousands):

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

Direct costs

 

$

600,634

 

 

$

655,851

 

 

$

(55,217

)

 

 

(8.4

)%

% of segment revenue

 

 

72.4

%

 

 

75.6

%

 

 

 

 

 

 

 

 

Segment gross margin %

 

 

27.6

%

 

 

24.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

Direct costs

 

$

1,868,028

 

 

$

1,936,021

 

 

$

(67,993

)

 

 

(3.5

)%

% of segment revenue

 

 

76.2

%

 

 

76.8

%

 

 

 

 

 

 

 

 

Segment gross margin %

 

 

23.8

%

 

 

23.2

%

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2020, our Clinical Solutions direct costs decreased by $55.2 million, or 8.4%, compared to the three months ended September 30, 2019. For the nine months ended September 30, 2020, our Clinical Solutions segment direct costs decreased by $68.0 million, or 3.5%, compared to the nine months ended September 30, 2019. The decrease for the periods compared to the prior year was primarily due to lower reimbursable out-of-pocket expenses and billable headcount, primarily due to COVID-19. There were additional decreases in direct costs from the impact of various cost management strategies and foreign currency exchange rate fluctuations. These cost management strategies included certain temporary compensation adjustments, our ForwardBound margin enhancement initiative, hiring restrictions, staffing reductions, voluntary and involuntary employee furloughs, reductions in third-party costs, and other initiatives. Some of these cost savings measures ended in the third quarter, including certain compensation adjustments.

Gross margins for our Clinical Solutions segment were 27.6% for the three months ended September 30, 2020, compared to 24.4% for the three months ended September 30, 2019 and 23.8% for the nine months ended September 30, 2020, compared to 23.2% for the nine months ended September 30, 2019. Gross margins were higher during the current year periods as compared to the same periods in 2019, primarily due to reduced travel and other reimbursable out-of-pocket expenses, and the impact of our cost management strategies, partially offset by the impact from lower revenue.

Although we are aggressively managing our response to the COVID-19 pandemic, it is expected to continue to negatively impact our full year 2020 Clinical Solutions margins. At this time, we continue to believe that the most significant impacts to margins in our Clinical Solutions segment will be those noted in the above Revenue section, partially offset by the impact of our cost management strategies and the impact of lower reimbursable out-of-pocket expenses. The trend of more remote monitoring visits is expected to continue after the pandemic, resulting in lower reimbursable out-of-pocket expenses and related revenue in the future.  

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Commercial Solutions

Direct costs for our Commercial Solutions segment, excluding share-based compensation expense, were as follows (dollars in thousands):

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

Direct costs

 

$

211,894

 

 

$

250,904

 

 

$

(39,010

)

 

 

(15.5

)%

% of segment revenue

 

 

78.5

%

 

 

81.0

%

 

 

 

 

 

 

 

 

Segment gross margin %

 

 

21.5

%

 

 

19.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

Direct costs

 

$

658,118

 

 

$

759,591

 

 

$

(101,473

)

 

 

(13.4

)%

% of segment revenue

 

 

79.8

%

 

 

80.8

%

 

 

 

 

 

 

 

 

Segment gross margin %

 

 

20.2

%

 

 

19.2

%

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2020, our Commercial Solutions segment direct costs decreased by $39.0 million, or 15.5%, compared to the three months ended September 30, 2019. For the nine months ended September 30, 2020, our Commercial Solutions segment direct costs decreased by $101.5 million, or 13.4%, compared to the nine months ended September 30, 2019. These decreases were primarily related to reduced billable headcount, declines in reimbursable out-of-pocket expenses, and the impact of our cost management strategies, which were all primarily in response to the COVID-19 pandemic. These cost management strategies included certain temporary compensation adjustments, our ForwardBound margin enhancement initiative, hiring restrictions, staffing reductions, voluntary and involuntary employee furloughs, reductions in third-party costs, and other initiatives. Some of these cost savings measures ended in the third quarter, including certain compensation adjustments.

 

Gross margins for our Commercial Solutions segment were 21.5% for the three months ended September 30, 2020, compared to 19.0% for the three months ended September 30, 2019 and 20.2% for the nine months ended September 30, 2020, compared to 19.2% for the nine months ended September 30, 2019. Gross margins were higher during the current year periods compared to the same periods in 2019 primarily due to lower reimbursable out-of-pocket expenses and the impact of our cost management strategies, which were both primarily due to the COVID-19 pandemic, partially offset by the impact from lower revenue.

Although lower reimbursable out-of-pocket expenses has resulted in higher gross margins, we continue to aggressively manage our response to the COVID-19 pandemic to limit impact to our full year 2020 Commercial Solutions profitability. At this time, we continue to believe that the most significant impacts in our Commercial Solutions segment will be those noted in the above Revenue section, partially offset by the impact of our cost management strategies.

