Syneos Health, Inc. (Form: 10-Q, Received: 10/31/2019 06:06:00)

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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, 2019


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

For the transition period from to .

Commission File Number: 001-36730

SYNEOS HEALTH, INC.

(Exact name of registrant as specified in its charter)


Delaware						27-3403111
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

1030 Sync Street, Morrisville, North Carolina 27560-5468

(Address of principal executive offices and Zip Code)

(919) 876-9300

(Registrant’s telephone number, including area code)

N/A

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

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, $0.01 par value per share	SYNH	The Nasdaq Stock Market LLC

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

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

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

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

As of October 24, 2019, there were approximately 103,796,489 shares of the registrant’s common stock outstanding.

Table of Contents

SYNEOS HEALTH, INC.

FORM 10-Q

TABLE OF CONTENTS



	PART I - FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018 (unaudited)	3
	Condensed Consolidated Statements of Comprehensive Income (Loss ) for the three and nine months ended September 30, 2019 and 2018 (unaudited)	4
	Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited)	6
	Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2019 and 2018 (unaudited)	7
	Notes to Condensed Consolidated Financial Statements (unaudited)	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	46

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	49
Item 5.	Other Information	49
Item 6.	Exhibits	50
	Signature	51

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

SYNEOS HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
	(In thousands, except per share data)
Revenue	$	1,177,028	$	1,114,918	$	3,462,861	$	3,244,644



Costs and operating expenses:
Direct costs (exclusive of depreciation and amortization)	913,674		872,214		2,718,005		2,560,502

Selling, general, and administrative expenses	109,864		96,943		333,860		296,420
Restructuring and other costs	13,456		19,349		39,751		41,647
Transaction and integration-related expenses	10,454		18,561		34,766		61,804

Depreciation	18,844		17,639		57,663		53,224
Amortization	41,293		50,395		124,423		150,333
Total operating expenses	1,107,585		1,075,101		3,308,468		3,163,930
Income from operations	69,443		39,817		154,393		80,714

Other income (expense), net:
Interest income	2,426		1,004		6,061		3,498
Interest expense	(32,607)		(33,097)		(101,500)		(97,727)
Loss on extinguishment of debt	—		(1,789)		(4,355)		(3,914)
Other income (expense), net	30,713		(4,346)		29,365		15,101
Total other income (expense), net	532		(38,228)		(70,429)		(83,042)
Income (loss) before provision for income taxes	69,975		1,589		83,964		(2,328)
Income tax expense	(11,055)		(11,983)		(43,756)		(19,058)
Net income (loss)	$	58,920	$	(10,394)	$	40,208	$	(21,386)

Earnings (loss) per share:
Basic	$	0.57	$	(0.10)	$	0.39	$	(0.21)
Diluted	$	0.56	$	(0.10)	$	0.38	$	(0.21)
Weighted average common shares outstanding:
Basic	103,594		103,012		103,553		103,453
Diluted	105,021		103,012		104,881		103,453

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

Table of Contents

SYNEOS HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
	(In thousands)
Net income (loss)	$	58,920	$	(10,394)	$	40,208	$	(21,386)
Unrealized gain (loss) on derivative instruments, net of income tax (expense) benefit of $0, $(475), $332 and $(475), respectively	74		2,624		(13,104)		1,341
Foreign currency translation adjustments, net of income tax benefit of $0, $2,868, $0 and $0, respectively	(34,421)		(1,295)		(25,736)		(36,541)
Comprehensive income (loss)	$	24,573	$	(9,065)	$	1,368	$	(56,586)

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

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SYNEOS HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30, 2019		December 31, 2018
	(in thousands, except par value)
ASSETS
Current assets:
Cash, cash equivalents, and restricted cash	$	129,204	$	155,932
Accounts receivable and unbilled services, net	1,295,089		1,256,731
Prepaid expenses and other current assets	68,219		79,299
Total current assets	1,492,512		1,491,962
Property and equipment, net	201,122		183,486
Operating lease right-of-use assets	220,346		—
Goodwill	4,322,183		4,333,159
Intangible assets, net	1,004,576		1,133,612
Deferred income tax assets	5,502		9,317
Other long-term assets	131,072		103,373
Total assets	$	7,377,313	$	7,254,909

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	82,838	$	98,624
Accrued expenses	587,895		563,527
Deferred revenue	703,916		777,141
Current portion of operating lease obligations	30,390		—
Current portion of finance lease obligations	17,945		13,806
Current portion of long-term debt	28,750		50,100
Total current liabilities	1,451,734		1,503,198
Long-term debt	2,680,111		2,737,019
Operating lease long-term obligations	222,199		—
Finance lease long-term obligations	36,676		26,759
Deferred income tax liabilities	33,500		25,120
Other long-term liabilities	85,577		106,669
Total liabilities	4,509,797		4,398,765

Commitments and contingencies (Note 17)

Shareholders' equity:
Preferred stock, $0.01 par value; 30,000 shares authorized, 0 shares issued and outstanding at September 30, 2019 and December 31, 2018	—		—
Common stock, $0.01 par value; 600,000 shares authorized, 103,793 and 103,372 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively	1,038		1,034
Additional paid-in capital	3,425,826		3,402,638
Accumulated other comprehensive loss, net of tax	(127,035)		(88,195)
Accumulated deficit	(432,313)		(459,333)
Total shareholders' equity	2,867,516		2,856,144
Total liabilities and shareholders' equity	$	7,377,313	$	7,254,909

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

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SYNEOS HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,
	2019		2018
	(In thousands)
Cash flows from operating activities:
Net income (loss)	$	40,208	$	(21,386)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	182,086		203,557
Share-based compensation	40,864		26,045
Provision for doubtful accounts	948		(3,453)
Provision for (benefit from) deferred income taxes	13,091		(721)
Foreign currency transaction adjustments	(6,090)		(14,927)

Fair value adjustment of contingent obligations	(571)		3,582
Loss on extinguishment of debt	4,355		3,914
Other non-cash items	1,177		3,169
Changes in operating assets and liabilities, net of effect of business combinations:
Accounts receivable, unbilled services, and deferred revenue	(110,083)		(48,802)
Accounts payable and accrued expenses	12,337		5,371
Other assets and liabilities	(20,389)		34,651
Net cash provided by operating activities	157,933		191,000
Cash flows from investing activities:
Payments associated with business combinations, net of cash acquired	—		(90,890)
Purchases of property and equipment	(50,645)		(42,963)
Investments in unconsolidated affiliates	(9,227)		—

Net cash used in investing activities	(59,872)		(133,853)
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net of discount	183,195		—
Payments of debt financing costs	(2,593)		(3,062)
Repayments of long-term debt	(370,936)		(354,396)
Proceeds from accounts receivable financing agreement	128,000		183,600
Repayments of accounts receivable financing agreement	(22,400)		—



Payments of contingent consideration related to business combinations	(178)		—
Payments of finance leases	(9,429)		(12,664)
Payments for repurchase of common stock	(56,716)		(74,985)

Proceeds from exercise of stock options	39,675		18,042
Payments related to tax withholding for share-based compensation	(12,503)		(3,212)
Net cash used in financing activities	(123,885)		(246,677)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	(904)		2,158
Net change in cash, cash equivalents, and restricted cash	(26,728)		(187,372)
Cash, cash equivalents, and restricted cash - beginning of period	155,932		321,976
Cash, cash equivalents, and restricted cash - end of period	$	129,204	$	134,604

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

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SYNEOS HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
	(in thousands)
Shareholders' equity, beginning balance	$	2,823,899	$	2,822,672	$	2,856,144	$	3,022,579
Impact from adoption of ASU 2014-09	—		—		—		(98,815)

Shareholders' equity, adjusted beginning balance	2,823,899		2,822,672		2,856,144		2,923,764

Common stock:
Beginning balance	1,035		1,029		1,034		1,044
Stock repurchase	(1)		—		(13)		(19)
RSU distributions net of shares for tax withholding	—		—		4		1
Stock option exercises	4		3		13		6

Ending balance	1,038		1,032		1,038		1,032

Additional paid-in capital:
Beginning balance	3,404,389		3,371,316		3,402,638		3,414,389
Stock repurchase	(4,648)		—		(43,515)		(64,482)
RSU distributions net of shares for tax withholding	(1,073)		(829)		(12,851)		(3,213)
Stock option exercises	14,355		10,456		38,690		17,995
Share-based compensation	12,803		9,791		40,864		26,045
Ending balance	3,425,826		3,390,734		3,425,826		3,390,734

