Annual Statements Open main menu

Syneos Health, Inc. - Quarter Report: 2022 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, 2022

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

img222613681_0.jpg 

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 31, 2022, there were approximately 102,904,024 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 Income for the three and nine months ended September 30, 2022 and 2021 (unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2022 and 2021 (unaudited)

4

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 (unaudited)

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (unaudited)

6

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2022 and 2021 (unaudited)

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

8

 

 

 

Item 2.

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

24

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

 

 

 

Item 4.

Controls and Procedures

37

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

38

 

 

 

Item 1A.

Risk Factors

38

 

 

 

Item 2.

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

39

 

 

 

Item 5.

Other Information

40

 

 

 

Item 6.

Exhibits

41

 

 

 

 

Signature

42

 

 

2


Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

 

SYNEOS HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

(in thousands, except per share data)

 

Revenue

 

$

1,336,223

 

 

$

1,348,230

 

 

$

4,033,215

 

 

$

3,839,586

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Direct costs (exclusive of depreciation and amortization)

 

 

1,017,784

 

 

 

1,031,887

 

 

 

3,097,113

 

 

 

2,969,718

 

Selling, general, and administrative expenses

 

 

130,355

 

 

 

139,524

 

 

 

409,561

 

 

 

421,507

 

Restructuring and other costs

 

 

8,727

 

 

 

7,209

 

 

 

33,267

 

 

 

18,403

 

Depreciation

 

 

21,797

 

 

 

17,680

 

 

 

63,617

 

 

 

54,285

 

Amortization

 

 

39,717

 

 

 

38,574

 

 

 

121,320

 

 

 

117,618

 

Total operating expenses

 

 

1,218,380

 

 

 

1,234,874

 

 

 

3,724,878

 

 

 

3,581,531

 

Income from operations

 

 

117,843

 

 

 

113,356

 

 

 

308,337

 

 

 

258,055

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other expense, net:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

(303

)

 

 

76

 

 

 

(342

)

 

 

5

 

Interest expense

 

 

22,131

 

 

 

16,698

 

 

 

55,998

 

 

 

62,645

 

Loss on extinguishment of debt

 

 

67

 

 

 

 

 

 

67

 

 

 

2,802

 

Other income, net

 

 

(20,737

)

 

 

(3,827

)

 

 

(21,247

)

 

 

(5,856

)

Total other expense, net

 

 

1,158

 

 

 

12,947

 

 

 

34,476

 

 

 

59,596

 

Income before provision for income taxes

 

 

116,685

 

 

 

100,409

 

 

 

273,861

 

 

 

198,459

 

Income tax expense

 

 

29,636

 

 

 

22,166

 

 

 

62,892

 

 

 

39,587

 

Net income

 

$

87,049

 

 

$

78,243

 

 

$

210,969

 

 

$

158,872

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.85

 

 

$

0.76

 

 

$

2.05

 

 

$

1.53

 

Diluted

 

$

0.84

 

 

$

0.75

 

 

$

2.04

 

 

$

1.51

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

102,731

 

 

 

103,562

 

 

 

102,997

 

 

 

103,924

 

Diluted

 

 

103,206

 

 

 

104,785

 

 

 

103,563

 

 

 

105,087

 

 

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,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

 

 

 

 

 

 

Net income

 

$

87,049

 

 

$

78,243

 

 

$

210,969

 

 

$

158,872

 

Unrealized (loss) gain on derivative instruments, net of income tax (benefit) expense of ($128), $317, $4,899, and $3,926, respectively

 

 

(360

)

 

 

936

 

 

 

13,808

 

 

 

11,581

 

Foreign currency translation adjustments, net of income tax expense (benefit) of $200, ($1,102), ($766), and ($1,260), respectively

 

 

(85,511

)

 

 

(23,687

)

 

 

(172,723

)

 

 

(19,172

)

Comprehensive income

 

$

1,178

 

 

$

55,492

 

 

$

52,054

 

 

$

151,281

 

 

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, 2022

 

 

December 31, 2021

 

 

 

(in thousands, except par value)

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash, cash equivalents, and restricted cash

 

$

170,100

 

 

$

106,475

 

Accounts receivable and unbilled services, net

 

 

1,647,461

 

 

 

1,524,890

 

Prepaid expenses and other current assets

 

 

145,645

 

 

 

135,091

 

Total current assets

 

 

1,963,206

 

 

 

1,766,456

 

Property and equipment, net

 

 

255,749

 

 

 

222,657

 

Operating lease right-of-use assets

 

 

185,727

 

 

 

209,408

 

Goodwill

 

 

4,850,457

 

 

 

4,956,015

 

Intangible assets, net

 

 

710,637

 

 

 

854,067

 

Deferred income tax assets

 

 

30,622

 

 

 

35,387

 

Other long-term assets

 

 

201,385

 

 

 

193,103

 

Total assets

 

$

8,197,783

 

 

$

8,237,093

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

118,952

 

 

$

107,535

 

Accrued expenses

 

 

653,199

 

 

 

614,441

 

Deferred revenue

 

 

885,013

 

 

 

868,455

 

Current portion of operating lease obligations

 

 

41,123

 

 

 

43,058

 

Current portion of finance lease obligations

 

 

25,053

 

 

 

20,627

 

Total current liabilities

 

 

1,723,340

 

 

 

1,654,116

 

Long-term debt

 

 

2,752,470

 

 

 

2,775,721

 

Operating lease long-term obligations

 

 

180,169

 

 

 

205,798

 

Finance lease long-term obligations

 

 

50,463

 

 

 

34,181

 

Deferred income tax liabilities

 

 

82,284

 

 

 

78,062

 

Other long-term liabilities

 

 

54,996

 

 

 

76,660

 

Total liabilities

 

 

4,843,722

 

 

 

4,824,538

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 16)

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

Preferred stock, $0.01 par value; 30,000 shares authorized, 0 shares issued and outstanding as of September 30, 2022 and December 31, 2021

 

 

 

 

 

 

Common stock, $0.01 par value; 600,000 shares authorized, 102,895 and 103,764 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively

 

 

1,029

 

 

 

1,038

 

Additional paid-in capital

 

 

3,449,399

 

 

 

3,474,088

 

Accumulated other comprehensive loss, net of taxes

 

 

(208,533

)

 

 

(49,618

)

Retained earnings (accumulated deficit)

 

 

112,166

 

 

 

(12,953

)

Total shareholders’ equity

 

 

3,354,061

 

 

 

3,412,555

 

Total liabilities and shareholders’ equity

 

$

8,197,783

 

 

$

8,237,093

 

 

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,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

210,969

 

 

$

158,872

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

184,937

 

 

 

171,903

 

Share-based compensation

 

 

46,499

 

 

 

48,891

 

Provision for doubtful accounts

 

 

179

 

 

 

51

 

Provision for (benefit from) deferred income taxes

 

 

8,797

 

 

 

(21,324

)

Foreign currency transaction adjustments

 

 

(30,445

)

 

 

(6,320

)

Fair value adjustment of contingent obligations

 

 

 

 

 

(597

)

Loss on extinguishment of debt

 

 

67

 

 

 

2,802

 

Other non-cash items

 

 

(8,219

)

 

 

6,657

 

Changes in operating assets and liabilities, net of effect of acquisitions:

 

 

 

 

 

 

Accounts receivable, unbilled services, and deferred revenue

 

 

(137,124

)

 

 

(154,162

)

Accounts payable and accrued expenses

 

 

74,466

 

 

 

99,417

 

Other assets and liabilities

 

 

(46,962

)

 

 

(41,891

)

Net cash provided by operating activities

 

 

303,164

 

 

 

264,299

 

Cash flows from investing activities:

 

 

 

 

 

 

Payments related to acquisitions of businesses, net of cash acquired

 

 

(4,484

)

 

 

(226,347

)

Proceeds from notes receivable from divestiture

 

 

 

 

 

5,000

 

Purchases of property and equipment

 

 

(69,833

)

 

 

(29,917

)

Investments in unconsolidated affiliates

 

 

(5,230

)

 

 

(5,074

)

Loan to unconsolidated affiliate

 

 

 

 

 

(3,844

)

Net cash used in investing activities

 

 

(79,547

)

 

 

(260,182

)

Cash flows from financing activities:

 

 

 

 

 

 

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

 

 

 

 

 

494,505

 

Payments of debt financing costs

 

 

 

 

 

(544

)

Repayments of long-term debt

 

 

(25,000

)

 

 

(602,277

)

Proceeds from accounts receivable financing agreement

 

 

 

 

 

65,000

 

Proceeds from revolving line of credit

 

 

130,000

 

 

 

30,000

 

Repayments of revolving line of credit

 

 

(130,000

)

 

 

 

Payments of contingent consideration related to acquisitions

 

 

(3,082

)

 

 

(7,197

)

Payments of finance leases

 

 

(4,379

)

 

 

(12,748

)

Payments for repurchases of common stock

 

 

(149,961

)

 

 

(117,521

)

Proceeds from exercises of stock options

 

 

23,568

 

 

 

26,223

 

Payments related to tax withholdings for share-based compensation

 

 

(30,633

)

 

 

(30,924

)

Net cash used in financing activities

 

 

(189,487

)

 

 

(155,483

)

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

 

 

29,495

 

 

 

1,728

 

Net change in cash, cash equivalents, and restricted cash

 

 

63,625

 

 

 

(149,638

)

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

 

 

106,475

 

 

 

272,173

 

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

 

$

170,100

 

 

$

122,535

 

 

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,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

 

 

 

 

 

 

Shareholders’ equity, beginning balance

 

$

3,329,065

 

 

$

3,238,614

 

 

$

3,412,555

 

 

$

3,242,112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

1,026

 

 

 

1,035

 

 

 

1,038

 

 

 

1,039

 

Repurchases of common stock

 

 

 

 

 

 

 

 

(19

)

 

 

(15

)

Issuances of common stock

 

 

3

 

 

 

2

 

 

 

10

 

 

 

13

 

Ending balance

 

 

1,029

 

 

 

1,037

 

 

 

1,029

 

 

 

1,037

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional paid-in capital:

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

3,425,584

 

 

 

3,430,375

 