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Selling, General, and Administrative Expenses

Selling, general, and administrative expenses were as follows (dollars in thousands):

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

Selling, general, and administrative expenses

 

$

111,096

 

 

$

109,864

 

 

$

1,232

 

 

 

1.1

%

% of total revenue

 

 

10.1

%

 

 

9.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

Selling, general, and administrative expenses

 

$

334,042

 

 

$

333,860

 

 

$

182

 

 

 

0.1

%

% of total revenue

 

 

10.2

%

 

 

9.6

%

 

 

 

 

 

 

 

 

Selling, general, and administrative expenses for the three and nine months ended September 30, 2020 were comparable to the same periods in 2019. Higher employee-related costs, including share-based compensation, were partially offset by the favorable impacts from our cost management strategies, primarily in response to the COVID-19 pandemic as well as our ForwardBound margin enhancement initiative. Our cost management strategies implemented in response to the uncertainty caused by the pandemic included certain temporary compensation adjustments, hiring restrictions, staffing reductions, voluntary and involuntary employee furloughs, reductions in third-party costs, and other initiatives. Some of these cost savings measures ended in the third quarter, including certain compensation adjustments.

Restructuring and Other Costs

Restructuring and other costs were $6.5 million and $13.5 million for the three months ended September 30, 2020 and 2019, respectively, and $23.4 million and $39.8 million for the nine months ended September 30, 2020 and 2019, respectively. In connection with the 2017 merger (the “Merger”) with Double Eagle Parent, Inc., the parent company of inVentiv Health, Inc., we established a restructuring plan to eliminate redundant positions and reduce our facility footprint worldwide. Additionally, for the three and nine months ended September 30, 2020 and 2019, we incurred employee severance costs and facility closure costs for non Merger-related restructuring activities, as we continue the ongoing evaluations of our workforce and facilities infrastructure needs in an effort to optimize our resources. The costs incurred during the three months ended September 30, 2020 were primarily related to our cost management strategies in response to the COVID-19 pandemic as well as our ForwardBound initiative.

Restructuring and other costs consisted of the following (in thousands):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Merger-related restructuring and other costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee severance and benefit costs

 

$

 

 

$

2,288

 

 

$

962

 

 

$

14,537

 

Facility and lease termination costs

 

 

425

 

 

 

2,283

 

 

 

1,256

 

 

 

10,741

 

Non Merger-related restructuring and other costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee severance and benefit costs

 

 

5,903

 

 

 

5,797

 

 

 

20,209

 

 

 

11,070

 

Facility and lease termination costs

 

 

72

 

 

 

2,855

 

 

 

349

 

 

 

3,130

 

Other costs

 

 

123

 

 

 

233

 

 

 

638

 

 

 

273

 

Total restructuring and other costs

 

$

6,523

 

 

$

13,456

 

 

$

23,414

 

 

$

39,751

 

 

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We expect to continue to incur significant costs related to the restructuring of our operations. However, the timing and the amount of these costs depends on various factors, including, but not limited to, identifying and realizing synergy opportunities and executing the integration of our combined operations. We may also continue to incur additional restructuring and other costs during 2020 related to our cost savings initiatives, including our response to the COVID-19 pandemic and our ForwardBound margin enhancement initiative.

Transaction and Integration-Related Expenses

Transaction and integration-related expenses consisted of the following (in thousands):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Professional fees

 

$

5,656

 

 

$

7,108

 

 

$

18,217

 

 

$

26,632

 

Debt modification and related expenses

 

 

4

 

 

 

1,582

 

 

 

75

 

 

 

5,555

 

Integration and personnel retention-related costs

 

 

1,143

 

 

 

1,394

 

 

 

3,399

 

 

 

3,150

 

Fair value adjustments to contingent obligations

 

 

152

 

 

 

370

 

 

 

(3,791

)

 

 

(571

)

Total transaction and integration-related expenses

 

$

6,955

 

 

$

10,454

 

 

$

17,900

 

 

$

34,766

 

 

As expected, our transaction and integration-related expenses have decreased in both 2020 periods as compared to the 2019 periods. We expect to continue to incur professional fees and integration-related costs associated with the Merger, primarily related to the continued consolidation of our legal entities and information technology systems.

The decrease in fair value adjustments to contingent obligations during the nine months ended September 30, 2020 as compared to 2019 is primarily due to a decrease in the estimate of the contingent earn-out liability associated with our acquisition of Kinapse Topco Limited in 2018.

Depreciation and Amortization Expense

Total depreciation and amortization expense was $55.4 million and $60.1 million for the three months ended September 30, 2020 and 2019, respectively, and $167.6 million and $182.1 million for the nine months ended September 30, 2020 and 2019, respectively. The decreases in total depreciation and amortization expense were primarily due to decreases in amortization expense from intangible assets resulting from business combinations completed in prior periods and decreases in depreciation expense related to fully depreciated assets.