Accumulated other comprehensive (loss) income:
Beginning balance	(92,688)		(55,064)		(88,195)		(22,385)
Impact from adoption of ASU 2018-02	—		—		—		3,850
Adjusted beginning balance	(92,688)		(55,064)		(88,195)		(18,535)
Unrealized gain (loss) on derivative instruments, net of taxes	74		2,624		(13,104)		1,341
Foreign currency translation adjustment, net of taxes	(34,421)		(1,295)		(25,736)		(36,541)
Ending balance	(127,035)		(53,735)		(127,035)		(53,735)

Accumulated deficit:
Beginning balance	(488,837)		(494,609)		(459,333)		(370,469)
Impact from adoption of ASU 2014-09	—		—		—		(98,815)
Impact from adoption of ASU 2018-02	—		—		—		(3,850)
Adjusted beginning balance	(488,837)		(494,609)		(459,333)		(473,134)
Stock repurchase	(2,396)		—		(13,188)		(10,483)
Net income (loss)	58,920		(10,394)		40,208		(21,386)
Ending balance	(432,313)		(505,003)		(432,313)		(505,003)

Shareholders' equity, ending balance	$	2,867,516	$	2,833,028	$	2,867,516	$	2,833,028

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

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SYNEOS HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation and Changes in Significant Accounting Policies

Nature of Operations

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

Unaudited Interim Financial Information

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

The unaudited condensed consolidated financial statements, in management’s opinion, include all adjustments of a normal recurring nature necessary for a fair presentation. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on March 18, 2019. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019 or any other future period. The unaudited condensed consolidated balance sheet at December 31, 2018 is derived from the amounts in the audited consolidated balance sheet included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Allowance for Doubtful Accounts

The Company maintains a credit approval process and makes judgments in connection with assessing its customers’ ability to pay throughout the contractual obligation period. Generally, the Company has the ability to limit credit exposure by discontinuing services in the event of non-payment. The Company has certain customers that may depend on the ability to continue to raise capital in order to complete the development or commercialization of their products. The Company monitors its customers’ credit worthiness and applies judgment in establishing a provision for estimated credit losses based on historical experience, current receivables aging, and identified customer-specific circumstances that would affect the customers’ ability to meet their obligation. Despite this assessment, from time to time, customers are unable to meet their payment obligations, which could impact the Company’s results of operations.

Recently Adopted Accounting Standards

Leases. In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-02 (“ASU 2016-02”), Leases (Topic 842), as further amended, to increase transparency and comparability among organizations by requiring the recognition of, at the lease commencement date, a lease liability for the obligation to make lease payments, and a right-of-use ("ROU") asset for the right to use the underlying asset, on the balance sheet. The Company adopted ASU 2016-02, and all related amendments, collectively “ASC 842”, as of January 1, 2019, using the modified retrospective approach. Results for reporting periods beginning on January 1, 2019 are presented under ASC 842, while prior

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period amounts continue to be reported and disclosed in accordance with the Company’s historical accounting treatment under Accounting Standards Codification 840, Leases (“ASC 840”). In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, does not require the Company to reassess if a contract is or contains a lease and allows the Company to carry forward the historical lease classifications and historical initial direct costs. The Company made an accounting policy election under ASC 842 not to recognize ROU assets and lease liabilities for leases with a term of 12 months or less. Lease payments for these leases are recognized as lease costs on a straight-line basis over the lease term. The Company also elected to account for lease components and the associated non-lease components in the contracts as a single lease component for all classes of underlying assets.

Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities, mainly related to operating leases, of approximately $214.0 million, as of January 1, 2019. The Company’s accounting for finance leases (previously classified as capital leases under ASC 840) remained substantially unchanged.

2. Financial Statement Details

Cash, Cash Equivalents, and Restricted Cash

Certain of the Company’s subsidiaries participate in a notional cash pooling arrangement to manage global liquidity requirements. The participants combine their cash balances in pooling accounts at the same financial institution with the ability to offset bank overdrafts of one participant against positive cash account balances held by another participant. The net cash balance related to this pooling arrangement is included in cash, cash equivalents, and restricted cash in the unaudited condensed consolidated balance sheets.

Accounts Receivable and Unbilled Services, net

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


	September 30, 2019		December 31, 2018
Accounts receivable billed	$	774,309	$	733,142
Less: Allowance for doubtful accounts	(4,974)		(4,587)
Accounts receivable billed, net	769,335		728,555
Accounts receivable unbilled	416,211		422,860
Contract assets	109,543		105,316
Accounts receivable and unbilled services, net	$	1,295,089	$	1,256,731

Accounts Receivable Factoring Arrangement

In May 2017, the Company entered into an accounts receivable factoring agreement to sell certain eligible unsecured trade accounts receivable, without recourse, to an unrelated third-party financial institution for cash. For the nine months ended September 30, 2019 and 2018, the Company factored $162.0 million and $197.4 million, respectively, of trade accounts receivable on a non-recourse basis and received $160.8 million and $196.4 million, respectively, in cash proceeds from the sale. The fees associated with these transactions were insignificant.

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Goodwill

The changes in the carrying amount of goodwill by segment for the nine months ended September 30, 2019 were as follows (in thousands):


	Clinical Solutions (a)		Commercial Solutions (b)		Total



Balance as of December 31, 2018	$	2,772,803	$	1,560,356	$	4,333,159

Business combinations (c)	—		(204)		(204)
Impact of foreign currency translation	(9,087)		(1,685)		(10,772)



Balance as of September 30, 2019	$	2,763,716	$	1,558,467	$	4,322,183

(a) Accumulated impairment losses of $8.1 million associated with the Clinical Solutions segment were recorded prior to 2016 and related to the former Phase I Services segment, now a component of the Clinical Solutions segment. No impairment of goodwill was recorded for the nine months ended September 30, 2019.

(b) Accumulated impairment losses of $8.0 million associated with the Commercial Solutions segment were recorded prior to 2015 and related to the former Global Consulting segment, now a component of the Commercial Solutions segment. No impairment of goodwill was recorded for the nine months ended September 30, 2019.

(c) Amount represents measurement period adjustments to goodwill recognized in connection with the acquisition of Kinapse Topco Limited (“Kinapse”).

Transaction and Integration-Related Expenses

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Professional fees	$	7,108	$	14,851	$	26,632	$	40,624

Debt modification and related expenses	1,582		409		5,555		1,726
Integration and personnel retention-related costs	1,394		2,107		3,150		15,847
Fair value adjustments to contingent obligations	370		1,194		(571)		3,582
Other	—		—		—		25
Total transaction and integration-related expenses	$	10,454	$	18,561	$	34,766	$	61,804

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Accumulated Other Comprehensive Loss, Net of Tax

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Beginning balance	$	(92,688)	$	(55,064)	$	(88,195)	$	(22,385)

Foreign Currency Translation:
Beginning balance	(72,270)		(55,166)		(80,955)		(23,514)
Impact from adoption of ASU 2018-02	—		—		—		3,594
Adjusted beginning balance	(72,270)		(55,166)		(80,955)		(19,920)
Other comprehensive loss before reclassifications	(34,421)		(1,295)		(25,736)		(36,541)
Reclassification adjustments	—		—		—		—
Ending balance	(106,691)		(56,461)		(106,691)		(56,461)

Derivative Instruments:
Beginning balance	(20,418)		102		(7,240)		1,129
Impact from adoption of ASU 2018-02	—		—		—		256
Adjusted beginning balance	(20,418)		102		(7,240)		1,385
Other comprehensive (loss) income before reclassifications	(1,105)		2,397		(15,351)		1,712
Reclassification adjustments	1,179		227		2,247		(371)
Ending balance	(20,344)		2,726		(20,344)		2,726

Ending balance	$	(127,035)	$	(53,735)	$	(127,035)	$	(53,735)