 

 

3,474,088

 

 

 

3,461,747

 

Repurchases of common stock

 

 

 

 

 

 

 

 

(64,092

)

 

 

(49,595

)

Issuances of common stock

 

 

10,840

 

 

 

10,904

 

 

 

(7,096

)

 

 

(4,665

)

Share-based compensation

 

 

12,975

 

 

 

15,099

 

 

 

46,499

 

 

 

48,891

 

Ending balance

 

 

3,449,399

 

 

 

3,456,378

 

 

 

3,449,399

 

 

 

3,456,378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

(122,662

)

 

 

(25,641

)

 

 

(49,618

)

 

 

(40,801

)

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

 

 

(360

)

 

 

936

 

 

 

13,808

 

 

 

11,581

 

Foreign currency translation adjustment, net of taxes

 

 

(85,511

)

 

 

(23,687

)

 

 

(172,723

)

 

 

(19,172

)

Ending balance

 

 

(208,533

)

 

 

(48,392

)

 

 

(208,533

)

 

 

(48,392

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings (accumulated deficit):

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

25,117

 

 

 

(167,155

)

 

 

(12,953

)

 

 

(179,873

)

Repurchases of common stock

 

 

 

 

 

 

 

 

(85,850

)

 

 

(67,911

)

Net income

 

 

87,049

 

 

 

78,243

 

 

 

210,969

 

 

 

158,872

 

Ending balance

 

 

112,166

 

 

 

(88,912

)

 

 

112,166

 

 

 

(88,912

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity, ending balance

 

$

3,354,061

 

 

$

3,320,111

 

 

$

3,354,061

 

 

$

3,320,111

 

 

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

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 to 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 fiscal year ended December 31, 2021 (the “2021 Form 10-K”), filed with the Securities and Exchange Commission on February 17, 2022. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the full year ending December 31, 2022 or any other future period. The unaudited condensed consolidated balance sheet as of December 31, 2021 is derived from the amounts in the audited consolidated balance sheet included in the 2021 Form 10-K.

Reclassification

Certain previously reported amounts have been reclassified to conform to the current year presentation.

Macroeconomic Environment

The Company’s business and operations have been and are expected to continue to be impacted by various risks and uncertainties, including but not limited to, the broad effects of the current macroeconomic environment on the global economy and major financial markets, including interest rate increases, inflation, and the ongoing COVID-19 pandemic, as well as other risks detailed in Part I, Item 1A, “Risk Factors” in the 2021 Form 10-K and Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q.

8


Table of Contents

 

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. As part of a master netting arrangement, 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. Under the terms of the master netting arrangement, the financial institution has the right, ability, and intent to offset a positive balance in one account against an overdrawn amount in another account. Amounts in each of the accounts are unencumbered and unrestricted with respect to use. As such, the net cash balance related to this pooling arrangement is included in cash, cash equivalents, and restricted cash in the condensed consolidated balance sheets.

The Company’s net cash pool position consisted of the following (in thousands):

 

 

September 30, 2022

 

 

December 31, 2021

 

Gross cash position

 

$

194,166

 

 

$

179,160

 

Less: cash borrowings

 

 

(194,713

)

 

 

(167,507

)

Net cash position

 

$

(547

)

 

$

11,653

 

The net cash position as of September 30, 2022 is negative due to the foreign exchange rate differential.

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, 2022

 

 

December 31, 2021

 

Accounts receivable billed

 

$

917,436

 

 

$

873,265

 

Accounts receivable unbilled

 

 

240,501

 

 

 

241,799

 

Contract assets

 

 

497,334

 

 

 

417,411

 

Less: Allowance for doubtful accounts

 

 

(7,810

)

 

 

(7,585

)

Accounts receivable and unbilled services, net

 

$

1,647,461

 

 

$

1,524,890

 

Accounts Receivable Factoring Arrangement

The Company has an accounts receivable factoring agreement to sell certain eligible unsecured trade accounts receivable, at its option, without recourse, to an unrelated third-party financial institution for cash. For the nine months ended September 30, 2022 and 2021, the Company factored $94.7 million and $97.5 million, respectively, of trade accounts receivable on a non-recourse basis and received $94.2 million and $97.4 million, respectively, in cash proceeds from the sale. The fees associated with these transactions were insignificant.

9


Table of Contents

 

Goodwill

The changes in the carrying amount of goodwill by segment for the nine months ended September 30, 2022 were as follows (in thousands):

 

 

Clinical
Solutions (a)

 

 

Commercial
Solutions (a)

 

 

Total

 

Balance as of December 31, 2021

 

$

3,448,699

 

 

$

1,507,316

 

 

$

4,956,015

 

Acquisitions (b)

 

 

1,903

 

 

 

2,924

 

 

 

4,827

 

Impact of foreign currency translation

 

 

(79,351

)

 

 

(31,034

)

 

 

(110,385

)

Balance as of September 30, 2022

 

$

3,371,251

 

 

$

1,479,206

 

 

$

4,850,457

 

(a) No impairment of goodwill was recorded for the nine months ended September 30, 2022.

(b) Amount represents goodwill recognized in connection with insignificant acquisitions and measurement period adjustments in connection with insignificant 2021 acquisitions during the nine months ended September 30, 2022.

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,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Beginning balance

 

$

(122,662

)

 

$

(25,641

)

 

$

(49,618

)

 

$

(40,801

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

11,547

 

 

 

(8,116

)

 

 

(2,621

)

 

 

(18,761

)

Other comprehensive income (loss) before reclassifications

 

 

2,840

 

 

 

(489

)

 

 

16,279

 

 

 

(205

)

Reclassification adjustments

 

 

(3,200

)

 

 

1,425

 

 

 

(2,471

)

 

 

11,786

 

Ending balance

 

 

11,187

 

 

 

(7,180

)

 

 

11,187

 

 

 

(7,180

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation:

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

(134,209

)

 

 

(17,525

)

 

 

(46,997

)

 

 

(22,040

)

Other comprehensive loss before reclassifications

 

 

(85,511

)

 

 

(23,687

)

 

 

(172,723

)

 

 

(19,172

)

Ending balance

 

 

(219,720

)

 

 

(41,212

)

 

 

(219,720

)

 

 

(41,212

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive loss, net of taxes

 

$

(208,533

)

 

$

(48,392

)

 

$

(208,533

)

 

$

(48,392

)

 

10


Table of Contents

 

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

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Unrealized (loss) gain on derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) during period, before taxes

 

$

3,848

 

 

$

(655

)

 

$

22,055

 

 

$

(275

)

Income tax expense (benefit)

 

 

1,008

 

 

 

(166

)

 

 

5,776

 

 

 

(70

)

Unrealized gain (loss) during period, net of taxes

 

 

2,840

 

 

 

(489

)

 

 

16,279

 

 

 

(205

)

Reclassification adjustment, before taxes

 

 

(4,336

)

 

 

1,908

 

 

 

(3,348

)

 

 

15,782

 

Income tax (benefit) expense

 

 

(1,136

)

 

 

483

 

 

 

(877

)

 

 

3,996

 

Reclassification adjustment, net of taxes

 

 

(3,200

)

 

 

1,425

 

 

 

(2,471

)

 

 

11,786

 

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

 

 

(360

)

 

 

936

 

 

 

13,808

 

 

 

11,581

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment, before taxes

 

 

(85,311

)

 

 

(24,789

)

 

 

(173,489

)

 

 

(20,432

)

Income tax expense (benefit)

 

 

200

 

 

 

(1,102

)

 

 

(766

)

 

 

(1,260

)

Foreign currency translation adjustment, net of taxes

 

 

(85,511

)

 

 

(23,687

)

 

 

(172,723

)

 

 

(19,172

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive loss, net of taxes

 

$

(85,871

)

 

$

(22,751

)

 

$

(158,915

)

 

$

(7,591

)

Other Income, Net

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

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net realized foreign currency (gain) loss

 

$

(1,417

)

 

$

1,861

 

 

$

5,837

 

 

$

3,623

 

Net unrealized foreign currency gain

 

 

(21,376

)

 

 

(2,757

)

 

 

(30,445

)

 

 

(6,320

)

Equity investment loss (income)

 

 

1,000

 

 

 

 

 

 

1,000

 

 

 

(1,100

)

Other, net

 

 

1,056

 

 

 

(2,931

)

 

 

2,361

 

 

 

(2,059

)

Total other income, net

 

$

(20,737

)

 

$

(3,827

)

 

$

(21,247

)

 

$

(5,856

)

 

3. Divestitures and Investments

Divestitures

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. Based on the financial results of the business through May 31, 2022 and 2021, the Company recognized $2.2 million and $1.8 million of contingent consideration in other expense, net in the accompanying condensed consolidated statements of income during the second quarter of 2022 and 2021, respectively, which reflects the maximum amount of future cash consideration.

11


Table of Contents

 

Investments

During 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. During the second quarter of 2021, the Company exchanged the intellectual property for an equity method investment in an unconsolidated variable interest entity. The Company provided the entity with $3.8 million in cash, in the form of a loan, during the third quarter of 2021. Based on the hypothetical liquidation book value of its investment as of September 30, 2022 and 2021, the Company recognized $0.7 million and $3.0 million of losses during the three and nine months ended September 30, 2022, respectively, and $1.2 million and $4.0 million of losses during the three and nine months ended September 30, 2021, respectively, to other expense, net in the accompanying condensed and consolidated statements of income. As of September 30, 2022 and December 31, 2021, the book value of the Company’s investment was $10.2 million and $16.2 million, respectively, and was included in other long-term assets in the accompanying condensed consolidated balance sheets, with a maximum exposure to loss of approximately $13.7 million as of September 30, 2022, which includes funding of the loan.