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Total Other Expense (Income), Net

Total other expense (income), net consisted of the following (dollars in thousands):

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

Interest expense, net

 

$

20,442

 

 

$

30,181

 

 

$

(9,739

)

 

 

(32.3

)%

Loss on extinguishment of debt

 

 

346

 

 

 

 

 

 

346

 

 

n/m

 

Other expense (income), net

 

 

10,596

 

 

 

(30,713

)

 

 

41,309

 

 

n/m

 

Total other expense (income), net

 

$

31,384

 

 

$

(532

)

 

$

31,916

 

 

n/m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

Interest expense, net

 

$

68,126

 

 

$

95,439

 

 

$

(27,313

)

 

 

(28.6

)%

Loss on extinguishment of debt

 

 

346

 

 

 

4,355

 

 

 

(4,009

)

 

 

(92.1

)%

Other income, net

 

 

(2,573

)

 

 

(29,365

)

 

 

26,792

 

 

 

(91.2

)%

Total other expense, net

 

$

65,899

 

 

$

70,429

 

 

$

(4,530

)

 

 

(6.4

)%

 

Total other expense (income), net was $31.4 million and $(0.5) million for the three months ended September 30, 2020 and 2019, respectively, and $65.9 million and $70.4 million for the nine months ended September 30, 2020 and 2019, respectively. The decreases in interest expense were primarily due to reductions in our higher interest rate debt as well as lower variable base interest rates. Other expense (income), net primarily consists of foreign currency gains and losses that result from exchange rate fluctuations on our monetary asset balances denominated in currencies other than our functional currency.

Income Tax Expense

For the three and nine months ended September 30, 2020, we recorded income tax expense of $4.0 million and $15.9 million, respectively, compared to pre-tax income of $67.4 million and $116.8 million, respectively. Income tax expense for the three and nine months ended September 30, 2020 included a discrete tax benefit of $18.8 million and $24.3 million, respectively, primarily related to the recognition of United States federal unrecognized tax benefits, excess tax benefits from share-based compensation, and the tax benefit from foreign tax credits claimed on amended returns filed during the year. The effective tax rate for the three and nine months ended September 30, 2020, excluding discrete items, varied from the United States federal statutory income tax rate of 21.0% primarily due to foreign income inclusions such as the Global Intangible Low-Taxed Income provisions (“GILTI”), state and local taxes on United States income, and research and general business credits.

For the three and nine months ended September 30, 2019, we recorded income tax expense of $11.1 million and $43.8 million, respectively, compared to pre-tax income of $70.0 million and $84.0 million, respectively. Income tax expense for the three and nine months ended September 30, 2019 included a discrete tax benefit of $0.1 million and discrete tax expense of $10.3 million, respectively, primarily related to a reduction in deferred tax assets associated with the closing of a Canadian business unit in the nine month period and prior year adjustments. The effective tax rate for the three and nine months ended September 30, 2019, excluding discrete items, varied from the United States federal statutory income tax rate of 21.0% primarily due to base erosion and anti-abuse minimum tax (“BEAT”), foreign income inclusions such as GILTI, and a valuation allowance change on domestic deferred tax assets.

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We currently maintain a valuation allowance against a portion of our state deferred tax assets and a portion of our foreign deferred tax assets as of September 30, 2020. We intend to continue to maintain a valuation allowance on these deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the United States to address the economic impacts of the COVID-19 pandemic. The CARES Act includes corporate income tax, payroll tax, and other relief provisions. We do not expect there to be a significant impact to our income tax provision as a result of the CARES Act and other global measures for the year ending December 31, 2020. We qualify for certain employer payroll tax credits, which will be treated as government subsidies to offset related operating expenses, as well as the deferral of certain payroll and other tax payments into the future. We have deferred, and plan to continue deferring, the timing of certain income tax payments and other taxes as permitted by the CARES Act and other stimulus measures enacted globally.

Numerous final and proposed tax regulations were issued during the three months ended September 30, 2020, including additional guidance related to changes included in the Tax Cuts and Jobs Act. The regulations included updated guidance related to items such as interest expense limitations pursuant to Section 163(j), GILTI high-tax exclusion, and Foreign Tax Credits. These regulations included certain elective provisions and may be retrospectively applied to our 2018 and 2019 tax years. We are continuing to evaluate these elective provisions.

Liquidity and Capital Resources

Key measures of our liquidity were as follows (in thousands):

 

 

 

September 30, 2020

 

 

December 31, 2019

 

Balance sheet statistics:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

248,629

 

 

$

163,227

 

Restricted cash

 

 

267

 

 

 

462

 

Working capital (excluding restricted cash)

 

 

84,193

 

 

 

45,241

 

As of September 30, 2020, we had $248.9 million of cash, cash equivalents, and restricted cash. As of September 30, 2020, the majority of our cash, cash equivalents, and restricted cash was held within the United States. In addition, we had $581.4 million (net of $18.6 million in outstanding letters of credit (“LOCs”)) available for borrowing under our revolving credit facility (the “Revolver”), of which $131.4 million was available for LOCs.

On October 26, 2020, we entered into a stock purchase agreement (the “Purchase Agreement”) with Synteract, Inc.’s parent company for the purchase of 100% of the outstanding shares of Synteract for an aggregate purchase price of $400 million in cash (the “Synteract Acquisition”), subject to certain customary working capital and other adjustments. Synteract is a contract research organization focused on the emerging biopharmaceutical industry. The Synteract Acquisition is expected to close in the fourth quarter of 2020, subject to the satisfaction or waiver of the closing conditions. The purchase price of the Synteract Acquisition is expected to be funded using cash on hand and borrowings under our Revolver.