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Foreign currency translation adjustments:
Foreign currency translation adjustments, before tax	$	(34,421)	$	(4,163)	$	(25,736)	$	(36,541)
Income tax benefit	—		2,868		—		—
Foreign currency translation adjustments, net of tax	(34,421)		(1,295)		(25,736)		(36,541)
Unrealized gain (loss) on derivative instruments:
Unrealized (loss) gain during period, before tax	(1,144)		2,863		(15,760)		2,178
Income tax benefit (expense)	39		(466)		409		(466)
Unrealized (loss) gain during period, net of tax	(1,105)		2,397		(15,351)		1,712
Reclassification adjustment, before tax	1,218		236		2,324		(362)
Income tax expense	(39)		(9)		(77)		(9)
Reclassification adjustment, net of tax	1,179		227		2,247		(371)
Total unrealized gain (loss) on derivative instruments, net of tax	74		2,624		(13,104)		1,341
Total other comprehensive (loss) income, net of tax	$	(34,347)	$	1,329	$	(38,840)	$	(35,200)

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Other Income (Expense), Net

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Net realized foreign currency gain	$	26,762	$	1,978	$	25,631	$	2,146
Net unrealized foreign currency gain (loss)	5,131		(4,706)		6,090		14,927
Other, net	(1,180)		(1,618)		(2,356)		(1,972)
Total other income (expense), net	$	30,713	$	(4,346)	$	29,365	$	15,101

3. Business Combinations

inVentiv Health Merger

On August 1, 2017, the Company completed a merger (the “Merger”) with Double Eagle Parent, Inc. (“inVentiv”), the parent company of inVentiv Health, Inc., with the Company surviving as the accounting and legal entity acquirer. The Merger was accounted for as a business combination using the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. The purchase price has been allocated to the tangible assets and identifiable intangible assets acquired and liabilities assumed based upon their fair values. The excess of the purchase price over the tangible and intangible assets acquired and liabilities assumed has been recorded as goodwill. The goodwill in connection with the Merger is primarily attributable to the assembled workforce of inVentiv and the expected synergies of the Merger.

In connection with the Merger, the Company assumed certain contingent tax-sharing obligations of inVentiv. The fair value of the contingent tax-sharing liability is remeasured at the end of each reporting period, with changes in the estimated fair value reflected in earnings until the liability is fully settled. The estimated fair value of the contingent tax-sharing obligations liability was $14.9 million and $15.7 million as of September 30, 2019 and December 31, 2018, respectively. The liability is included in accrued expenses and other long-term liabilities on the accompanying unaudited condensed consolidated balance sheets.

Kinapse Limited Acquisition

In August 2018, the Company completed its acquisition of Kinapse, a provider of advisory and operational solutions to the global life sciences industry. The total purchase consideration was $100.1 million plus assumed debt, and included cash acquired of $4.9 million. The Company recognized $74.5 million of goodwill and $57.3 million of intangible assets, principally customer relationships, as a result of the acquisition. The goodwill is not deductible for income tax purposes. The purchase price has been allocated to the tangible assets and identifiable intangible assets acquired and liabilities assumed based upon their fair values. The excess of the purchase price over the tangible and intangible assets acquired and liabilities assumed has been recorded as goodwill. The operating results from the Kinapse acquisition have been included in the Company’s Commercial Solutions segment from the date of acquisition.

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4. Long-Term Debt Obligations

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


	September 30, 2019		December 31, 2018
Secured Debt
Term Loan A due March 2024	$	1,150,000	$	975,000
Term Loan B due August 2024	862,564		1,221,000

Accounts receivable financing agreement due September 2021	275,000		169,400
Total secured debt	2,287,564		2,365,400
Unsecured Debt
7.5% Senior Unsecured Notes due 2024 (the "Senior Notes")	403,000		403,000
Total debt obligations	2,690,564		2,768,400
Add: unamortized Senior Notes premium, net of term loan original issuance discount	27,178		32,303
Less: unamortized deferred issuance costs	(8,881)		(13,584)
Less: current portion of debt	(28,750)		(50,100)
Total debt obligations, non-current portion	$	2,680,111	$	2,737,019

Concurrent with the completion of the Merger on August 1, 2017, the Company entered into a credit agreement (as amended, the "Credit Agreement") for: (i) a $1.0 billion Term Loan A facility that would mature on August 1, 2022 (the “Term Loan A”); (ii) a $1.6 billion Term Loan B facility that would mature on August 1, 2024 (the “Term Loan B”); and (iii) a five-year $500.0 million revolving credit facility (the “Revolver”) that would mature on August 1, 2022.

On May 4, 2018, the Company entered into Amendment No. 1 to the Credit Agreement, which, among other things, modified the terms of the Credit Agreement to reduce by 0.25% overall the applicable margins for Alternate Base Rate (as defined in the Credit Agreement) loans and Adjusted Eurocurrency Rate (as defined in the Credit Agreement) loans with respect to both the Term Loan A and Term Loan B facilities.

During the nine months ended September 30, 2019, the Company voluntarily prepaid $179.8 million towards reducing its outstanding Term Loan B balance, which was applied against the regularly-scheduled quarterly principal payments. As a result of these and previous voluntary prepayments, the Company is not required to make a mandatory principal payment against the Term Loan B principal balance until maturity in August 2024. Additionally, during the nine months ended September 30, 2019, the Company made mandatory principal repayments of $12.5 million towards its Term Loan A.

Amendment No. 2 to the Credit Agreement

On March 26, 2019, the Company entered into Amendment No. 2 to the Credit Agreement (the "Second Amendment”). The Second Amendment, among other things, modifies the terms of the Credit Agreement to refinance the existing Term Loan A facility and the Revolver as follows:

(a) to increase the existing Term Loan A facility by $587.5 million to $1.55 billion. $187.5 million of such increase was applied at closing to repay a portion of the Company’s existing Term Loan B facility and the fees and expenses incurred in connection with the Second Amendment, and the remaining $400.0 million will be available to be funded in multiple draws within nine months of closing;

(b) to increase the existing Revolver commitments available by $100.0 million to $600.0 million, and reduce the margin spread by 0.25% overall, resulting in (i) for Adjusted Eurocurrency Rate loans, a margin spread of 1.50% and (ii) for Alternate Base Rate loans, a margin spread of 0.50%, with a single 0.25% step-down based on the achievement of certain leverage ratios; and

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The Term Loan A facility and the Revolver will continue to be subject to the same affirmative covenants and negative covenants. The financial covenant will be set at a First Lien Leverage Ratio (as defined in the Credit Agreement) of 5.00:1.00 with a single step-down to 4.50:1.00 commencing with the fiscal quarter ending March 31, 2020. The Company was in compliance with all covenants of the Credit Agreement as of September 30, 2019.

In connection with the Second Amendment, during the three months ended March 31, 2019, the Company recorded a $4.4 million loss on extinguishment of debt, mainly due to the write-off of the deferred issuance costs and debt discount.

The funded amount of the Term Loan A facility was issued net of a discount and debt issuance costs totaling $2.8 million. These costs are being accreted as a component of interest expense using the effective interest rate method over the term of this facility.

The Company recorded debt issuance costs and related fees in connection with the Revolver and the unfunded amount of the Term Loan A facility of approximately $3.5 million, which are included in other long-term assets in the unaudited condensed consolidated balance sheet. These costs are amortized as a component of interest expense on a straight-line basis over the related terms.

Redemption of Senior Notes

On October 2, 2019, the Company drew down the $400.0 million Term Loan A balance and used the proceeds and cash on hand to redeem all of the Senior Notes for $403.0 million and pay a $15.1 million premium related to the early redemption.

Covenant Restrictions under Lease Agreement

The lease agreement for the Company’s new corporate headquarters in Morrisville, North Carolina includes a provision that requires the Company to issue a letter of credit in certain amounts to the landlord based on the Company’s debt rating issued by Moody’s Investors Service (or other nationally-recognized debt rating agency). As of September 30, 2019 (and through the date of this filing), the Company’s credit rating was Ba3. As such, no letter of credit was required through the date of this filing. Any letters of credit issued in accordance with the aforementioned requirements could be issued under the Revolver, and, if issued under the Revolver, would reduce its available borrowing capacity by the same amount.

As of September 30, 2019, the Company had $580.2 million (net of $19.8 million in outstanding letters of credit) of available borrowings under the Revolver and $0.7 million of letters of credit that were issued under the Revolver.