4. Long-Term Debt Obligations

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

 

 

September 30, 2022

 

 

December 31, 2021

 

Secured Debt

 

 

 

 

 

 

Term Loan A - tranche one due March 2024

 

$

145,926

 

 

$

149,195

 

Term Loan A - tranche two due August 2024

 

 

1,615,067

 

 

 

1,636,797

 

Accounts receivable financing agreement due October 2024

 

 

400,000

 

 

 

400,000

 

Total secured debt

 

 

2,160,993

 

 

 

2,185,992

 

Unsecured Debt

 

 

 

 

 

 

Senior notes due January 2029 (the “Notes”)

 

 

600,000

 

 

 

600,000

 

Total debt obligations

 

 

2,760,993

 

 

 

2,785,992

 

Less: Term loan original issuance discount

 

 

(1,564

)

 

 

(2,228

)

Less: Unamortized deferred issuance costs

 

 

(6,959

)

 

 

(8,043

)

Total long-term debt

 

$

2,752,470

 

 

$

2,775,721

 

Credit Agreement

The Company is party to a credit agreement (as amended, the “Credit Agreement”) that includes a Term Loan A facility (“Term Loan A”) that has two tranches (as detailed in the table above), and a $600.0 million revolving credit facility that matures on August 1, 2024 (the “Revolver”). During the three months ended September 30, 2022, the Company made $25.0 million of voluntary prepayments against Term Loan A that were applied to future mandatory principal payments due. As a result of these and previous voluntary prepayments, the Company is not required to make a mandatory payment against the principal balance of Term Loan A until January 2024. In connection with these prepayments, the Company recorded a $0.1 million loss on extinguishment of debt during the three months ended September 30, 2022. As of September 30, 2022, the interest rate on Term Loan A was 4.37%.

Revolver and Letters of Credit

The Revolver includes letters of credit (“LOCs”) with a sublimit of $150.0 million. As of September 30, 2022, there were no outstanding Revolver borrowings and $13.9 million of LOCs outstanding, leaving $586.1 million of available borrowings under the Revolver, including $136.1 million available for LOCs.

The Notes

The Notes bear interest at a rate of 3.625% per annum, payable semi-annually in arrears that began on July 15, 2021, and will mature on January 15, 2029.

12


Table of Contents

 

Accounts Receivable Financing Agreement

The Company has an accounts receivable financing agreement (as amended) with a termination date of October 2024, unless terminated earlier pursuant to its terms. As of September 30, 2022, the Company had $400.0 million of outstanding borrowings under this agreement, which were recorded in long-term debt on the accompanying condensed consolidated balance sheet. There was no remaining borrowing capacity available under this agreement as of September 30, 2022. As of September 30, 2022, the interest rate on the accounts receivable financing agreement was 4.06%.
 

On October 3, 2022, the Company amended its accounts receivable financing agreement to increase the amount it can borrow from $400.0 million to $550.0 million, and drew down the additional $150.0 million. At the same time, the Company made voluntary prepayments on its Term Loan A totaling $150.0 million; therefore, there was no incremental impact on the Company’s debt balance.

Maturities of Debt Obligations

As of September 30, 2022, the contractual maturities of the Company’s debt obligations (excluding finance leases) were as follows (in thousands):

 

 

Principal

 

Remainder of 2022

 

$

 

2023

 

 

 

2024

 

 

2,160,993

 

2025

 

 

 

2026

 

 

 

2027 and thereafter

 

 

600,000

 

Less: Term loan original issuance discount

 

 

(1,564

)

Less: Unamortized deferred issuance costs

 

 

(6,959

)

Total

 

$

2,752,470

 

 

5. Derivatives

Interest Rate Swaps

The Company has entered into various interest rate swaps to mitigate its exposure to changes in interest rates on its variable rate debt. 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 that increased to $1.42 billion on June 30, 2021, an effective date of March 31, 2020, and will expire on March 31, 2023. As of September 30, 2022, the notional value of these interest rate swaps was $1.03 billion.

Foreign Exchange Forward

On October 30, 2020, the Company entered into a foreign exchange forward in order to minimize monthly foreign currency remeasurement gains or losses on non-functional currency monetary balances. The foreign exchange forward notional value may be adjusted each month as the exposure balance changes. The Company did not designate the derivative as a hedge. All changes in the fair value of the foreign exchange forward are recorded in earnings every month to other (income) expense, net in the accompanying condensed consolidated statements of income. The Company recognized $2.6 million and $10.0 million of realized losses during the three and nine months ended September 30, 2022, respectively, and $2.0 million and $0.5 million of realized losses during the three and nine months ended September 30, 2021, respectively, related to this foreign exchange forward. As of September 30, 2022, the notional value was zero as the Company discontinued the use of this foreign exchange forward during the three months ended September 30, 2022.

13


Table of Contents

 

Fair Values

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, 2022

 

 

December 31, 2021

 

Interest rate swaps - current

 

Prepaid expenses and other current assets

 

$

17,829

 

 

$

 

Interest rate swaps - non-current

 

Other long-term assets

 

 

 

 

 

948

 

Fair value of derivative assets

 

 

 

$

17,829

 

 

$

948

 

 

 

 

 

 

 

 

 

 

Interest rate swaps - current

 

Accrued expenses

 

$

 

 

$

1,827

 

Fair value of derivative liabilities

 

 

 

$

 

 

$

1,827

 

 

6. Fair Value Measurements

Assets and Liabilities Carried at Fair Value

As of September 30, 2022 and December 31, 2021, 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, 2022, 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)

 

$

19,347

 

 

$

 

 

$

 

 

$

 

 

$

19,347

 

Partnership interests (b)

 

 

 

 

 

 

 

 

 

 

 

12,906

 

 

 

12,906

 

Derivative instruments (c)

 

 

 

 

 

17,829

 

 

 

 

 

 

 

 

 

17,829

 

Total assets

 

$

19,347

 

 

$

17,829

 

 

$

 

 

$

12,906

 

 

$

50,082

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent obligations related to acquisitions (d)

 

$

 

 

$

 

 

$

16,100

 

 

$

 

 

$

16,100

 

Total liabilities

 

$

 

 

$

 

 

$

16,100

 

 

$

 

 

$

16,100

 

 

14


Table of Contents

 

As of December 31, 2021, 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)

 

$

24,775

 

 

$

 

 

$

 

 

$

 

 

$

24,775

 

Partnership interests (b)

 

 

 

 

 

 

 

 

 

 

 

11,176

 

 

 

11,176

 

Derivative instruments (c)

 

 

 

 

 

948

 

 

 

 

 

 

 

 

 

948

 

Total assets

 

$

24,775

 

 

$

948

 

 

$

 

 

$

11,176

 

 

$

36,899

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments (c)

 

$

 

 

$

1,827

 

 

$

 

 

$

 

 

$

1,827

 

Contingent obligations related to acquisitions (d)

 

 

 

 

 

 

 

 

17,997

 

 

 

 

 

 

17,997

 

Total liabilities

 

$

 

 

$

1,827

 

 

$

17,997

 

 

$

 

 

$

19,824

 

(a) Represents the 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, 2022, the Company’s remaining unfunded commitment in the private equity funds was $9.7 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 Accounting Standards Codification (“ASC”) Topic 946, Financial Services – Investment Companies.

(c) Represents the fair value of interest rate swap arrangements (see “Note 5 – Derivatives” for further information).

(d) Represents the fair value of contingent consideration obligations related to acquisitions. 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, 2022 (in thousands):

Balance as of December 31, 2021

 

$

17,997

 

Additions (a)

 

 

1,500

 

Changes in fair value recognized in earnings

 

 

(315

)

Payments (b)

 

 

(3,082

)

Balance as of September 30, 2022

 

$

16,100

 

 

(a) Represents obligations in connection with an insignificant acquisition completed during the three months ended September 30, 2022.

(b) The Company made payments to fully settle the obligations in connection with the insignificant acquisition completed during the third quarter of 2021.

During the nine months ended September 30, 2022, there were no transfers of assets or liabilities between Level 1, Level 2, or Level 3 fair value measurements.

15


Table of Contents

 

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, 2022 and December 31, 2021, assets carried on the condensed consolidated balance sheets and not remeasured to fair value on a recurring basis totaled $5.57 billion and $5.83 billion, respectively.

Fair Value Disclosures for Financial Instruments Not Carried at Fair Value

The estimated fair values of the term loan (based on tranche) and the Notes are determined based on the price that the Company would have had to pay to settle the liabilities. As these liabilities are not actively traded, they are classified as Level 2 fair value measurements. The estimated fair values of the Company’s term loan (based on tranche) and the Notes were as follows (in thousands):

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

Carrying
Value (a)

 

 

Estimated
Fair Value

 

 

Carrying
Value (a)

 

 

Estimated
Fair Value

 

Term Loan A - tranche one due March 2024

 

$

145,797

 

 

$

143,737

 

 

$

149,008

 

 

$

148,945

 

Term Loan A - tranche two due August 2024

 

 

1,613,632

 

 

 

1,590,841

 

 

 

1,634,756

 

 

 

1,635,138

 

Senior notes due January 2029

 

 

600,000

 

 

 

486,000

 

 

 

600,000

 

 

 

595,500

 

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

7. Restructuring and Other Costs

During the three and nine months ended September 30, 2022 and 2021, the Company incurred employee severance and benefit costs, facility and lease termination costs, and other costs related to its restructuring activities. These costs were primarily related to the Company’s ForwardBound margin enhancement initiative. We expect to continue to incur costs related to the restructuring of our operations during 2022 and beyond as we continue the ongoing evaluations of our global workforce and facilities infrastructure needs and in light of changing market conditions and customer requirements.

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

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Employee severance and benefit costs

 

$

7,402

 

 

$

3,438

 

 

$

24,590

 

 

$

11,815

 

Facility and lease termination costs

 

 

1,325

 

 

 

3,760

 

 

 

4,677

 

 

 

6,530

 

Other costs

 

 

 

 

 

11

 

 

 

4,000

 

 

 

58

 

Total restructuring and other costs

 

$

8,727

 

 

$

7,209

 

 

$

33,267

 

 

$

18,403

 

 

16


Table of Contents

 

Accrued Restructuring Liabilities

The following table summarizes activity related to employee severance and benefit costs within accrued restructuring liabilities for the nine months ended September 30, 2022 (in thousands):

Balance as of December 31, 2021

 

$

6,657

 

Expenses incurred (a)

 

 

24,590

 

Payments

 

 

(18,443

)

Balance as of September 30, 2022

 

$

12,804

 

(a) The amount of expenses incurred for the nine months ended September 30, 2022 excludes $4.0 million of other costs that are included in accounts payable and $4.7 million of facility lease closure and lease termination costs that are reflected as reductions of operating lease right-of-use assets, current portion of operating lease obligations, and operating lease long-term obligations under ASC Topic 842, Leases, on the accompanying condensed consolidated balance sheet.