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We have historically funded our operations and growth, including acquisitions, primarily with our working capital, cash flow from operations, and funds available through various borrowing arrangements. Our principal liquidity requirements are to fund our debt service obligations, capital expenditures, expansion of service offerings, possible acquisitions, integration and restructuring costs, geographic expansion, stock repurchases, working capital, and other general corporate expenses. Cash from operations also could be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic on the global economy and major financial markets, as well as other risks detailed in Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q. We have implemented cash conservation initiatives, including delaying certain capital expenditures, reducing operating costs, deferring certain payroll taxes and other tax payments as permitted by various government stimulus packages in multiple jurisdictions, and entering into interest rate swaps to fix certain variable rate debt at lower interest rates. Based on past performance and current expectations, we believe our cash and cash equivalents, cash generated from operations, and funds available under the Revolver will be sufficient to meet our working capital needs, capital expenditures, scheduled debt and interest payments, income tax obligations, and other currently anticipated liquidity requirements for at least the next 12 months.

As the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. A continued worldwide disruption could materially affect our future access to sources of liquidity, particularly our cash flows from operations, and financial condition. In the event of a sustained market deterioration, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions.

Indebtedness

As of September 30, 2020, we had approximately $2.58 billion of total principal indebtedness (including $45.0 million in finance lease obligations), consisting of $2.23 billion in term loan debt, and $300.0 million in borrowings against our accounts receivable financing agreement.

Credit Agreement

We are party to a credit agreement (as amended, the “Credit Agreement”) that includes a $1.55 billion Term Loan A facility that matures on March 26, 2024 (“Term Loan A”), a $1.60 billion Term Loan B facility that matures on August 1, 2024 (“Term Loan B”), and a $600.0 million Revolver that matures on March 26, 2024.

During the three months ended September 30, 2020, we made $40.0 million and $35.0 million of voluntary prepayments against Term Loan A and Term Loan B, respectively, and repaid the outstanding $150.0 million balance on the Revolver. The Term Loan A prepayments were applied to the mandatory principal payments due October 2020 and January 2021 and to a partial principal payment for April 2021. Additionally, during the three and nine months ended September 30, 2020, we made $19.4 million and $38.8 million of mandatory principal payments towards Term Loan A, respectively. As a result of previous voluntary prepayments, we are not required to make a mandatory payment against the Term Loan B principal balance until maturity in August 2024.

In February 2020, as a result of our Secured Leverage Ratio (as defined in the Credit Agreement) being less than or equal to 2.75x, the Adjusted Eurocurrency Rate Spread (as defined in the Credit Agreement) on our Term B Loans decreased from 2.00% to 1.75%.

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Our ability to make payments on our indebtedness and to fund planned capital expenditures and necessary working capital will depend on our ability to generate cash in the future. Our ability to meet our cash needs through cash flows from operations will depend on the demand for our services, as well as general economic, financial, competitive, and other factors, many of which are beyond our control, including the broad effects of the COVID-19 pandemic on the global economy and major financial markets. Our business may not generate cash flow in an amount sufficient to enable us to pay the principal of, or interest on, our indebtedness, or to fund our other liquidity needs, including working capital, capital expenditures, acquisitions, investments, and other general corporate requirements. If we cannot fund our liquidity needs, we will have to take actions such as reducing or delaying capital expenditures, acquisitions or investments, selling assets, restructuring or refinancing our debt, reducing the scope of our operations and growth plans, or seeking additional capital. We cannot assure you that any of these remedies could, if necessary, be affected on commercially reasonable terms, or at all, or that they would permit us to meet our scheduled debt service obligations. Our Credit Agreement contains covenant restrictions that limit our ability to direct the use of proceeds from any disposition of assets and, as a result, we may not be allowed to use the proceeds from any such dispositions to satisfy all current debt service obligations.

Debt Covenants

Our Credit Agreement contains usual and customary restrictive covenants. Our Credit Agreement requires us to maintain a maximum First Lien Leverage Ratio (as defined in the Credit Agreement) of no more than 4.5 to 1.0 as of the last day of each fiscal quarter from and after March 31, 2020. We were in compliance with all applicable debt covenants as of September 30, 2020.

Revolver and Letters of Credit

The Revolver includes LOCs with a sublimit of $150.0 million. As of September 30, 2020, there were $18.6 million of LOCs outstanding, leaving $581.4 million of available borrowings under the Revolver, including $131.4 million available for LOCs.

Accounts Receivable Financing Agreement

On September 25, 2020, we amended our accounts receivable financing agreement to increase the amount we can borrow from $275.0 million to $300.0 million and extend the maturity date to October 2022, and drew down the additional $25.0 million. As of September 30, 2020, we had $300.0 million of outstanding borrowings under this agreement with no remaining borrowing capacity available.

Interest Rates

We have entered into various interest rate swaps to mitigate our exposure to changes in interest rates on our term loans. As of September 30, 2020, the percentage of our total principal debt (excluding leases) that is subject to fixed interest rates was approximately 59%. Each quarter-point increase or decrease in the applicable floating interest rate at September 30, 2020 would change our annual interest expense by approximately $2.6 million.