Accounts Receivable Financing Agreement

On June 29, 2018, the Company entered into an accounts receivable financing agreement (as amended) with a termination date of September 30, 2021, unless terminated earlier pursuant to its terms. Under this agreement, certain of the Company’s consolidated subsidiaries sell accounts receivable and unbilled services (including contract assets) balances to a wholly-owned, bankruptcy-remote special purpose entity (“SPE”). On September 30, 2019, the Company entered into an amendment that increased the amount the SPE can borrow from a third-party lender from $250.0 million to $275.0 million, secured by liens on certain receivables and other assets of the SPE. The Company has guaranteed the performance of the obligations of existing and future subsidiaries that sell and service the accounts receivable under this agreement. The available borrowing capacity varies monthly according to the levels of the Company’s eligible accounts receivable and unbilled receivables. Loans under this agreement will accrue interest at a reserve-adjusted LIBOR rate or a base rate equal to the higher of (i) the applicable lender’s prime rate and (ii) the federal funds rate plus 0.50%. The Company may prepay loans upon one business day’s prior notice and may terminate or reduce the facility limit of the accounts receivable financing agreement with 15 days’ prior notice. The aforementioned amendment entered into on September 30, 2019 also extended the termination date as stated above from June 29, 2020 to September 30, 2021.

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As of September 30, 2019, the Company had $275.0 million of outstanding borrowings under the accounts receivable financing agreement, which are recorded in long-term debt on the accompanying unaudited condensed consolidated balance sheet. There was no remaining borrowing capacity under this agreement as of September 30, 2019.

As of September 30, 2019, the contractual maturities of the Company’s debt obligations were as follows (in thousands):


	Principal		Interest
2019	$	—	$	32,004
2020	43,125		126,606
2021	354,063		120,732
2022	107,813		111,147
2023	115,000		106,493
2024 and thereafter	2,070,563		53,970
Less: deferred issuance costs	(8,881)
Unamortized Senior Notes premium, net of term loan original issuance discount	27,178
Total	$	2,708,861	$	550,952

5. Leases

The Company’s operating leases are primarily related to its office facilities. The Company’s finance leases are related to vehicles that the Company leases for certain sales representatives in its Commercial Solutions segment. The Company's leases have remaining lease terms of less than one year to 13 years, some of which include options to extend the term or terminate the lease. These options to extend or terminate a lease are included in the lease terms when it is reasonably certain that the Company will exercise that option.

ROU assets and lease liabilities are recognized based on the present value of the fixed lease payments over the lease term at the commencement date. The ROU assets also include any initial direct costs incurred and lease payments made at or before the commencement date, and are reduced by lease incentives. The Company uses its incremental borrowing rate as the discount rate to determine the present value of the lease payments for leases that do not have a readily determinable implicit discount rate. The Company’s incremental borrowing rate is the rate of interest that it would have to borrow on a collateralized basis over a similar term and amount in a similar economic environment. The Company determines the incremental borrowing rates for its leases by adjusting the local risk free interest rate with a credit risk premium corresponding to the Company’s credit rating.

The Company records rent expense for its operating leases on a straight-line basis from the lease commencement date until the end of the lease term. The Company records finance lease cost as a combination of the amortization expense for the ROU assets and interest expense for the outstanding lease liabilities using the discount rate discussed above. Variable lease payments for operating leases are related to the office facilities and include but are not limited to common area maintenance, parking, electricity, and management fees. The variable lease payments for finance leases are related to maintenance programs for leased vehicles. Variable lease payments are based on occurrence or based on usage; therefore, they are not included as part of the initial calculations of the ROU assets and liabilities.

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The components of lease cost were as follows for the three and nine months ended September 30, 2019 (in thousands):


		Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating leases:
Fixed lease costs	Selling, general, and administrative expenses	$	15,720	$	49,825
Short-term lease costs	Selling, general, and administrative expenses	630		1,204
Variable lease costs	Selling, general, and administrative expenses	8,580		25,234
Total operating lease costs		$	24,930	$	76,263
Finance leases:
Amortization of right-of-use assets	Depreciation	$	3,677	$	11,987
Interest on lease liabilities	Interest expense	502		1,309
Variable lease costs	Selling, general, and administrative expenses	2,138		5,769
Total finance lease costs		$	6,317	$	19,065

Supplemental balance sheet information related to finance leases was as follows as of September 30, 2019 (in thousands):



Property and equipment, gross	$	66,875
Accumulated depreciation	(18,513)
Property and equipment, net	$	48,362

Current portion of finance lease obligations	$	17,945
Finance lease long-term obligations	36,676
Total finance lease liabilities	$	54,621

Supplemental cash flow information related to leases was as follows for the nine months ended September 30, 2019 (in thousands):


Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	(12,115)
Operating cash flows for finance leases	(1,309)
Financing cash flows for finance leases	(9,429)

Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	48,548
Finance leases	30,525

Lease obligations closed out in exchange for right-of-use assets:
Operating leases	$	(634)

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Weighted average remaining lease term as of September 30, 2019:

Operating leases			8 years
Finance leases			3 years


Weighted average discount rate as of September 30, 2019:
Operating leases	4.9	%
Finance leases	3.3	%

As of September 30, 2019, maturities of lease liabilities were as follows (in thousands):


	Operating Leases		Finance Leases		Total
2019	$	2,816	$	5,530	$	8,346
2020	52,426		18,918		71,344
2021	46,974		16,952		63,926
2022	40,717		12,762		53,479
2023	35,723		4,366		40,089
2024 and thereafter	131,233		—		131,233
Total lease payments	309,889		58,528		$	368,417
Less: management fee			(768)
Less: imputed interest	(57,300)		(3,139)
Total lease liabilities	$	252,589	$	54,621

Under ASC 840, as of December 31, 2018, the Company had total capital lease assets of $55.3 million and accumulated depreciation of $17.6 million, which are included within property and equipment, net, on the unaudited condensed consolidated balance sheet. The related capital lease obligations totaled $40.6 million as of December 31, 2018. For the three and nine months ended September 30, 2018, the Company recorded rent expense of $15.1 million and $48.4 million, respectively, for operating leases.

6. Derivatives

In May 2016, the Company entered into interest rate swaps with a combined notional value of $300.0 million in an effort to limit its exposure to variable interest rates on its term loans. The swaps became effective on June 30, 2016 and a portion of the interest rate swaps expired on June 30, 2018, with the remainder expiring on May 14, 2020. As of September 30, 2019, the remaining notional value of these interest rate swaps was $100.0 million. In June 2018, the Company entered into an interest rate swap with an aggregate notional value of $1.01 billion that became effective on December 31, 2018 and will expire on June 30, 2021. The significant terms of these derivatives are substantially the same as those contained within the Credit Agreement, including monthly settlements with the swap counterparties. Interest rate swaps are designated as hedging instruments. During the three and nine months ended September 30, 2019, the amount of loss recognized in other income (expense), net with respect to these contracts was inconsequential.

As a result of an acquisition that occurred during the third quarter of 2018, the Company became a party to certain foreign currency exchange rate forward contracts. These contracts expired on various dates through April 2019. During the three and nine months ended September 30, 2019, the amount of loss recognized in other income (expense), net with respect to these contracts was inconsequential.

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


	Balance Sheet Classification	September 30, 2019		December 31, 2018
Interest rate swaps - current	Prepaid expenses and other current assets	$	306	$	1,355
Interest rate swaps - non-current	Other long-term assets	—		441
Foreign currency exchange rate swaps - current	Accrued expenses	—		(138)
Interest rate swaps - current	Accrued expenses	(11,083)		(3,031)
Interest rate swaps - non-current	Other long-term liabilities	(10,241)		(6,201)

7. Fair Value Measurements

Assets and Liabilities Carried at Fair Value

As of September 30, 2019 and December 31, 2018, the Company’s financial assets and liabilities carried at fair value included cash and cash equivalents, restricted cash, trading securities, billed and unbilled accounts receivable (including contract assets), accounts payable, accrued expenses, deferred revenue, assumed contingent obligations, finance leases, liabilities under the accounts receivable financing agreement, and derivative instruments.