The Company expects the employee severance and benefit costs accrued as of September 30, 2022 will be paid within the next twelve months and are included within accrued expenses on the accompanying condensed consolidated balance sheet.

8. Shareholders’ Equity

Shares Outstanding

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

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Common stock shares, beginning balance

 

 

102,647

 

 

 

103,473

 

 

 

103,764

 

 

 

103,935

 

Repurchases of common stock

 

 

 

 

 

 

 

 

(1,929

)

 

 

(1,500

)

Issuances of common stock

 

 

248

 

 

 

215

 

 

 

1,060

 

 

 

1,253

 

Common stock shares, ending balance

 

 

102,895

 

 

 

103,688

 

 

 

102,895

 

 

 

103,688

 

Stock Repurchase Programs

On November 17, 2020, the Company’s Board of Directors (the “Board”) authorized the repurchase of up to an aggregate of $300.0 million of the Company’s Class A common stock, par value $0.01 per share, 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 through December 31, 2022 (the “2021 Stock Repurchase Program”). The 2021 Stock Repurchase Program took effect on January 1, 2021.

On May 25, 2022, the Board approved a new stock repurchase program (the “2022 Stock Repurchase Program”) that took effect immediately and replaced the 2021 Stock Repurchase Program. The 2022 Stock Repurchase Program authorizes the Company to repurchase up to $350.0 million of the Company’s Class A common stock, par value $0.01, and will expire on December 31, 2024.

17


Table of Contents

 

The 2022 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 cash requirements, and overall market conditions. The 2022 Stock Repurchase Program is subject to applicable legal requirements, including federal and state securities laws and applicable Nasdaq rules. 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 would permit 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, 2022, there were no repurchases under the 2022 Stock Repurchase Program.

The following table sets forth repurchase activity under the 2021 Stock Repurchase Program from inception through the program’s termination on May 25, 2022:

 

 

Total number of
shares purchased

 

 

Average price
paid per share

 

 

Approximate
dollar value of
shares purchased
(in thousands)

 

March 2021

 

 

600,000

 

 

$

74.18

 

 

$

44,505

 

May 2021

 

 

400,000

 

 

 

81.04

 

 

 

32,416

 

June 2021

 

 

500,000

 

 

 

81.20

 

 

 

40,600

 

February 2022

 

 

515,003

 

 

 

78.52

 

 

 

40,439

 

March 2022

 

 

1,413,920

 

 

 

77.46

 

 

 

109,522

 

Total

 

 

3,428,923

 

 

 

 

 

$

267,482

 

 

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 retained earnings (accumulated deficit).

As of September 30, 2022, the Company had remaining authorization to repurchase up to $350.0 million of shares of its common stock under the 2022 Stock Repurchase Program.

9. 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,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

87,049

 

 

$

78,243

 

 

$

210,969

 

 

$

158,872

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

 

102,731

 

 

 

103,562

 

 

 

102,997

 

 

 

103,924

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

475

 

 

 

1,223

 

 

 

566

 

 

 

1,163

 

Diluted weighted average common shares outstanding

 

 

103,206

 

 

 

104,785

 

 

 

103,563

 

 

 

105,087

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.85

 

 

$

0.76

 

 

$

2.05

 

 

$

1.53

 

Diluted

 

$

0.84

 

 

$

0.75

 

 

$

2.04

 

 

$

1.51

 

 

18


Table of Contents

 

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 838,177, 128,894, 592,541, and 146,339 for the three and nine months ended September 30, 2022 and 2021, respectively.

10. Income Taxes

Income Tax Expense

For the three and nine months ended September 30, 2022, the Company recorded income tax expense of $29.6 million and $62.9 million, respectively, compared to pre-tax income of $116.7 million and $273.9 million, respectively. Income tax expense for the three months ended September 30, 2022 included discrete tax expense of $3.1 million, primarily related to unrecognized tax benefits. Income tax expense for the nine months ended September 30, 2022 included net discrete tax benefits of $3.3 million, primarily related to excess tax benefits from share-based compensation partially offset by unrecognized tax benefits related to prior year tax positions. The effective tax rates for the three and nine months ended September 30, 2022, excluding discrete items, varied from the United States (“U.S.”) federal statutory income tax rate of 21.0% primarily due to state and local taxes on U.S. income, foreign income inclusions such as the Global Intangible Low-Taxed Income (“GILTI”) provisions, and foreign tax credits.

For the three and nine months ended September 30, 2021, the Company recorded income tax expense of $22.2 million and $39.6 million, respectively, compared to pre-tax income of $100.4 million and $198.5 million, respectively. Income tax expense for the three and nine months ended September 30, 2021 included discrete tax benefits of $0.7 million and $6.5 million, respectively, primarily related to excess tax benefits from share-based compensation. The effective tax rates for the three and nine months ended September 30, 2021, excluding discrete items, varied from the U.S. federal statutory income tax rate of 21.0% primarily due to foreign tax credits, foreign income inclusions such as the GILTI provisions, and state and local taxes on U.S. income.

Unrecognized Tax Benefits

The Company’s gross unrecognized tax benefits, exclusive of associated interest and penalties, were $14.3 million and $12.1 million as of September 30, 2022 and December 31, 2021, respectively. The increase of $2.2 million was primarily due to changes in prior year positions. The Company believes it is reasonably possible that its unrecognized tax benefits may decrease by approximately $1.3 million within the next 12 months as a result of lapses in statutes of limitations.

Tax Returns under Audit

The Company is not currently under any U.S. federal income tax audits, however, income tax returns are under examination by tax authorities in several state and foreign jurisdictions. The Company’s federal and state tax filings are open to investigations in numerous years due to net operating loss carryforwards. Additionally, the Company currently has an ongoing examination for tax years 2014 to 2020 in the United Kingdom. The United Kingdom is the jurisdiction with the Company’s largest foreign operations. The Company believes that its reserve for uncertain tax positions is adequate to cover existing risks or exposures related to all open tax years and jurisdictions.

19


Table of Contents

 

11. Revenue from Contracts with Customers

Unsatisfied Performance Obligations

As of September 30, 2022, 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 ASC Topic 606, Revenue from Contracts with Customers and all the related amendments was $6.32 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.

Timing of Billing and Performance

During the three and nine months ended September 30, 2022, the Company recognized approximately $363.8 million and $599.5 million, respectively, of revenue that was included in the deferred revenue balance at the beginning of the respective periods. During the three and nine months ended September 30, 2022, there were reductions of approximately $19.7 million and $1.0 million, respectively, in the Company’s revenue recognized related to performance obligations partially satisfied in previous periods. The gross and net amounts of revenue recognized solely from changes in estimates were not material.

12. 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 comprehensive global services for the development of diagnostics, drugs, biologics, devices, and digital therapeutics that span Phases I to IV of clinical development. The segment is organized around clinical pharmacology and bioanalytical services, workforce deployment, full-service clinical studies, real world evidence, and consulting. This segment offers individual services including product development and regulatory consulting, project management, protocol development, investigational site recruitment, clinical monitoring, technology-enabled patient recruitment and engagement, clinical home health services, clinical trial diversity, biometrics, and regulatory affairs; all across a comprehensive range of therapeutic areas. Commercial Solutions provides the pharmaceutical, biotechnology, and healthcare industries with commercialization services, including deployment solutions, communication solutions (public relations, advertising, and medical communications), and consulting services.

The Company’s Chief Operating Decision Maker (the “CODM”) reviews segment performance and allocates resources based upon segment revenue and income from operations. Inter-segment revenue is eliminated from the segment reporting provided 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, general operating expenses associated with the Board and the Company’s senior leadership, finance, investor relations, and internal audit functions, and transaction and integration-related expenses. The Company does not allocate depreciation, amortization, asset impairment charges, or restructuring and other costs to its segments. Prior period segment results have been recast to conform to insignificant changes to management reporting in 2022. 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.

20


Table of Contents

 

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

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Clinical Solutions

 

$

1,003,253

 

 

$

1,040,067

 

 

$

3,047,338

 

 

$

2,972,570

 

Commercial Solutions

 

 

332,970

 

 

 

308,163

 

 

 

985,877

 

 

 

867,016

 

Total revenue

 

 

1,336,223

 

 

 

1,348,230

 

 

 

4,033,215

 

 

 

3,839,586

 

Segment direct costs:

 

 

 

 

 

 

 

 

 

 

 

 

Clinical Solutions

 

 

734,934

 

 

 

779,270

 

 

 

2,263,053

 

 

 

2,248,796

 

Commercial Solutions

 

 

274,714

 

 

 

244,201

 

 

 

809,257

 

 

 

695,284

 

Total segment direct costs

 

 

1,009,648

 

 

 

1,023,471

 

 

 

3,072,310

 

 

 

2,944,080

 

Segment selling, general, and administrative expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Clinical Solutions

 

 

88,823

 

 

 

87,907

 

 

 

267,588

 

 

 

264,742

 

Commercial Solutions

 

 

21,117

 

 

 

20,875

 

 

 

63,946

 

 

 

62,164

 

Total segment selling, general, and administrative expenses

 

 

109,940

 

 

 

108,782

 

 

 

331,534

 

 

 

326,906

 

Segment operating income:

 

 

 

 

 

 

 

 

 

 

 

 

Clinical Solutions

 

 

179,496

 

 

 

172,890

 

 

 

516,697

 

 

 

459,032

 

Commercial Solutions

 

 

37,139

 

 

 

43,087

 

 

 

112,674

 

 

 

109,568

 

Total segment operating income

 

 

216,635

 

 

 

215,977

 

 

 

629,371

 

 

 

568,600

 

Direct costs and operating expenses not allocated to segments:

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation included in direct costs

 

 

8,136

 

 

 

8,416

 

 

 

24,803

 

 

 

25,638

 

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

 

 

4,839

 

 

 

6,683

 

 

 

21,696

 

 

 