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Stock Repurchase Program

On February 26, 2018, our Board of Directors (our “Board”) authorized the repurchase of up to an aggregate of $250.0 million of our common stock to be executed from time to time in open market transactions effected through a broker at prevailing market prices, in block trades, or privately negotiated transactions through December 31, 2019 (the “stock repurchase program”). On December 5, 2019, our Board approved an expansion and extension of the stock repurchase program. The Board increased the share repurchase authorization of our common stock to $300.0 million and extended the term of the program to December 31, 2020. Share repurchases are funded primarily with our working capital, cash flow from operations, and funds available through various borrowing arrangements.

We are not obligated to repurchase any particular amount of our common stock, and the stock repurchase program may be modified, extended, suspended, or discontinued at any time. The timing and amount of repurchases is determined by our management based on a variety of factors such as the market price of our common stock, our corporate requirements for cash, and overall market conditions. The stock repurchase program is subject to applicable legal requirements, including federal and state securities laws and applicable Nasdaq rules.

The following table sets forth repurchase activity under the stock repurchase program from inception through September 30, 2020:

 

 

 

Total number of

shares purchased

 

 

Average price

paid per share

 

 

Approximate

value of

shares purchased

(in thousands)

 

March 2018

 

 

948,100

 

 

$

39.55

 

 

$

37,493

 

April 2018

 

 

1,024,400

 

 

 

36.60

 

 

 

37,492

 

January 2019

 

 

552,100

 

 

 

39.16

 

 

 

21,623

 

February 2019

 

 

120,600

 

 

 

41.40

 

 

 

4,993

 

June 2019

 

 

509,100

 

 

 

45.29

 

 

 

23,055

 

August 2019

 

 

141,100

 

 

 

49.93

 

 

 

7,045

 

March 2020

 

 

600,000

 

 

 

53.38

 

 

 

32,029

 

September 2020

 

 

506,244

 

 

 

59.26

 

 

 

30,000

 

Total

 

 

4,401,644

 

 

 

 

 

 

$

193,730

 

As of September 30, 2020, we had remaining authorization to repurchase up to approximately $106.3 million of shares of our common stock under the stock repurchase program.

Cash, Cash Equivalents and Restricted Cash

Our cash flows from operating, investing, and financing activities were as follows (in thousands):

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

Net cash provided by operating activities

 

$

311,167

 

 

$

157,933

 

 

$

153,234

 

Net cash used in investing activities

 

 

(45,352

)

 

 

(59,872

)

 

 

14,520

 

Net cash used in financing activities

 

 

(188,176

)

 

 

(123,885

)

 

 

(64,291

)

 

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Cash Flows from Operating Activities

Cash flows provided by operating activities increased by $153.2 million during the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019. The increase is primarily due to both positive changes in operating assets and liabilities relative to the prior year and higher cash-related net income. Fluctuations in accounts receivable, unbilled services (including contract assets), and deferred revenue occur on a regular basis as we perform services, achieve milestones or other billing criteria, send invoices to customers, and collect outstanding accounts receivable. This activity varies by individual customer and contract. We attempt to negotiate payment terms that provide for payment of services prior to or soon after the provision of services, but the levels of accounts receivable, unbilled services (including contract assets), and deferred revenue can vary significantly from period to period. The impacts of the COVID-19 pandemic could result in lower cash flows from operating activities during 2020 as a result of the impacts on our revenue and costs.

Cash Flows from Investing Activities

For the nine months ended September 30, 2020, we used $45.4 million in cash for investing activities, which consisted of $38.5 million for purchases of property and equipment and $6.9 million for investments in unconsolidated affiliates. We continue to closely monitor our capital expenditures, especially in light of the COVID-19 pandemic, while making strategic investments in the development of our information technology infrastructure to meet the needs of our workforce, enable efficiencies, reduce business continuity risks, and conform to changes in governing rules and regulations.

For the nine months ended September 30, 2019, we used $59.9 million in cash for investing activities, which consisted of $50.6 million for purchases of property and equipment and $9.2 million for investments in unconsolidated affiliates.

Cash Flows from Financing Activities

For the nine months ended September 30, 2020, our financing activities used $188.2 million in cash, which consisted primarily of repurchases of our common stock, contingent consideration payments, and repayments of long-term debt.

For the nine months ended September 30, 2019, we used $123.9 million in cash for financing activities, which consisted primarily of repayments of our term loan debt and payments for repurchases of our common stock. These payments were partially offset by proceeds from issuance of term loan debt, additional borrowings under our accounts receivable financing agreement, and proceeds from exercise of stock options.

Contractual Obligations and Commitments

There have been no material changes during the nine months ended September 30, 2020, outside of the ordinary course of business, to our contractual obligations as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

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Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses during the period, as well as disclosures of contingent assets and liabilities at the date of the financial statements. We evaluate our estimates on an ongoing basis, including those related to revenue recognition, share-based compensation, valuation of goodwill and identifiable intangibles, tax-related contingencies and valuation allowances, allowance for doubtful accounts, and litigation contingencies, among others. These estimates are based on the information available to management at the time these estimates, judgments, and assumptions are made. Actual results may differ materially from these estimates. Except as set forth below, there have been no significant changes to our critical accounting policies and estimates. For additional information on all of our critical accounting policies and estimates, refer to Part II - Item 7 - Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Goodwill and Intangible Assets

Goodwill represents the excess of purchase price over the estimated fair value of net assets acquired, including the amount assigned to identifiable intangible assets, in business combinations. In accordance with ASC Topic 350, Intangibles - Goodwill and Other, goodwill is not subject to amortization but must be tested for impairment annually or more frequently if events or changes in circumstances indicate that goodwill might be impaired. Goodwill is tested for impairment at the reporting unit level, which is one level below the operating segment level. This test requires us to determine if the implied fair value of the reporting unit’s goodwill is less than its carrying amount.