The fair values of cash and cash equivalents, restricted cash, billed and unbilled accounts receivable (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, 2019, the fair values of the major classes of the Company’s assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):


	Level 1		Level 2		Level 3		Investments Measured at Net Asset Value		Total
Assets:
Trading securities (a)	$	21,026	$	—	$	—	$	—	$	21,026
Partnership interest (b)	—		—		—		6,227		6,227
Derivative instruments (c)	—		306		—		—		306
Total assets	$	21,026	$	306	$	—	$	6,227	$	27,559

Liabilities:
Derivative instruments (c)	$	—	$	21,324	$	—	$	—	$	21,324
Contingent obligations related to business combinations (d)	—		—		19,200		$	—	19,200
Total liabilities	$	—	$	21,324	$	19,200	$	—	$	40,524

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As of December 31, 2018, 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		Total
Assets:
Trading securities (a)	$	14,945	$	—	$	—	$	14,945
Derivative instruments (e)	—		1,796		—		1,796
Total assets	$	14,945	$	1,796	$	—	$	16,741

Liabilities:
Derivative instruments (e)	$	—	$	9,370	$	—	$	9,370
Contingent obligations related to business combinations (d)	—		—		20,127		20,127
Total liabilities	$	—	$	9,370	$	20,127	$	29,497

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

(b) The Company has committed to invest $20.0 million as a limited partner in the NovaQuest Pharma Opportunities Fund V, LP (the "Fund”). As of September 30, 2019, the Company’s remaining unfunded commitment was $14.1 million. The Company has determined that it does not exercise significant influence over the Fund’s operating and finance activities. As the Fund does not have a readily determinable fair value, the Company has estimated fair value using the Fund’s Net Asset Value, the amount by which the value of the assets exceeds debt and liabilities, in accordance with ASC Topic 946, Financial Services – Investment Companies.

(d) Represents fair value of contingent consideration obligations related to business combinations (see "Note 3 - Business Combinations" for further information). The fair value of these liabilities are determined based on the Company’s best estimate of the probable timing and amount of settlement.

(e) Represents fair value of interest rate swap and foreign currency exchange rate forward contract arrangements (see "Note 6 - Derivatives" for further information).

The following table presents changes in the carrying amount of contingent obligations related to business combinations classified as Level 3 within the fair value hierarchy for the nine months ended September 30, 2019 (in thousands):


Balance at December 31, 2018	$	20,127
Additions	—
Changes in fair value recognized in earnings	(749)
Payments	(178)
Balance at September 30, 2019	$	19,200

During the nine months ended September 30, 2019, there were no transfers of assets or liabilities between Level 1, Level 2, or Level 3 fair value measurements.

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Financial Instruments Subject to Non-Recurring Fair Value Measurements

Certain assets, including goodwill and identifiable intangible assets, are carried on the 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, 2019 and December 31, 2018, assets subject to non-recurring fair value measurements totaled $5.33 billion and $5.47 billion, respectively.

Fair Value Disclosures for Financial Instruments Not Carried at Fair Value

The estimated fair value of the outstanding term loans and the Senior Notes is determined based on the price that the Company would have 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 outstanding term loans and Senior Notes were as follows (in thousands):


	September 30, 2019						December 31, 2018
	Carrying Value (a)		Estimated Fair Value		Carrying Value (a)		Estimated Fair Value
Term Loan A due March 2024	$	1,146,656	$	1,150,000	$	973,218	$	975,000
Term Loan B due August 2024	861,673		862,564		1,219,755		1,221,000
7.5% Senior Unsecured Notes due 2024	434,413		418,133		438,330		423,150

(a) The carrying value of the term loan debt is shown net of original issue debt discounts. The carrying value of the Senior Notes is inclusive of unamortized premiums.

8. Restructuring and Other Costs

Merger-Related Restructuring

In connection with the Merger, the Company established a restructuring plan to eliminate redundant positions and reduce its facility footprint worldwide. The Company expects to continue the ongoing evaluations of its workforce and facilities infrastructure needs through 2020 in an effort to optimize its resources. During the nine months ended September 30, 2019, the Company recognized approximately: (i) $14.6 million of employee severance and benefits related costs; and (ii) $10.7 million of facility closure and lease termination costs. The Company expects to continue to incur significant costs related to the restructuring of its operations in order to achieve targeted synergies as a result of the Merger. However, the timing and the amount of these costs depend on various factors, including, but not limited to, identifying and realizing synergy opportunities and executing the integration of the Company’s operations.

Non-Merger Restructuring and Other Costs

During the nine months ended September 30, 2019, the Company incurred $3.4 million of facility closure and lease termination costs related to the Company’s pre-Merger activities aimed at optimizing its resources worldwide. Additionally, during the nine months ended September 30, 2019, the Company recognized approximately $11.1 million of employee severance and benefits related costs.

Accrued Restructuring Liabilities

The following table summarizes activity related to the liabilities associated with restructuring and other costs during the nine months ended September 30, 2019 (in thousands):


	Employee Severance Costs		Facility Closure and Lease Termination Costs		Other Costs		Total
Balance at December 31, 2018	$	7,474	$	16,761	$	52	$	24,287
Adoption of ASC 842 (a)	—		(16,761)		—		(16,761)
Expenses incurred (b)	25,607		—		273		25,880
Cash payments made	(22,513)		—		(303)		(22,816)
Balance at September 30, 2019	$	10,568	$	—	$	22	$	10,590

(a) As a result of the adoption of ASC 842, accrued expenses related to facility closure and lease termination costs are now reflected within the current portion of operating lease obligations and operating lease long-term obligations on the unaudited condensed consolidated balance sheets as of September 30, 2019. These facility costs will be paid over the remaining terms of exited facilities, which range from 2019 through 2027.

(b) The amount of expenses incurred for the nine months ended September 30, 2019 excludes $4.8 million of non-cash restructuring and other expenses, because these expenses were not subject to accrual prior to the period in which they were incurred, and $9.0 million of facility lease closure and lease termination costs. Under ASC 842, these costs are reflected as a reduction of operating lease right-of-use assets on the unaudited condensed consolidated balance sheets.

The Company expects that substantially all of the employee severance costs accrued as of September 30, 2019 will be paid within the next twelve months. Liabilities associated with these costs are included in accrued expenses on the accompanying unaudited condensed consolidated balance sheets. Restructuring and other costs included in net income for the three and nine months ended September 30, 2019 are presented in restructuring and other costs in the unaudited condensed consolidated statements of operations.

9. Shareholders' Equity

Shares Outstanding

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


	Three Months Ended September 30,			Nine Months Ended September 30,
	2019	2018	2019	2018
Common stock shares, beginning balance	103,460	102,871	103,372	104,436
Stock repurchase	(141)	—	(1,323)	(1,973)
RSU distributions net of shares for tax withholding	33	32	423	134
Stock option exercises	441	320	1,321	626
Common stock shares, ending balance	103,793	103,223	103,793	103,223

2018 Stock Repurchase Program

On February 26, 2018, the Company’s Board of Directors authorized the repurchase of up to an aggregate of $250.0 million of the Company’s common stock, to be executed from time to time in open market transactions effected through a broker at prevailing market prices, in block trades, or through privately negotiated transactions (“2018 stock repurchase program”). The 2018 stock repurchase program commenced on March 1, 2018 and will end no later than December 31, 2019. The Company intends to use cash on hand and future operating cash flow to fund the 2018 stock repurchase program.

The 2018 stock repurchase program does not obligate the Company to repurchase any particular amount of the Company’s common stock and may be modified, extended, suspended, or discontinued at any time. The timing and amount of repurchases will be determined by the Company’s management based on a variety of factors such as the market price of the Company’s common stock, the Company’s corporate requirements for cash, and overall market conditions. The 2018 stock repurchase program is subject to applicable legal requirements, including federal and state securities laws and the 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.

In March 2018, the Company repurchased 948,100 shares of its common stock in open market transactions at an average price of $39.55 per share, resulting in a total purchase price of approximately $37.5 million. In April 2018, the Company repurchased 1,024,400 shares of its common stock in open market transactions at an average price of $36.60 per share, resulting in a total purchase price of approximately $37.5 million. In January 2019, the Company repurchased 552,100 shares of its common stock in open market transactions at an average price of $39.16 per share, resulting in a total purchase price of approximately $21.6 million. In February 2019, the Company repurchased 120,600 shares of its common stock in open market transactions at an average price of $41.40 per share, resulting in a total purchase price of approximately $5.0 million. In June 2019, the Company repurchased 509,100 shares of its common stock in open market transactions at an average price of $45.29 per share, resulting in a total purchase price of approximately $23.1 million. In August 2019, the Company repurchased 141,100 shares of its common stock in open market transactions at an average price of $49.93 per share, resulting in a total purchase price of approximately $7.0 million. The Company immediately retired all of the repurchased common stock and charged the par value of the shares to common stock. The excess of the repurchase price over the par value was applied on a pro rata basis against additional paid-in capital, with the remainder applied to accumulated deficit.