23,253

 

Corporate selling, general, and administrative expenses

 

 

15,576

 

 

 

24,059

 

 

 

56,331

 

 

 

71,348

 

Restructuring and other costs

 

 

8,727

 

 

 

7,209

 

 

 

33,267

 

 

 

18,403

 

Depreciation and amortization

 

 

61,514

 

 

 

56,254

 

 

 

184,937

 

 

 

171,903

 

Total income from operations

 

$

117,843

 

 

$

113,356

 

 

$

308,337

 

 

$

258,055

 

 

13. 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,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

North America (a)

 

$

816,378

 

 

$

821,700

 

 

$

2,404,672

 

 

$

2,334,929

 

Europe, Middle East, and Africa

 

 

309,940

 

 

 

324,816

 

 

 

1,005,917

 

 

 

969,887

 

Asia-Pacific

 

 

173,204

 

 

 

159,078

 

 

 

506,972

 

 

 

429,768

 

Latin America

 

 

36,701

 

 

 

42,636

 

 

 

115,654

 

 

 

105,002

 

Total revenue

 

$

1,336,223

 

 

$

1,348,230

 

 

$

4,033,215

 

 

$

3,839,586

 

 

(a) Revenue for the North America region includes revenue attributable to the U.S. of $766.0 million and $775.7 million, or 57.3% and 57.5% of total revenue, for the three months ended September 30, 2022 and 2021, respectively. Revenue for the North America region includes revenue attributable to the U.S. of $2,257.2 million and $2,192.4 million, or 56.0% and 57.1% of total revenue, for the nine months ended September 30, 2022 and 2021, respectively. No other country represented more than 10% of total revenue for any period.

21


Table of Contents

 

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

 

 

 

September 30, 2022

 

 

December 31, 2021

 

Property and equipment, net:

 

 

 

 

 

 

North America (a)

 

$

196,637

 

 

$

165,446

 

Europe, Middle East, and Africa

 

 

31,119

 

 

 

37,004

 

Asia-Pacific

 

 

20,488

 

 

 

13,615

 

Latin America

 

 

7,505

 

 

 

6,592

 

Total property and equipment, net

 

$

255,749

 

 

$

222,657

 

 

(a) Long-lived assets for the North America region include property and equipment, net attributable to the U.S. of $190.0 million and $160.0 million as of September 30, 2022 and December 31, 2021, respectively.

14. 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, 2022 and December 31, 2021, substantially all of the Company’s cash and cash equivalents were held within the U.S.

No single customer accounted for greater than 10% of the Company’s revenue for the three and nine months ended September 30, 2022 or 2021.

As of September 30, 2022 and December 31, 2021, no single customer accounted for greater than 10% of the Company’s accounts receivable and unbilled services (including contract assets) balances.

15. Related-Party Transactions

For the three and nine months ended September 30, 2022, the Company had combined revenue of $3.4 million and $7.0 million, respectively, from six customers whose board of directors each included a member who was also a member of the Company’s Board. As of September 30, 2022, the Company had combined receivables of $0.6 million from three customers whose board of directors included a member who was also a member of the Company’s Board.

On February 8, 2022, the Company completed an insignificant acquisition, which was associated with the 2021 acquisition of RxDataScience, Inc., through an arm’s-length transaction. A member of the Company’s management was a minority shareholder of the acquired company. For additional information, refer to “Note 2 – Financial Statements Details – Goodwill.”

For the three and nine months ended September 30, 2021, the Company had combined revenue of $0.9 million and $2.8 million, respectively, and, as of September 30, 2021, combined receivables of $1.5 million from two customers whose board of directors each included a member who was also a member of the Company’s Board.

22


Table of Contents

 

16. Commitments and Contingencies

Legal Proceedings

In the opinion of management, the outcome of any existing claims and legal or regulatory proceedings, other than Vaitkuvienë v. Syneos Health, Inc., et al, No. 18-0029 (E.D.N.C.) (the “Vaitkuvienë action”), if decided adversely, is not expected to have a material adverse effect on the Company’s business, financial condition, results of operations, or cash flows. There have been no updates from the description of the Vaitkuvienë action included in “Note 17 – Commitments and Contingencies” to the consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” in the 2021 Form 10-K.

23


Table of Contents

 

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, 2021 (our “2021 Form 10-K”).

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 future financial and operational results, our business strategy, the future impact of macroeconomic trends, such as inflation and increased interest rates, and the COVID-19 pandemic on our business, financial results, and financial condition, benefits of acquisitions, 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: 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; risks associated with the COVID-19 pandemic; fluctuations in our operating results and effective income tax rate; 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; cyber-security and other risks associated with our information systems infrastructure; changes and costs of compliance with regulations related to data privacy; concentration of our customers or therapeutic areas; the risks associated with doing business internationally, including risks related to the war in Ukraine; 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; risks related to the management of clinical trials; the need to hire, develop, and retain key personnel; the impact of unfavorable economic conditions, including the uncertain international economic environment and changes in foreign currency exchange rates; effective income tax rate fluctuations; our ability to protect our intellectual property; risks related to our acquisition strategy, including our ability to realize synergies; our relationships with customers who are in competition with each other; any failure to realize the full value of our goodwill and intangible assets; risks related to restructuring; our compliance with anti-corruption and anti-bribery laws; our dependence on third parties; potential employment liability; the increasing focus on environmental sustainability and social initiatives; our ability to utilize net operating loss carryforwards and other tax attributes; downgrades of our credit ratings; competition in the biopharmaceutical services industry; outsourcing trends and changes in aggregate spending and research and development budgets; the impact of, including changes in, government regulations and healthcare reform; intense competition faced by our customers from lower cost generic products and other competing products; our ability to keep pace with rapid technological

24


Table of Contents

 

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 Part I, Item 1A, “Risk Factors” in our 2021 Form 10-K.

Overview of Our Business and Services

We are the only fully integrated biopharmaceutical solutions organization purpose-built to accelerate customer success. We lead with a product development mindset, strategically blending clinical development, medical affairs, and commercial capabilities to address modern market realities for customers in the biopharmaceutical, biotechnology, and healthcare industries. We offer both stand-alone and integrated biopharmaceutical product development solutions 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. Our Clinical Solutions segment offers comprehensive global services for the development of diagnostics, drugs, biologics, devices, and digital therapeutics that span Phases I to IV of clinical development. The segment is organized around clinical pharmacology and bioanalytical services, workforce deployment, full-service clinical studies, real world evidence, and consulting. Our Commercial Solutions segment provides commercialization services, including deployment solutions, communication solutions (public relations, advertising, and medical communications), and consulting services. We integrate our clinical and commercial capabilities into customized solutions by sharing knowledge, data, and insights. This collaboration across the development and commercialization continuum facilitates unique insights into patient populations, therapeutic environments, product timelines, and the competitive landscape. For a further discussion, refer to Part I, Item 1, “Business” in our 2021 Form 10-K.

The current macroeconomic conditions, which include interest rate increases, inflation, and the ongoing COVID-19 pandemic, among others, are expected to continue to impact our business and our operations. We have experienced increased delays in award decisions from the small to mid-sized ("SMID") market and lower flow of requests for proposals in our Clinical Solutions segment. Within our Commercial Solutions segment, we have also experienced lower flow of requests for proposals from the SMID market. This reduced demand for our services, which stems from both current macroeconomic conditions and our ability to win repeat business, among other factors, has resulted, and may continue to result in lower net new business awards, backlog and revenue. Additionally, we continue to experience lower reimbursable out-of-pocket expenses as a percentage of revenue relative to pre-pandemic levels in both of our segments due to reduced travel as the ongoing COVID-19 pandemic accelerated adoption of virtual engagement with sites and patients. For a further discussion of these and other risks relating to our business, refer to Part I, Item 1A, “Risk Factors” in our 2021 Form 10-K and Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q.

Prior period segment results have been recast to conform to insignificant changes to management reporting in 2022.

25


Table of Contents

 

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 received proper authorization from 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.

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

 

 

 

2022

 

 

2021

 

 

Change

 

Clinical Solutions

 

$

9,746.7

 

 

$

11,284.7

 

 

$

(1,538.0

)

 

 

(13.6

)%

Commercial Solutions - Deployment Solutions

 

 

784.0

 

 

 

732.8

 

 

 

51.2

 

 

 

7.0

%

Total backlog

 

$

10,530.7

 

 

$

12,017.5

 

 

$

(1,486.8

)

 

 

(12.4

)%

 

We expect approximately $1.18 billion of our backlog as of September 30, 2022 will be recognized as revenue during the remainder of 2022. We adjust the amount of our backlog each quarter for the effects of fluctuations in foreign currency exchange rates.

26


Table of Contents

 

Net New Business Awards

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

 

 

 

2022

 

 

2021

 

Clinical Solutions

 

$

2,729.7

 

 

$

5,333.3

 

Commercial Solutions

 

 

1,399.9

 

 

 

1,320.0

 

Total net new business awards

 

$

4,129.6

 

 

$

6,653.3

 

 

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.

 

In our Clinical Solutions segment, we have experienced increased delays in award decisions from the SMID market and lower flow of requests for proposals. These factors have resulted and may continue to result in lower net new business awards and backlog. Additionally, net new business awards and backlog have been, and we expect will continue to be affected by the broad effects of the current macroeconomic environment on the global economy and major financial markets, including but not limited to interest rate increases, inflation, and the ongoing COVID-19 pandemic. We have also started to experience lower flow of requests for proposals from the SMID market in our Commercial Solutions segment, attributable to current macroeconomic conditions, which may negatively impact future net new business awards and backlog in the segment.

 

We believe that our backlog and net new business awards might not be consistent indicators of future revenue for a variety of reasons, including, but not limited to, the variable size and duration of projects, changes to the scope of work during the course of projects, including the variable size and duration of projects, and our ability to win repeat business. Additionally, projects may be canceled or delayed by the customer or regulatory authorities. 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 net new business awards and 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” in our 2021 Form 10-K and “--If we do not generate a large number of new business awards, or if new business awards are delayed, terminated, reduced in scope, or fail to go to contract, our business, financial condition, results of operations, or cash flows may be materially adversely affected” in Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q.