The impairment analysis requires significant judgments, estimates and assumptions. There is no assurance that the actual future earnings or cash flows of the reporting units will not decline significantly from the projections used in the impairment analysis. Goodwill impairment charges may be recognized in future periods in one or more of the reporting units to the extent changes in factors or circumstances occur, including deterioration in the macroeconomic environment, industry, deterioration in our performance or future projections, or changes in plans for one or more of our reporting units. Specifically, the broad impacts of the COVID-19 pandemic may contribute to the potential impairment of the carrying value of our goodwill and long-lived assets in the future.

We completed our annual impairment test for potential impairment as of October 1, 2019 for all five of our reporting units, determining that there were no impairments. Our goodwill is principally related to the Merger completed on August 1, 2017. As of September 30, 2020, we evaluated whether a triggering event had occurred because of the broad impacts of the COVID-19 pandemic. The COVID-19 pandemic negatively impacted our results of operations during the three and nine months ended September 30, 2020. We expect the pandemic to continue to negatively impact our full year 2020 results of operations. However, at this time, we do not believe there has been a significant change in the long-term fundamentals of our business. Therefore, we have concluded a triggering event did not occur, and, as a result, no interim impairment testing was required during the three months ended September 30, 2020. We will continue to evaluate the impacts of the COVID-19 pandemic on our business. Depending on the extent to which future developments negatively impact our results of operations and financial outlook, an interim impairment test may be required in the future.

Intangible assets consist of backlog, customer relationships, and trademarks. We amortize intangible assets related to customer relationships and trademarks on a straight-line basis over the estimated useful life of the asset. Intangible assets related to backlog are amortized based on our expectations of the timing of when revenue associated with the backlog is expected to be recognized.

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We review intangible assets at the end of each reporting period to determine if facts and circumstances indicate that the useful life is shorter than originally estimated or that the carrying amount of the assets might not be recoverable. If such facts and circumstances exist, we assess the recoverability of identified assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives to their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets and occur in the period in which the impairment determination is made. As of September 30, 2020, we evaluated whether a triggering event had occurred because of the broad impacts of the COVID-19 pandemic. The COVID-19 pandemic negatively impacted our results of operations during the three and nine months ended September 30, 2020. We expect the pandemic to continue to negatively impact our full year 2020 results of operations. However, at this time, we do not believe there has been a significant change in the long-term fundamentals of our business. Therefore, we have concluded a triggering event did not occur, and, as a result, no interim impairment testing was required during the three months ended September 30, 2020. We will continue to evaluate the impacts of the COVID-19 pandemic on our business. Depending on the extent to which future developments negatively impact our results of operations and financial outlook, an interim impairment test may be required in the future.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Except for the broad effects of the COVID-19 pandemic on the global economy and major financial markets, there have been no material changes to our quantitative and qualitative disclosures about market risk as compared to the quantitative and qualitative disclosures about market risk described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Changes in Internal Controls

There have been no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

We are party to legal proceedings incidental to our business. While our management currently believes the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our consolidated financial statements, litigation is subject to inherent uncertainties. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on our financial condition and results of operations.

Please refer to “Note 15 – Commitments and Contingencies” of our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional material developments to legal proceedings included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Item 1A. Risk Factors.

Other than the following risk factors, there have been no significant changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019. Refer to “Risk Factors” in Part 1, Item 1A of that report for a detailed discussion of risk factors affecting us.

Our acquisition strategy may present additional risks, including the risk that we may be unable to fully realize the competitive and operating synergies projected to be achieved through any specific acquisition.

We have historically grown our business both organically and through acquisitions, most notably our 2017 merger (the “Merger”) with Double Eagle Parent, Inc. (“inVentiv”), the parent company of inVentiv Health, Inc., and our pending acquisition (the “Synteract Acquisition”) of SHCR Holdings Corporation (“Synteract”). We have and will continue to assess the need and opportunity to offer additional services through acquisitions of other companies. Acquisitions involve numerous risks, including the following:

 

ability to identify suitable acquisition opportunities or obtain any necessary financing on commercially acceptable terms;

 

increased risk to our financial position and liquidity through changes to our capital structure and assumption of acquired liabilities, including any indebtedness incurred to finance the acquisitions and related interest expense;

 

diversion of management’s attention from normal daily operations of the business;

 

insufficient revenues to offset increased expenses associated with acquisitions;

 

assumption of liabilities and exposure to unforeseen liabilities of acquired companies, including liabilities for their failure to comply with healthcare, tax, and other regulations;

 

inability to achieve identified operating and financial synergies and other benefits anticipated to result from an acquisition;

 

difficulties integrating and documenting processes and controls in conformance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002;

 

ability to integrate acquired operations, products, and technologies into our business;

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difficulties retaining and integrating acquired personnel and distinct cultures into our business; and

 

the potential loss of key employees, customers, or projects.