As of September 30, 2019, the Company had remaining authorization to repurchase up to approximately $118.3 million of shares of its common stock under the 2018 stock repurchase program.

10. Earnings (Loss) Per Share

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Numerator:
Net income (loss)	$	58,920	$	(10,394)	$	40,208	$	(21,386)
Denominator:
Basic weighted average common shares outstanding	103,594		103,012		103,553		103,453
Effect of dilutive securities:
Stock options and other awards under deferred share-based compensation programs	1,427		—		1,328		—
Diluted weighted average common shares outstanding	105,021		103,012		104,881		103,453
Earnings (loss) per share:
Basic	$	0.57	$	(0.10)	$	0.39	$	(0.21)
Diluted	$	0.56	$	(0.10)	$	0.38	$	(0.21)

Potential common shares outstanding that are considered anti-dilutive are excluded from the computation of diluted earnings (loss) per share. Potential common shares related to stock options and other awards under deferred 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 the event of a net loss.

The number of potential shares outstanding that were considered anti-dilutive using the treasury stock method and therefore excluded from the computation of diluted earnings (loss) per share, weighted for the portion of the period they were outstanding were as follows (in thousands):


	Three Months Ended September 30,			Nine Months Ended September 30,
	2019	2018	2019	2018
Anti-dilutive stock options and other awards	220	335	296	1,224
Anti-dilutive stock options and other awards under share-based compensation programs excluded based on reporting a net loss for the period	—	1,621	—	1,208
Total common stock equivalents excluded from diluted loss per share	220	1,956	296	2,432

11. Income Taxes

Income Tax Expense

For the three and nine months ended September 30, 2019, the Company recorded income tax expense of $11.1 million and $43.8 million, respectively, compared to pre-tax income of $70.0 million and $84.0 million, respectively. The effective tax rate for the three and nine months ended September 30, 2019 varied from the U.S. federal statutory income tax rate of 21.0% primarily due to: (i) base erosion and anti-abuse minimum tax (“BEAT”), (ii) foreign income inclusions such as the Global Intangible Low-Taxed Income provisions, and (iii) valuation allowance change on domestic deferred tax assets.

For the three and nine months ended September 30, 2018, the Company recorded an income tax expense of $12.0 million and $19.1 million, respectively, compared to pre-tax income of $1.6 million and pre-tax loss of $2.3 million, respectively. The effective tax rate for the three and nine months ended September 30, 2018 varied from the U.S. federal statutory income tax rate of 21.0% primarily due to: (i) the recognition of unfavorable discrete adjustments related to foreign currency exchange; (ii) the geographical split of pre-tax income; and (iii) deferred expense related to hanging credits on domestic indefinite-lived intangibles.

BEAT

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

Unrecognized Tax Benefits

The Company's gross unrecognized tax benefits, exclusive of associated interest and penalties, were $19.9 million and $19.2 million as of September 30, 2019 and December 31, 2018, respectively. The increase of $0.7 million was primarily due to unrecognized tax benefits in foreign jurisdictions.

Tax Returns Under Audit

During the first quarter of 2019, the Company was notified by the Internal Revenue Service that the legacy inVentiv federal income tax return was under audit for the tax year beginning November 10, 2016 and ending December 31, 2016. The examination commenced on May 8, 2019.

12. Revenue from Contracts with Customers

Unsatisfied Performance Obligations

As of September 30, 2019, the total aggregate transaction price allocated to the unsatisfied performance obligations under contracts with contract terms greater than one year and which are not accounted for as a series pursuant to ASU No. 2014-09, Revenue from Contracts with Customers (“ASC 606”) was $5.34 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. Specifically, contracts that do not commence within a certain period of time require the Company to undertake numerous activities to fulfill these performance obligations, including various activities that are outside of the Company’s control. Accordingly, such contracts have been excluded from the unsatisfied performance obligations balance presented above.

Timing of Billing and Performance

During the three and nine months ended September 30, 2019, the Company recognized approximately $340.8 million and $556.2 million, respectively, of revenue that was included in the deferred revenue balance at the beginning of the periods. During the three and nine months ended September 30, 2019, approximately $19.1 million and $40.1 million, respectively, of the Company’s revenue recognized was allocated to performance obligations partially satisfied in previous periods and predominately related to changes in scope and estimates in full service clinical studies. Changes in the contract assets and deferred revenue balances during the three and nine months ended September 30, 2019 were not materially impacted by any other factors.

13. Segment Information

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

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

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Revenue:
Clinical Solutions	$	867,427	$	819,203	$	2,522,307	$	2,389,955
Commercial Solutions	309,601		295,715		940,554		854,689


Total consolidated revenue	1,177,028		1,114,918		3,462,861		3,244,644
Segment direct costs:
Clinical Solutions	655,851		633,258		1,936,021		1,857,623
Commercial Solutions	250,904		233,740		759,591		688,339
Total segment direct costs	906,755		866,998		2,695,612		2,545,962




Segment selling, general, and administrative expenses:
Clinical Solutions	68,659		63,707		205,986		197,764
Commercial Solutions	21,416		22,182		69,671		63,368
Total segment selling, general, and administrative expenses	90,075		85,889		275,657		261,132
Segment operating income:
Clinical Solutions	142,917		122,238		380,300		334,568
Commercial Solutions	37,281		39,793		111,292		102,982
Total segment operating income	180,198		162,031		491,592		437,550
Direct costs and operating expenses not allocated to segments:

Corporate selling, general, and administrative expenses	13,905		6,479		39,732		23,874
Share-based compensation included in direct costs	6,919		5,216		22,393		14,540
Share-based compensation included in selling, general, and administrative expenses	5,884		4,575		18,471		11,414
Restructuring and other costs	13,456		19,349		39,751		41,647
Transaction and integration-related expenses	10,454		18,561		34,766		61,804

Depreciation and amortization	60,137		68,034		182,086		203,557
Total consolidated income from operations	$	69,443	$	39,817	$	154,393	$	80,714

14. Operations by Geographic Location

The following table summarizes information about revenue by geographic area (in thousands and with all intercompany transactions eliminated):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Revenue:
North America (a)	$	780,460	$	761,414	$	2,299,439	$	2,219,725
Europe, Middle East, and Africa	251,519		232,916		768,653		693,874
Asia-Pacific	119,268		97,726		325,129		269,353
Latin America	25,781		22,862		69,640		61,692
Total revenue	$	1,177,028	$	1,114,918	$	3,462,861	$	3,244,644

(a) Revenue for the North America region includes revenue attributable to the United States of $745.6 million and $718.0 million, or 63.3% and 64.4% of total revenue, for the three months ended September 30, 2019 and 2018, respectively. Revenue for the North America region includes revenue attributable to the United States of $2,190.9 million and $2,104.8 million, or 63.3% and 64.9% of total revenue, for the nine months ended September 30, 2019 and September 30, 2018, respectively. No other country represented more than 10% of revenue for any period.

Long-lived assets by geographic area for each period were as follows (in thousands and all intercompany transactions have been eliminated):


	September 30, 2019		December 31, 2018
Property and equipment, net:
North America (a)	$	156,460	$	133,593
Europe, Middle East, and Africa	28,006		33,053
Asia-Pacific	13,726		13,328
Latin America	2,930		3,512
Total property and equipment, net	$	201,122	$	183,486

(a) Long-lived assets for the North America region include property and equipment, net attributable to the United States of $151.0 million and $128.3 million as of September 30, 2019 and December 31, 2018, respectively.

15. Concentration of Credit Risk

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 December 31, 2018, the amount of cash and cash equivalents held outside the United States by the Company’s foreign subsidiaries was $43.6 million, or approximately 28% of the total consolidated cash and cash equivalents balance. As of September 30, 2019, substantially all of the Company’s cash and cash equivalents were held within the United States.

As of September 30, 2019, no single customer accounted for greater than 10% of the Company’s billed accounts receivable, unbilled accounts receivable, and contract assets balances. As of December 31, 2018, one customer accounted for approximately 13% of the Company’s billed accounts receivable, unbilled accounts receivable, and contract assets balances.

16. Related-Party Transactions

For the nine months ended September 30, 2019, the Company incurred reimbursable out-of-pocket expenses of $1.1 million for professional services obtained from a provider whose member of the Board of Directors was also a member of the Company’s Board of Directors. No related party expenses were recorded for the three months ended September 30, 2019.