27


Table of Contents

 

Results of Operations

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

 

 

 

Three Months Ended
September 30,

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

Change

 

Revenue

 

$

1,336,223

 

 

$

1,348,230

 

 

$

(12,007

)

 

 

(0.9

)%

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Direct costs (exclusive of depreciation and amortization)

 

 

1,017,784

 

 

 

1,031,887

 

 

 

(14,103

)

 

 

(1.4

)%

Selling, general, and administrative expenses

 

 

130,355

 

 

 

139,524

 

 

 

(9,169

)

 

 

(6.6

)%

Restructuring and other costs

 

 

8,727

 

 

 

7,209

 

 

 

1,518

 

 

 

21.1

%

Depreciation and amortization

 

 

61,514

 

 

 

56,254

 

 

 

5,260

 

 

 

9.4

%

Total operating expenses

 

 

1,218,380

 

 

 

1,234,874

 

 

 

(16,494

)

 

 

(1.3

)%

Income from operations

 

 

117,843

 

 

 

113,356

 

 

 

4,487

 

 

 

4.0

%

Total other expense, net

 

 

1,158

 

 

 

12,947

 

 

 

(11,789

)

 

 

(91.1

)%

Income before provision for income taxes

 

 

116,685

 

 

 

100,409

 

 

 

16,276

 

 

 

16.2

%

Income tax expense

 

 

29,636

 

 

 

22,166

 

 

 

7,470

 

 

 

33.7

%

Net income

 

$

87,049

 

 

$

78,243

 

 

$

8,806

 

 

 

11.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended
September 30,

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

Change

 

Revenue

 

$

4,033,215

 

 

$

3,839,586

 

 

$

193,629

 

 

 

5.0

%

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Direct costs (exclusive of depreciation and amortization)

 

 

3,097,113

 

 

 

2,969,718

 

 

 

127,395

 

 

 

4.3

%

Selling, general, and administrative expenses

 

 

409,561

 

 

 

421,507

 

 

 

(11,946

)

 

 

(2.8

)%

Restructuring and other costs

 

 

33,267

 

 

 

18,403

 

 

 

14,864

 

 

 

80.8

%

Depreciation and amortization

 

 

184,937

 

 

 

171,903

 

 

 

13,034

 

 

 

7.6

%

Total operating expenses

 

 

3,724,878

 

 

 

3,581,531

 

 

 

143,347

 

 

 

4.0

%

Income from operations

 

 

308,337

 

 

 

258,055

 

 

 

50,282

 

 

 

19.5

%

Total other expense, net

 

 

34,476

 

 

 

59,596

 

 

 

(25,120

)

 

 

(42.2

)%

Income before provision for income taxes

 

 

273,861

 

 

 

198,459

 

 

 

75,402

 

 

 

38.0

%

Income tax expense

 

 

62,892

 

 

 

39,587

 

 

 

23,305

 

 

 

58.9

%

Net income

 

$

210,969

 

 

$

158,872

 

 

$

52,097

 

 

 

32.8

%

Revenue

For the three months ended September 30, 2022, our revenue decreased by $12.0 million, or 0.9%, to $1,336.2 million from $1,348.2 million for the three months ended September 30, 2021. This decrease is primarily driven by lower reimbursable out-of-pocket expenses in our Clinical Solutions segment and negative impacts from fluctuations in foreign currency exchange rates, partially offset by growth from increased project start-ups in both our Clinical Solutions and Commercial Solutions segments. For the nine months ended September 30, 2022, our revenue increased by $193.6 million, or 5.0%, to $4,033.2 million from $3,839.6 million for the nine months ended September 30, 2021. This increase is primarily driven by growth from increased project start-ups in both our Clinical Solutions and Commercial Solutions segments partially offset by lower reimbursable out-of-pocket expenses in our Clinical Solutions segment.

No single customer accounted for greater than 10% of our total consolidated revenue for the three and nine months ended September 30, 2022 or 2021. Revenue from our top five customers accounted for approximately 24% and 23% of revenue for the three and nine months ended September 30, 2022, respectively, and 23% and 22% of revenue for the three and nine months ended September 30, 2021, respectively.

28


Table of Contents

 

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

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

2022

 

 

% of total

 

 

2021

 

 

% of total

 

 

Change

 

Clinical Solutions

 

$

1,003,253

 

 

 

75.1

%

 

$

1,040,067

 

 

 

77.1

%

 

$

(36,814

)

 

 

(3.5

)%

Commercial Solutions

 

 

332,970

 

 

 

24.9

%

 

 

308,163

 

 

 

22.9

%

 

 

24,807

 

 

 

8.0

%

Total revenue

 

$

1,336,223

 

 

 

 

 

$

1,348,230

 

 

 

 

 

$

(12,007

)

 

 

(0.9

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

2022

 

 

% of total

 

 

2021

 

 

% of total

 

 

Change

 

Clinical Solutions

 

$

3,047,338

 

 

 

75.6

%

 

$

2,972,570

 

 

 

77.4

%

 

$

74,768

 

 

 

2.5

%

Commercial Solutions

 

 

985,877

 

 

 

24.4

%

 

 

867,016

 

 

 

22.6

%

 

 

118,861

 

 

 

13.7

%

Total revenue

 

$

4,033,215

 

 

 

 

 

$

3,839,586

 

 

 

 

 

$

193,629

 

 

 

5.0

%

Clinical Solutions

For the three months ended September 30, 2022, revenue attributable to our Clinical Solutions segment decreased compared to the same period in the prior year, primarily driven by decreases in revenue from projects related to COVID-19, which generally experience higher reimbursable out-of-pocket expenses, partially offset by increased project start-ups related to large pharmaceutical customers. For the nine months ended September 30, 2022, revenue attributable to our Clinical Solutions segment increased compared to the same period in the prior year, primarily driven by increased project start-ups related to large pharmaceutical customers and, to a lesser extent, the acquisitions of StudyKIK Corporation (“StudyKIK”) and RxDataScience, Inc. This increase was partially offset by decreases in revenue from projects related to COVID-19. For the three and nine months ended September 30, 2022, revenue was negatively impacted by $34.4 million and $69.1 million, respectively, from fluctuations in foreign currency exchange rates compared to the same periods in the prior year.

We have experienced increased delays in award decisions from the SMID market and lower flow of requests for proposals. This reduced demand for our services, which stems from both current macroeconomic conditions and our ability to win repeat business, among other factors, has resulted, and may continue to result in lower net new business awards, backlog, and revenue. Additionally, we also continue to experience lower reimbursable out-of-pocket expenses as a percentage of revenue relative to pre-pandemic levels due to reduced travel as the ongoing COVID-19 pandemic accelerated adoption of virtual engagement with sites and patients.

The war in Ukraine has not had a material impact on our revenue; however, that could change depending on the magnitude of the conflict and the imposition of additional sanctions by the United States (“U.S.”) and other countries. We continue to adapt our strategic approach as the crisis persists and we are continuing our risk assessments in neighboring countries to be proactive about potential future challenges. Banking and economic sanctions imposed on Russia continue to present challenges to clinical trials. We are monitoring these sanctions to ensure we are in compliance and we are adapting our operations to address both the sanctions and the increasing logistical challenges of conducting trials in Russia. At this time, we are continuing to service patients in Ukraine and Russia in existing trials where possible. Any impacts to our revenue are expected to be temporary in nature as we work with customers to explore alternate sources of recruiting new patients, including potentially activating sites in other regions.

29


Table of Contents

 

Commercial Solutions

For the three and nine months ended September 30, 2022, revenue attributable to our Commercial Solutions segment increased compared to the same periods in the prior year, primarily driven by increased project start-ups, including new deployments of field teams, and higher reimbursable out-of-pocket expenses. For the three and nine months ended September 30, 2022, revenue was negatively impacted by $7.9 million and $15.4 million, respectively, from fluctuations in foreign currency exchange rates compared to the same periods in the prior year.

We have started to experience lower flow of requests for proposals from the SMID market attributable to current macroeconomic conditions, which may negatively impact future net new business awards, backlog, and revenue. Additionally, we continue to experience lower reimbursable out-of-pocket expenses as a percentage of revenue relative to pre-pandemic levels related to declines in field team visits to healthcare providers and increased virtual investigator meetings.

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. Relative to pre-pandemic levels, we continue to experience reduced travel and other reimbursable out-of-pocket expenses related to lower physical monitoring visits for Clinical Solutions, as well as fewer field team visits to healthcare providers and investigator meetings for Commercial Solutions. As discussed above, we expect reimbursable out-of-pocket expenses to remain lower relative to pre-pandemic levels.

Direct costs were as follows (dollars in thousands):

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

Change

 

Direct costs (exclusive of depreciation and amortization)

 

$

1,017,784

 

 

$

1,031,887

 

 

$

(14,103

)

 

 

(1.4

)%

% of revenue

 

 

76.2

%

 

 

76.5

%

 

 

 

 

 

 

Gross margin %

 

 

23.8

%

 

 

23.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

Change

 

Direct costs (exclusive of depreciation and amortization)

 

$

3,097,113

 

 

$

2,969,718

 

 

$

127,395

 

 

 

4.3

%

% of revenue

 

 

76.8

%

 

 

77.3

%

 

 

 

 

 

 

Gross margin %

 

 

23.2

%

 

 

22.7

%

 

 

 

 

 

 

For the three months ended September 30, 2022, our direct costs decreased by $14.1 million, or 1.4%, compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, our direct costs increased by $127.4 million, or 4.3%, compared to the nine months ended September 30, 2021.