For example, fully realizing the anticipated benefits of the Merger and the Synteract Acquisition will depend on, among other things, our ability to integrate the businesses, achieve operating synergies and obtain the other expected benefits from the transactions. We have incurred and will continue to incur substantial expenses in connection with consummation of the Merger and the Synteract Acquisition and combining the businesses, operations, networks, systems, technologies, policies, and procedures of these companies, including integrating and documenting processes and controls in conformance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which were not applicable to inVentiv prior to the Merger or Synteract prior to the Synteract Acquisition. If we are unsuccessful in managing our integrated operations, or if we do not fully realize the expected operating efficiencies, cost savings, and other benefits currently anticipated from the Merger or the Synteract Acquisition, our operations and financial condition could be adversely affected and we might not be able to take advantage of business development opportunities.

We may also spend time and money investigating and negotiating with potential acquisition targets but not complete the transaction. Any acquisition could involve other risks, including, among others, the assumption of additional liabilities and expenses, difficulties and expenses in connection with integrating the acquired companies and achieving the expected benefits, issuances of potentially dilutive securities or interest-bearing debt, loss of key employees of the acquired companies, transaction expenses, diversion of management's attention from other business concerns, and, with respect to the acquisition of international companies, the inability to overcome differences in international business practices, language and customs. Our failure to successfully integrate potential future acquisitions could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

The COVID-19 pandemic has adversely impacted our business and results of operations, and is expected to continue to do so.

On March 11, 2020, the World Health Organization designated the outbreak of the novel strain of coronavirus that causes the disease known as COVID-19 as a global pandemic. Governments around the world have taken unprecedented actions to mitigate the spread of COVID-19, including stay-at-home orders, social distancing requirements, quarantine requirements, and limitations on travel, including the closing of national borders. Governments have also encouraged businesses to allow their employees to work remotely and minimize travel. As a result of these restrictions and recommendations, most of our employees are working remotely where possible and we have limited employee travel.

As a result of the COVID-19 pandemic, we have experienced, and expect to continue to experience, disruptions that have severely impacted, and are expected to continue to impact, our business and our operations, including:

 

delays or difficulties in commencing new and operating ongoing clinical trials, including the inability to access investigative sites, delays in enrolling patients and difficulty obtaining necessary pharmaceutical products and supplies;

 

within the Commercial Solutions segment, delayed decision making related to new business awards, delays or cancellations of existing customer projects, and restrictions on the ability of our field teams to visit healthcare providers;

 

diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our clinical trials, as well as the reduction of our customers’ operating budgets;

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interruption of key clinical trial activities, such as clinical trial site data monitoring, due to social distancing requirements, stay-at-home orders imposed or recommended by federal or state governments, employers, and others or interruption of clinical trial subject visits and study procedures;

 

shutdowns or other business disruptions at our customers;

 

limitations on our employee resources, including because of stay-at-home orders from federal or state governments, sickness of employees or their families or the desire of employees to avoid contact with large groups of people;

 

diversion of management resources to focus on mitigating the impacts of the COVID-19 pandemic; and

 

impacts from prolonged remote work arrangements, such as strains on our business continuity plans, cybersecurity risks, and inability of certain employees to perform their work remotely.

We currently expect that these disruptions will continue to negatively impact our results of operations for the year ending December 31, 2020. The COVID-19 pandemic continues to evolve rapidly. The extent to which the pandemic will impact our business, liquidity and financial results will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate duration and severity of the pandemic; the effectiveness of any vaccines created; the frequency and severity of future waves of infections; travel restrictions and social distancing requirements in the countries where we conduct business; the effectiveness of actions taken to contain and treat the disease; and how quickly and to what extent more normalized economic and operating conditions can resume. If we or our customers experience prolonged shutdowns or other business disruptions beyond current expectations, our ability to conduct our business could be materially and adversely impacted, and our business, liquidity, and financial results may be adversely affected.

The continued spread of COVID-19 has led to disruption and volatility in the global capital markets, which increases the cost of, and adversely impacts access to, capital and increases economic uncertainty. This volatility and uncertainty adversely affected our stock price, and may again adversely affect our stock price in the future. The actions that governments and individuals have taken in response to COVID-19 have led to a sharp contraction in many aspects of the United States economy and a steep rise in unemployment. The pandemic has caused an economic recession, which may lead our customers to reduce their operating budgets or drive them to internally perform the clinical development and commercialization tasks that we provide, in which case our business would suffer. Even after the COVID-19 pandemic has subsided, we may continue to experience material adverse effects to our business as a result of the global economic impact of the pandemic.

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Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.

Recent Sales of Unregistered Securities

Not applicable.

Purchases of Equity Securities by the Issuer

During the three months ended September 30, 2020, we repurchased 506,244 shares of our Class A common stock in a private transaction under our previously announced stock repurchase program described below, for a total purchase price of approximately $30.0 million. As of September 30, 2020, we have remaining authorization to repurchase up to approximately $106.3 million of shares of our Class A common stock under the stock repurchase program.