For the three and nine months ended September 30, 2018, the Company incurred reimbursable out-of-pocket expenses of $1.6 million and $2.8 million, respectively, for professional services obtained from two providers, one whose significant shareholder was also a significant shareholder of the Company and the other whose member of the Board of Directors was also a member of the Company’s Board of Directors. Additionally, at September 30, 2018 the Company had related party liabilities of $1.0 million included in Accounts Payable and Accrued Expenses on the unaudited condensed consolidated balance sheets.

No material related-party revenue was recorded for the three and nine months ended September 30, 2019 or 2018.

17. Commitments and Contingencies

Legal Proceedings

The Company is involved in various claims and legal actions arising in the ordinary course of business. The Company accrues a liability when a loss is considered probable and the amount can be reasonably estimated. When a material loss contingency is reasonably possible but not probable, the Company does not record a liability, but instead discloses the nature and the amount of the claim, and an estimate of the loss or range of loss, if such an estimate can be made. Legal fees are expensed as incurred. In the opinion of management, the outcome of any existing claims and legal or regulatory proceedings, other than the specific matters described below, 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.

On December 1, 2017, the first of two virtually identical actions alleging federal securities law claims was filed against the Company and certain of its officers on behalf of a putative class of its shareholders. The first action, captioned Bermudez v. INC Research, Inc., et al, No. 17-09457 (S.D.N.Y.), names as defendants the Company, Michael Bell, Alistair MacDonald, Michael Gilbertini, and Gregory S. Rush (the "Bermudez action"), and the second action, Vaitkuvienë v. Syneos Health, Inc., et al, No. 18-0029 (E.D.N.C.), filed on January 25, 2018 (the “Vaitkuvienë action"), names as defendants the Company, Alistair MacDonald, and Gregory S. Rush (the "Initial Defendants"). Both complaints allege similar claims under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of purchasers of the Company's common stock between May 10, 2017 and November 8, 2017 and November 9, 2017. The complaints allege that the Company published inaccurate or incomplete information regarding, among other things, the financial performance and business outlook for inVentiv’s business prior to the Merger and with respect to the combined company following the Merger. On January 30, 2018, two alleged shareholders separately filed motions seeking to be appointed lead plaintiff and approving the selection of lead counsel. On March 30, 2018, Plaintiff Bermudez filed a notice of voluntary dismissal of the Bermudez action, without prejudice, and as to all defendants. On May 29, 2018, the Court in the Vaitkuvienë action appointed the San Antonio Fire & Police Pension Fund and El Paso Firemen & Policemen’s Pension Fund as Lead Plaintiffs and, on June 7, 2018, the Court entered a schedule providing for, among other things, Lead Plaintiffs to file an amended complaint by July 23, 2018 (later extended to July 30, 2018). Lead Plaintiffs filed their amended complaint on July 30, 2018, which also includes a claim against the Initial Defendants, as well as each member of the board of directors at the time of the INC Research - inVentiv Health merger vote in July 2017 (the “Defendants”), contending that the inVentiv merger proxy was misleading under Section 14(a) of the Act. Lead Plaintiffs seek, among

other things, orders (i) declaring that the lawsuit is a proper class action and (ii) awarding compensatory damages in an amount to be proven at trial, including interest thereon, and reasonable costs and expenses incurred in this action, including attorneys’ fees and experts' fees, to Lead Plaintiffs and other class members. Defendants filed a Motion to Dismiss Plaintiffs’ Amended Complaint on September 20, 2018. Lead Plaintiffs filed a Response in Opposition to such motion on November 21, 2018, and Defendants filed a Reply to such response on December 5, 2018. On May 23, 2019, Lead Plaintiffs filed a Notice of Filings in Related Case regarding the New Jersey shareholder action filed on March 1, 2019 described below, and Defendants filed their response on May 31, 2019. On September 26, 2019, the Court ordered, among other things, that this action is stayed in light of the litigation filed on March 1, 2019 and described below, pending before the United States District Court for the District of New Jersey. The Company and the other defendants deny the allegations in these complaints and intend to defend vigorously against these claims. In the Company's opinion, the ultimate outcome of this matter is not expected to have a material adverse effect on the Company's financial position, results of operations, or cash flows.

On September 24, 2018, the Court unsealed a civil complaint captioned United States, et. al vs. AstraZeneca PLC, et. al, No. 2:17-cv-01328-RSL (W.D. Wa.) against inVentiv Health, Inc. and other co-defendants. The complaint alleges that the Company and co-defendants violated the Federal False Claims Act (and various state analogues) and Anti-Kickback Statute through the provision of clinical education services. On December 17, 2018, the United States moved to dismiss this lawsuit, as well as other similar lawsuits supported by the relator in this action. A hearing on such motion is scheduled for October 30, 2019. The Company denies the allegations in the complaint and intends to defend vigorously against these claims. In the Company’s opinion, the ultimate outcome of this matter is not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

On February 21, 2019, the SEC notified the Company that it had commenced an investigation into the Company’s revenue accounting policies, internal controls and related matters. On August 26, 2019, the SEC notified the Company that it had concluded its investigation and does not intend to recommend an enforcement action against the Company at this time.

On March 1, 2019, a complaint was filed in the United States District Court for the District of New Jersey on behalf of a putative class of shareholders who purchased the Company's common stock during the period between May 10, 2017 and February 27, 2019. The action, captioned Murakami v. Syneos Health, Inc. et al, No. 19-7377 (D.N.J.), names the Company and certain of its executive officers as defendants and alleges violations of the Securities Exchange Act of 1934, as amended, based on allegedly false or misleading statements about its business, operations, and prospects. The plaintiffs seek awards of compensatory damages, among other relief, and their costs and attorneys’ and experts’ fees. On March 28, 2019, Lead Plaintiffs in the Vaitkuvienë action filed a motion to intervene and to transfer this action to the Eastern District of North Carolina, and the Company filed its response on April 22, 2019. On April 30, 2019, a shareholder filed a motion seeking to be appointed lead plaintiff and approving the selection of lead counsel. On October 16, 2019, the Court ordered that Plaintiff, by November 8, 2019, file proof of service of the Complaint in Compliance with Rule 4, or otherwise show cause why the action should not be dismissed for failure to properly serve Defendants (the "Order to Show Cause"). The Court further ordered that the action is stayed and that both motions are administratively terminated pending the Court's resolution of the Order to Show Cause. The Company and the other defendants deny the allegations in the complaint and intend to defend vigorously against these claims. In the Company's opinion, the ultimate outcome of this matter is not expected to have a material adverse effect on the Company's financial position, results of operations, or cash flows.

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

Self-Insurance Reserves

The Company is self-insured for certain losses relating to health insurance claims for the majority of its employees located within the United States. Additionally, the Company maintains certain self-insurance retention limits related to automobile and workers’ compensation insurance.

Assumed Contingent Tax-Sharing Obligations

As a result of the Merger, the Company assumed contingent tax-sharing obligations arising from inVentiv’s 2016 merger with Double Eagle Parent, Inc. As of September 30, 2019 and December 31, 2018, the estimated fair value of the assumed contingent tax-sharing obligations was $14.9 million and $15.7 million, respectively.

Contingent Earn-out Liability

In connection with the Kinapse acquisition, the Company recorded a contingent earn-out liability to be paid based on Kinapse meeting revenue targets as of March 31, 2021. The fair value of the earn-out liability is remeasured at the end of each reporting period, with changes in the estimated fair value reflected in earnings until the liability is settled. The estimated fair value of the contingent earn-out liability was $4.3 million and $4.4 million as of September 30, 2019 and December 31, 2018, respectively, and is included in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets.

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, 2018.