30


Table of Contents

 

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,

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

Change

 

Direct costs

 

$

734,934

 

 

$

779,270

 

 

$

(44,336

)

 

 

(5.7

)%

% of segment revenue

 

 

73.3

%

 

 

74.9

%

 

 

 

 

 

 

Segment gross margin %

 

 

26.7

%

 

 

25.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

Change

 

Direct costs

 

$

2,263,053

 

 

$

2,248,796

 

 

$

14,257

 

 

 

0.6

%

% of segment revenue

 

 

74.3

%

 

 

75.7

%

 

 

 

 

 

 

Segment gross margin %

 

 

25.7

%

 

 

24.3

%

 

 

 

 

 

 

For the three months ended September 30, 2022, our Clinical Solutions segment direct costs decreased by $44.3 million, or 5.7%, compared to the three months ended September 30, 2021. This decrease was primarily driven by lower reimbursable out-of-pocket expenses related to COVID-19 projects and positive impacts from fluctuations in foreign currency exchange rates, partially offset by increased billable headcount. For the nine months ended September 30, 2022, our Clinical Solutions segment direct costs increased by $14.3 million, or 0.6%, compared to the nine months ended September 30, 2021. This increase was primarily driven by increased billable headcount to support revenue growth, partially offset by positive impacts from fluctuations in foreign currency exchange rates, lower reimbursable out-of-pocket expenses related to COVID-19 projects, and our ForwardBound margin enhancement initiative.

Gross margins for our Clinical Solutions segment were 26.7% and 25.1% for the three months ended September 30, 2022 and 2021, respectively, and 25.7% and 24.3% for the nine months ended September 30, 2022 and 2021, respectively. Gross margins were higher during the current year periods as compared to the same periods in the prior year primarily due to lower reimbursable out-of-pocket expenses and positive impacts from fluctuations in foreign currency exchange rates, partially offset by increased billable headcount costs and a larger proportion of contract labor.

31


Table of Contents

 

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,

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

Change

 

Direct costs

 

$

274,714

 

 

$

244,201

 

 

$

30,513

 

 

 

12.5

%

% of segment revenue

 

 

82.5

%

 

 

79.2

%

 

 

 

 

 

 

Segment gross margin %

 

 

17.5

%

 

 

20.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

Change

 

Direct costs

 

$

809,257

 

 

$

695,284

 

 

$

113,973

 

 

 

16.4

%

% of segment revenue

 

 

82.1

%

 

 

80.2

%

 

 

 

 

 

 

Segment gross margin %

 

 

17.9

%

 

 

19.8

%

 

 

 

 

 

 

 

For the three months ended September 30, 2022, our Commercial Solutions segment direct costs increased by $30.5 million, or 12.5%, compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, our Commercial Solutions segment direct costs increased by $114.0 million, or 16.4%, compared to the nine months ended September 30, 2021. These increases were primarily driven by increased billable headcount to support revenue growth and higher reimbursable out-of-pocket expenses.

Gross margins for our Commercial Solutions segment were 17.5% and 20.8% for the three months ended September 30, 2022 and 2021, respectively, and 17.9% and 19.8% for the nine months ended September 30, 2022 and 2021, respectively. Gross margins were lower during the current year periods as compared to the same periods in the prior year due to a less favorable revenue mix.

Selling, General, and Administrative Expenses

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

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

Change

 

Selling, general, and administrative expenses

 

$

130,355

 

 

$

139,524

 

 

$

(9,169

)

 

 

(6.6

)%

% of total revenue

 

 

9.8

%

 

 

10.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

Change

 

Selling, general, and administrative expenses

 

$

409,561

 

 

$

421,507

 

 

$

(11,946

)

 

 

(2.8

)%

% of total revenue

 

 

10.2

%

 

 

11.0

%

 

 

 

 

 

 

Selling, general, and administrative expenses for the three and nine months ended September 30, 2022 decreased compared to the same periods in 2021 primarily due to lower transaction, integration-related, and other expenses. These decreases were partially offset by increased headcount. Selling, general, and administrative expenses for the three and nine months ended September 30, 2022 included costs resulting from the war in Ukraine, including incremental costs related to impacted employees and ongoing assessment of imposed sanctions.

32


Table of Contents

 

Restructuring and Other Costs

Restructuring and other costs were $8.7 million and $7.2 million for the three months ended September 30, 2022 and 2021, respectively, and $33.3 million and $18.4 million for the nine months ended September 30, 2022 and 2021, respectively. The costs incurred were primarily related to our ForwardBound margin enhancement initiative as we continue the ongoing evaluations of our global workforce and facilities infrastructure needs in an effort to streamline the structure of our global operations and processes. During 2022, these ForwardBound initiatives included specific actions primarily focused on 1) streamlining the operations of our Clinical Solutions segment to optimize efficiency and enhance the delivery of customer projects and 2) reducing overcapacity in response to changing market conditions and customer requirements.

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

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Employee severance and benefit costs

 

$

7,402

 

 

$

3,438

 

 

$

24,590

 

 

$

11,815

 

Facility and lease termination costs

 

 

1,325

 

 

 

3,760

 

 

 

4,677

 

 

 

6,530

 

Other costs

 

 

 

 

 

11

 

 

 

4,000

 

 

 

58

 

Total restructuring and other costs

 

$

8,727

 

 

$

7,209

 

 

$

33,267

 

 

$

18,403

 

We expect to continue to incur costs related to our ForwardBound initiative, including the restructuring of our operations during 2022 and beyond as we continue the ongoing evaluations of our global workforce and facilities infrastructure needs and in light of changing market conditions and customer requirements.

Depreciation and Amortization Expense

Total depreciation and amortization expense was $61.5 million and $56.3 million for the three months ended September 30, 2022 and 2021, respectively, and $184.9 million and $171.9 million for the nine months ended September 30, 2022 and 2021, respectively. The increases were primarily due to vehicle fleet leases, internal-use software, and intangible assets from acquisitions completed in the second half of 2021.

Total Other Expense, Net

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

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

Change

 

Interest income

 

$

(303

)

 

$

76

 

 

$

(379

)

 

n/m

 

Interest expense

 

 

22,131

 

 

 

16,698

 

 

 

5,433

 

 

 

32.5

%

Loss on extinguishment of debt

 

 

67

 

 

 

 

 

 

67

 

 

 

100.0

%

Other income, net

 

 

(20,737

)

 

 

(3,827

)

 

 

(16,910

)

 

 

(441.9

)%

Total other expense, net

 

$

1,158

 

 

$

12,947

 

 

$

(11,789

)

 

 

(91.1

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

Change

 

Interest income

 

$

(342

)

 

$

5

 

 

$

(347

)

 

n/m

 

Interest expense

 

 

55,998

 

 

 

62,645

 

 

 

(6,647

)

 

 

(10.6

)%

Loss on extinguishment of debt

 

 

67

 

 

 

2,802

 

 

 

(2,735

)

 

 

(97.6

)%

Other income, net

 

 

(21,247

)

 

 

(5,856

)

 

 

(15,391

)

 

 

(262.8

)%

Total other expense, net

 

$

34,476

 

 

$

59,596

 

 

$

(25,120

)

 

 

(42.2

)%

 

33


Table of Contents

 

 

Total other expense, net was $1.2 million and $12.9 million for the three months ended September 30, 2022 and 2021, respectively, and $34.5 million and $59.6 million for the nine months ended September 30, 2022 and 2021, respectively. The increase in interest expense for the three months ended September 30, 2022 compared to the same period in the prior year was primarily due to increased interest rates on variable rate debt. The decrease in interest expense for the nine months ended September 30, 2022 compared to the same period in the prior year was primarily due to reductions in our higher interest rate debt as a result of debt prepayments and refinancing transactions. Other (income) expense, 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, other gains and losses related to investments, and contingent consideration related to divested businesses.

Income Tax Expense

For the three and nine months ended September 30, 2022, we recorded income tax expense of $29.6 million and $62.9 million, respectively, compared to pre-tax income of $116.7 million and $273.9 million, respectively. Income tax expense for the three months ended September 30, 2022 included discrete tax expense of $3.1 million, primarily related to unrecognized tax benefits. Income tax expense for the nine months ended September 30, 2022 included net discrete tax benefits of $3.3 million, primarily related to excess tax benefits from share-based compensation partially offset by unrecognized tax benefits related to prior year tax positions. The effective tax rates for the three and nine months ended September 30, 2022, excluding discrete items, varied from the U.S. federal statutory income tax rate of 21.0% primarily due to state and local taxes on U.S. income, foreign income inclusions such as the Global Intangible Low-Taxed Income (“GILTI”) provisions, and research and development credits.

For the three and nine months ended September 30, 2021, we recorded income tax expense of $22.2 million and $39.6 million, respectively, compared to pre-tax income of $100.4 million and $198.5 million, respectively. Income tax expense for the three and nine months ended September 30, 2021 included discrete tax benefits of $0.7 million and $6.5 million, respectively, primarily related to excess tax benefits from share-based compensation. The effective tax rates for the three and nine months ended September 30, 2021, excluding discrete items, varied from the U.S. federal statutory income tax rate of 21.0% primarily due to foreign tax credits, foreign income inclusions such as the GILTI provisions, and state and local taxes on U.S. income.

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, 2022. 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.

Liquidity and Capital Resources

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

 

 

 

September 30, 2022

 

 

December 31, 2021

 

Balance sheet statistics:

 

 

 

 

 

 

Cash and cash equivalents

 

$

169,995

 

 

$

106,363

 

Restricted cash

 

 

105

 

 

 

112

 

Working capital (excluding restricted cash)

 

 

239,761

 

 

 

112,228

 

 

34


Table of Contents

 

As of September 30, 2022, we had $170.1 million of cash, cash equivalents, and restricted cash. As of September 30, 2022, substantially all of our cash, cash equivalents, and restricted cash was held within the U.S. In addition, we had $586.1 million (net of $13.9 million in outstanding letters of credit (“LOCs”)) available for borrowing under our revolving credit facility (the “Revolver”), of which $136.1 million was available for LOCs.

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 flow from operations also could be affected by the broad effects of the current macroeconomic environment on the global economy and major financial markets, including but not limited to interest rate increases, inflation, and the ongoing COVID-19 pandemic, as well as various other risks and uncertainties detailed in Part I, Item 1A, “Risk Factors” in our 2021 Form 10-K and in Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q. 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.

Indebtedness

As of September 30, 2022, we had approximately $2.84 billion of total principal indebtedness (including $75.5 million in finance lease obligations), consisting of $1.76 billion in term loan debt (collectively, “Term Loan A”), $600.0 million of senior notes (the “Notes”), and $400.0 million in borrowings against our accounts receivable financing agreement. See “Note 4 – Long-Term Debt Obligations” of our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q as well as Part II, Item 7 of our 2021 Form 10-K for additional details regarding our long-term debt arrangements.