 

Period

 

Total number of shares purchased

 

 

Average price paid per share

 

 

Total number of shares purchased as part of publicly announced plans or programs (1)

 

 

Approximate dollar value of shares that may yet be purchased under the plans or programs (in thousands)

 

July 1, 2020 - July 31, 2020

 

 

 

 

$

 

 

 

 

 

$

 

August 1, 2020 - August 31, 2020

 

 

 

 

$

 

 

 

 

 

$

 

September 1, 2020 - September 30, 2020

 

 

506,244

 

 

$

59.26

 

 

 

506,244

 

 

$

106,270

 

 

 

 

506,244

 

 

 

 

 

 

 

506,244

 

 

 

 

 

 

(1) On February 26, 2018, our Board authorized the repurchase of up to an aggregate of $250.0 million of our Class A common stock, par value $0.01 per share, from time to time in open market transactions effected through a broker at prevailing market prices, in block trades, or privately negotiated transactions through December 31, 2019 (the “stock repurchase program”). The stock repurchase program commenced on March 1, 2018. On December 5, 2019, our Board increased the dollar amount authorized under the stock repurchase program to an aggregate of $300.0 million and extended the term of the program to December 31, 2020. Share repurchases are funded primarily with our working capital, cash flow from operations, and funds available through various borrowing arrangements. The stock repurchase program does not obligate us to repurchase any particular amount of our Class A common stock, and may be modified, extended, suspended, or discontinued at any time. The timing and amount of repurchases is determined by our management based on a variety of factors such as the market price of our Class A common stock, our corporate cash requirements, and overall market conditions. The stock repurchase program is subject to applicable legal requirements, including federal and state securities laws and applicable Nasdaq rules. We may also repurchase shares of our Class A common stock pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, which would permit shares of our Class A common stock to be repurchased when we might otherwise be precluded from doing so by law.

We immediately retired all of the repurchased common stock and charged the par value of the shares to common stock. The excess of the repurchase price over the par value was applied on a pro rata basis against additional paid-in capital, with the remainder applied to accumulated deficit.

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Item 5. Other Information.

On October 26, 2020, Syneos Health Clinical, Inc. (“Buyer”), our wholly-owned subsidiary, entered into a stock purchase agreement (the “Purchase Agreement”) with Synteract, Inc.’s parent company, SHCR Holdings, LLC (“Seller”), for the purchase of 100% of the outstanding shares of SHCR Holdings Corporation (“Synteract”) for an aggregate purchase price of $400 million in cash (the “Synteract Acquisition”), subject to certain customary working capital and other adjustments. The Synteract Acquisition is expected to close in the fourth quarter of 2020, subject to the satisfaction or waiver of customary closing conditions.

Consummation of the Synteract Acquisition is subject to various conditions, including, among others, the expiration of the applicable waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended and certain foreign regulatory approvals. The Purchase Agreement contains termination rights for each of Buyer and Seller, including, among others, if the closing of the transaction does not occur on or before February 23, 2021, subject to extension until May 24, 2021 in certain circumstances.

The purchase price of the Synteract Acquisition is expected to be funded using cash on hand and borrowings under our revolving credit facility.

The foregoing summary of the Purchase Agreement is qualified in its entirety by the full text of the Purchase Agreement, which is attached hereto as Exhibit 2.1 and is incorporated by reference herein.

 

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Item 6. Exhibits

 

 

 

 

Incorporated by Reference

(Unless Otherwise Indicated)

Exhibit

Number

 

Exhibit Description

Form

File No.

Exhibit

Filing Date

2.1

 

Stock Purchase Agreement, dated as of October 26, 2020, by and between SHCR Holdings, LLC and Syneos Health Clinical, Inc.

Filed herewith

10.1

 

Fourth Amendment to the Purchase and Sale Agreement, dated as of September 25, 2020, among each of the entities listed on the signature pages as a New Originator, each of the entities listed on the signature pages as an Existing Originator, and Syneos Health, LLC, as servicer, and Syneos Health Receivables LLC.

Filed herewith

10.2

 

Ninth Amendment to the Receivables Financing Agreement, dated as of September 25, 2020, by and among Syneos Health Receivables LLC, as borrower, Syneos Health, LLC, as initial servicer, and PNC Bank, National Association, as administrative agent and as lender.

Filed herewith

10.3

 

Second Amendment to the Purchase and Sale Agreement, dated as of July 25, 2019, among inVentiv Commercial Services, LLC, each of the entities listed on the signature pages as an Existing Originator, and Syneos Health, LLC, as servicer, and Syneos Health Receivables LLC.

Filed herewith

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Filed herewith

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Filed herewith

32.1

 

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Furnished herewith

32.2

 

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Furnished herewith

101.INS

 

Inline XBRL Instance Document - the Instance Document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.

Filed herewith

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document.

Filed herewith

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

Filed herewith

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document.

Filed herewith

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document.

Filed herewith

101.PRE

 

Inline Taxonomy Extension Presentation Linkbase Document.

Filed herewith

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

Filed herewith

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

SYNEOS HEALTH, INC.

 

 

 

 

 

 

 

 

 

 

Date:  October 28, 2020

 

BY:

 

/s/ Jason Meggs

 

 

 

 

Jason Meggs

 

 

 

 

Chief Financial Officer

(Principal Financial Officer)

 

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