During the three months ended September 30, 2022, we made $25.0 million of voluntary prepayments against Term Loan A that were applied to future mandatory principal payments due. As a result of these and previous voluntary prepayments, we are not required to make a mandatory payment against the principal balance of Term Loan A until January 2024. In connection with these prepayments, we recorded a $0.1 million loss on extinguishment of debt during the three months ended September 30, 2022.
 

On October 3, 2022, we amended our accounts receivable financing agreement to increase the amount we can borrow from $400.0 million to $550.0 million, and drew down the additional $150.0 million. At the same time, we made voluntary prepayments on our term loans totaling $150.0 million; therefore, there was no incremental impact on our debt balance.

Our long-term debt arrangements contain customary restrictive covenants and, as of September 30, 2022, we were in compliance with all applicable debt covenants.

Interest Rates

We have entered into various interest rate swaps to mitigate our exposure to changes in interest rates on our variable rate debt. As of September 30, 2022, the percentage of our total principal debt (excluding finance leases) that is subject to fixed interest rates was approximately 59%. Each quarter-point increase or decrease in the applicable floating interest rate as of September 30, 2022 would change our annual interest expense by approximately $2.8 million.

35


Table of Contents

 

Stock Repurchase Programs

During the three months ended September 30, 2022, there were no share repurchases under our repurchase program that authorizes us to repurchase up to $350.0 million of our Class A common stock, par value $0.01, and will expire on December 31, 2024 (the “2022 Stock Repurchase Program”). See “Note 8 – Shareholders’ Equity” of our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details.

As of September 30, 2022, we had remaining authorization to repurchase up to $350.0 million of shares of our common stock under the 2022 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,

 

 

 

 

 

 

2022

 

 

2021

 

 

Change

 

Net cash provided by operating activities

 

$

303,164

 

 

$

264,299

 

 

$

38,865

 

Net cash used in investing activities

 

 

(79,547

)

 

 

(260,182

)

 

 

180,635

 

Net cash used in financing activities

 

 

(189,487

)

 

 

(155,483

)

 

 

(34,004

)

Cash Flows from Operating Activities

Cash flows provided by operating activities increased by $38.9 million during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was primarily due to higher cash-related net income, partially offset by negative changes in operating assets and liabilities relative to the prior year period. 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.

Cash Flows from Investing Activities

For the nine months ended September 30, 2022, we used $79.5 million in cash for investing activities, which included $69.8 million for purchases of property and equipment. We continue to closely monitor our capital expenditures 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, 2021, we used $260.2 million in cash for investing activities, which consisted of $226.3 million of payments related to acquisitions, including the acquisition of StudyKIK, $29.9 million for purchases of property and equipment, and $8.9 million of net investments in unconsolidated affiliates, partially offset by proceeds of $5.0 million from notes receivable from a divestiture.

Cash Flows from Financing Activities

For the nine months ended September 30, 2022, we used $189.5 million in cash for financing activities, which consisted primarily of repurchases of our common stock, voluntary prepayments of long-term debt, and payments related to tax withholdings for share-based compensation. These payments were partially offset by proceeds from exercises of stock options.

36


Table of Contents

 

For the nine months ended September 30, 2021, we used $155.5 million in cash for financing activities, which consisted primarily of repurchases of our common stock, net repayments of long-term debt, and payments related to tax withholdings for share-based compensation. These payments were partially offset by proceeds from our accounts receivable financing agreement, our Revolver, and exercises of stock options.

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, valuation of goodwill and identifiable intangibles, and tax-related contingencies and valuation allowances. 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. There have been no significant changes to our critical accounting policies and estimates from those disclosed in our 2021 Form 10-K. 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 2021 Form 10-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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 2021 Form 10-K.

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 (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.

37


Table of Contents

 

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.

Item 1A. Risk Factors.

Other than the following risk factor, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021. Refer to “Risk Factors” in Part 1, Item 1A of that report for a detailed discussion of risk factors affecting us.

If we do not generate a large number of new business awards, or if new business awards are delayed, terminated, reduced in scope, or fail to go to contract, our business, financial condition, results of operations, or cash flows may be materially adversely affected.

Our business is dependent on our ability to generate new business awards from new and existing customers and maintain existing customer contracts. Our inability to generate new business awards on a timely basis and subsequently enter into contracts for such awards could have a material adverse effect on our business, financial condition, results of operations or cash flows. For example, in our Clinical Solutions segment, we have experienced lower net new business awards, increased delays in award decisions from the SMID market, and lower flow of requests for proposals. These headwinds have been caused by the current macroeconomic conditions and our ability to win repeat business, among other factors.

There is risk of cancelability in both the clinical and commercial businesses. The time between when a clinical study is awarded and when it goes to contract is typically several months, and prior to a new business award going to contract, our customer can cancel the award without notice. Once an award goes to contract, the majority of our customers can terminate the contract without cause with a notice period that generally ranges from 30 to 90 days. Our contracts may be delayed or terminated by our customers or reduced in scope for a variety of reasons, including factors beyond our control, including but not limited to:

decisions to forego or terminate a particular trial;
budgetary limits or changing priorities;
macroeconomic conditions, including but not limited to interest rate increases and inflation;
actions by regulatory authorities;
production problems resulting in shortages of the candidate drug being tested;
failure of products being tested to satisfy safety requirements or efficacy criteria;
unexpected or undesired clinical results for products;
insufficient patient enrollment in a trial;
insufficient principal investigator recruitment;
production problems resulting in shortages of the product being tested;
the customers’ decision to terminate or scale back the development or commercialization of a product or to end a particular project;

38


Table of Contents

 

shift of business to a competitor or internal resources; or
product withdrawal following market launch.

Our commercial services contracts typically have a significantly shorter wind down period than clinical contracts, particularly within our Deployment Solutions offerings. Furthermore, many of our communications services and consulting services projects are tied to a customer’s annual marketing budget or ad hoc service requests, which can lead to seasonal variability in revenue and less predictability in future revenues. In addition, many of our biopharmaceutical Deployment Solutions service contracts provide our customers with the opportunity to internalize the resources provided under the contract and terminate all or a portion of the services we provide under the contract. Our customers may also decide to shift their business to a competitor. Each of these factors results in less visibility to future revenue and may result in high volatility in future revenue.

Contract terminations, delays and modifications are a regular part of our business across each of our segments. Our full-service offering within our Clinical Solutions business has been, and may continue to be, negatively impacted by project delays, which impact near term revenue disproportionately. In addition, project delays, downsizings and cancellations, particularly within our Deployment Solutions and communications offerings, which are part of our Commercial Solutions business, have impacted our results in the past and might impact them in the future. The loss, reduction in scope or delay of a large project or of multiple projects could have a material adverse effect on our business, results of operations, and financial condition. In addition, we might not realize the full benefits of our backlog if our customers cancel, delay, or reduce their commitments to us.

In the event of termination, our contracts often provide for fees for winding down the project, which include both fees incurred and actual and non-cancellable expenditures and may include a fee to cover a percentage of the remaining professional fees on the project. These fees might not be sufficient for us to maintain our margins, and termination may result in lower resource utilization rates and therefore lower operating margins. In addition, cancellation of a contract or project for the reasons noted above may result in the unwillingness or inability of our customer to satisfy its existing obligations to us such as payments of accounts receivable, which may in turn result in a material impact to our results of operations and cash flow. Historically, cancellations and delays have negatively impacted our operating results, and they might again. In addition, we might not realize the full benefits of our backlog if our customers cancel, delay, or reduce their commitments to us, which may occur if, among other things, a customer decides to shift its business to a competitor or revoke our status as a preferred provider. Thus, the loss or delay of a large business award or the loss or delay of multiple awards could adversely affect our revenues and profitability. Additionally, a change in the timing of a new business award could affect the period over which we recognize revenue and reduce our revenue in any one quarter.

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

On November 17, 2020, our Board authorized the repurchase of up to an aggregate of $300.0 million of our Class A common stock, par value $0.01 per share, 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 through December 31, 2022 (the “2021 Stock Repurchase Program”). The 2021 Stock Repurchase Program took effect on January 1, 2021.

39


Table of Contents

 

On May 25, 2022, our Board approved a new stock repurchase program (the “2022 Stock Repurchase Program”) that took effect immediately and replaced the 2021 Stock Repurchase Program. The 2022 Stock Repurchase Program authorizes the repurchase of up to an aggregate of $350.0 million of our Class A common stock, par value $0.01, and will expire on December 31, 2024. Share repurchases are funded primarily with our working capital, cash flow from operations, and funds available through various borrowing arrangements.

The 2022 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 will be 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 2022 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.

During the three months ended September 30, 2022, there were no share repurchases under the 2022 Stock Repurchase Program. As of September 30, 2022, we have remaining authorization to repurchase up to $350.0 million of shares of our Class A common stock under the 2022 Stock Repurchase Program.

Item 5. Other Information.

Not applicable.

40


Table of Contents

 

Item 6. Exhibits

 

 

 

Incorporated by Reference

(Unless Otherwise Indicated)

Exhibit

Number

 

Exhibit Description

Form

File No.

Exhibit

Filing Date

4.1

 

Fifth Supplemental Indenture, dated as of October 3, 2022, among the Guaranteeing Subsidiaries, the Company, the other Guarantors, and Wells Fargo Bank, National Association, as trustee.

Filed herewith

10.1

 

Separation Agreement and General Release of Claims between Syneos Health, Inc. and Paul Colvin.

Filed herewith

10.2

 

Supplemental Release between Syneos Health, Inc. and Paul Colvin.

Filed herewith

10.3

 

Twelfth Amendment to the Receivables Financing Agreement, dated as of October 3, 2022, by and among Syneos Health Receivables LLC, as borrower, Syneos Health, LLC, as initial servicer, Regions Bank, as lender, and PNC Bank, National Association, as administrative agent and as a lender.

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

 

41


Table of Contents

 

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: November 3, 2022

 

BY:

 

 /s/ Jason Meggs

 

 

 

 

Jason Meggs

 

 

 

 

Chief Financial Officer

(Principal Financial Officer)

 

42