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 our anticipated results of operations, our business strategy and planned capital expenditures, and our expectations regarding the resolution of our material weaknesses. Without limiting the foregoing, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “should,” “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: the need to hire, develop, and retain key personnel; the impact of unfavorable economic conditions, including the uncertain international economic environment, changes in exchange rates, and effective income tax rate fluctuations; the impact of potentially underpricing our contracts, overrunning our cost estimates, or failing to receive approval for or experiencing delays with documentation of change orders; any adverse effects from customer or therapeutic area concentration; our potential failure to generate a large number of new business awards and the risk of delay, termination, reduction in scope, or failure to go to contract of our business awards; our potential failure to convert backlog to revenue; fluctuations in our operating results and effective income tax rate; the cyber-security and other risks associated with our information systems infrastructure; risks associated with the integration of our business with the business of Double Eagle Parent, Inc. (“inVentiv”) and our operation of the combined business following the closing of the merger with inVentiv (the “Merger”); the risks associated with doing business internationally; risks related to the U.K.’s planned withdrawal from the European Union; impact of the Tax Cuts and Jobs Act; challenges by tax authorities of our intercompany transfer pricing policies; our potential failure to successfully increase our market share, grow our business, and execute our growth strategies; our ability to effectively upgrade our information systems; our failure to perform our services in accordance with contractual requirements, regulatory standards, and ethical considerations; the risk of litigation and personal injury claims; risks related to the management of clinical trials; failure of our insurance to cover our indemnification obligations and other liabilities; risks related to marketing drugs for biopharmaceutical companies; our ability to protect our intellectual property; the risks associated with potential future acquisitions or investments in our customers’ businesses or drugs; our relationships with customers who are in competition with each other; any failure to realize the full value of our goodwill and intangible assets; risks related to restructuring; our compliance with anti-corruption and anti-bribery laws; our dependence on third parties; potential employment liability; downgrades of our credit ratings; outsourcing trends and changes in aggregate spending and research and development budgets; the impact of, including changes in, government regulations and healthcare reform; our ability to keep pace with rapid technological change; the cost of and our ability to service our substantial indebtedness; and other risks related to ownership of our common stock. For a further discussion of the risks relating to our business, refer to

“Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Overview of Our Business and Services

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

Our operations are divided into two reportable segments, Clinical Solutions and Commercial Solutions. Our Clinical Solutions segment offers a variety of services spanning Phase I to Phase IV of clinical development, including full-service global studies, as well as individual service offerings such as clinical monitoring, investigator recruitment, patient recruitment, data management, and study startup to assist customers with their drug development process. Our Commercial Solutions segment provides the pharmaceutical, biotechnology, and healthcare industries with commercialization services, including deployment solutions, communication solutions (public relations and advertising), and consulting services. For further discussion, refer to “Note 13 - Segment Information” of our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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:

•the customer has received appropriate internal funding approval and collection of the award value is probable;

•the project or projects are not contingent upon completion of another clinical trial or event that would place the project or projects at material risk of not commencing in accordance with the expected timeline;

•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;

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

•for awards related to our deployment solutions and Functional Service Provider ("FSP") offerings, a maximum of twelve months of services are included in the award value.

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

Beginning in 2019, we now 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 service offering within our Commercial Solutions segment. We do not report backlog for the remaining service offerings in the Commercial Solutions segment. New business awards and backlog include reimbursable out-of-pocket expenses for all periods presented.

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 can be terminated by the customer with a 30-day notice.

Our backlog was as follows as of September 30, 2019 and 2018 (in millions):


	2019		2018		Change
Clinical Solutions	$	7,781.8	$	7,263.5	$	518.3	7.1	%
Commercial Solutions - Deployment Solutions	597.5		603.7		(6.2)		(1.0)	%
Total backlog	$	8,379.3	$	7,867.2	$	512.1	6.5	%

We expect that approximately $0.98 billion of our backlog as of September 30, 2019 will be recognized as revenue during the remainder of 2019. We adjust the amount of our backlog each quarter for the effects of fluctuations in foreign currency exchange rates.

Net new business awards

New business awards, net of cancellations, were as follows for the TTM period ended September 30, 2019 (in millions):


Clinical Solutions	$	3,911.9
Commercial Solutions - Deployment Solutions	1,260.1
Total net new business awards	$	5,172.0

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

We believe that our backlog and net new business awards might not be consistent indicators of future revenue because they have been, and likely will continue to be, affected by a number of factors, including the variable size and duration of projects, many of which are performed over several years, and cancellations and changes to the scope of work during the course of projects. Additionally, projects may be canceled or delayed by the customer or regulatory authorities. We generally do not have a contractual right to the full amount of the awards reflected in our backlog. If a customer cancels an award, we might be reimbursed for the costs we have incurred. As we increasingly compete for and enter into large contracts that are more global in nature, we expect that the rate at which our backlog and net new business awards convert into revenue is likely to decrease, and the duration of projects and the period over which related revenue is recognized to lengthen. For more information about risks related to our backlog see Part I, Item 1A "Risk Factors - Risks Related to Our Business - Our backlog might not be indicative of our future revenues, and we might not realize all of the anticipated future revenue reflected in our backlog" included in “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Results of Operations

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


	Three Months Ended September 30,
	2019		2018		Change
Revenue	$	1,177,028	$	1,114,918	$	62,110	5.6	%


Costs and operating expenses:
Direct costs (exclusive of depreciation and amortization)	913,674		872,214		41,460		4.8	%

Selling, general, and administrative expenses	109,864		96,943		12,921		13.3	%
Restructuring and other costs	13,456		19,349		(5,893)		(30.5)	%
Transaction and integration-related expenses	10,454		18,561		(8,107)		(43.7)	%

Depreciation and amortization	60,137		68,034		(7,897)		(11.6)	%
Total operating expenses	1,107,585		1,075,101		32,484		3.0	%
Income from operations	69,443		39,817		29,626		74.4	%
Total other income (expense), net	532		(38,228)		38,760		n/m
Income before provision for income taxes	69,975		1,589		68,386		n/m
Income tax expense	(11,055)		(11,983)		928		7.7	%
Net income (loss)	$	58,920	$	(10,394)	$	69,314	n/m


	Nine Months Ended September 30,
	2019		2018		Change
Revenue	$	3,462,861	$	3,244,644	$	218,217	6.7	%


Costs and operating expenses:
Direct costs (exclusive of depreciation and amortization)	2,718,005		2,560,502		157,503		6.2	%

Selling, general, and administrative expenses	333,860		296,420		37,440		12.6	%
Restructuring and other costs	39,751		41,647		(1,896)		(4.6)	%
Transaction and integration-related expenses	34,766		61,804		(27,038)		(43.7)	%

Depreciation and amortization	182,086		203,557		(21,471)		(10.5)	%
Total operating expenses	3,308,468		3,163,930		144,538		4.6	%
Income from operations	154,393		80,714		73,679		91.3	%
Total other income (expense), net	(70,429)		(83,042)		12,613		15.2	%
Income (loss) before provision for income taxes	83,964		(2,328)		86,292		n/m
Income tax expense	(43,756)		(19,058)		(24,698)		(129.6)	%
Net income (loss)	$	40,208	$	(21,386)	$	61,594	n/m

Revenue

For the three months ended September 30, 2019, our revenue increased by $62.1 million, or 5.6%, to $1.18 billion from $1.11 billion for the three months ended September 30, 2018. For the nine months ended September 30, 2019, our revenue increased by $218.2 million, or 6.7%, to $3.46 billion from $3.24 billion for the nine months ended September 30, 2018. The increases were primarily driven by growth in both our Clinical Solutions and Commercial Solutions segments as discussed below.

No single customer accounted for greater than 10% of the Company’s revenue for the three months ended September 30, 2019. During the nine months ended September 30, 2019, one customer accounted for approximately 10% of our revenue. During the three and nine months ended September 30, 2018, one customer accounted for approximately 12% and 11%, respectively, of our revenue. Revenue from our top five customers accounted for approximately 22% and 25% of revenue for the three months ended September 30, 2019 and 2018, respectively, and 23% and 25% of revenue for the nine months ended September 30, 2019 and 2018, respectively.

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


	Three Months Ended September 30,
	2019		% of total		2018		% of total		Change
Clinical Solutions	$	867,427	73.7	%	$	819,203	73.5	%	$	48,224	5.9	%
Commercial Solutions	309,601		26.3	%	295,715		26.5	%	13,886		4.7	%
Total revenue	$	1,177,028			$	1,114,918			$	62,110	5.6	%


	Nine Months Ended September 30,
	2019		% of total		2018		% of total		Change
Clinical Solutions	$	2,522,307	72.8	%	$	2,389,955	73.7	%	$	132,352	5.5	%
Commercial Solutions	940,554		27.2	%	854,689		26.3	%	85,865		10.0	%
Total revenue	$	3,462,861			$	3,244,644			$	218,217	6.7	%

Clinical Solutions

For the three and nine months ended September 30, 2019, revenue attributable to our Clinical Solutions segment increased compared to the same periods in the prior year primarily due to net new business awards resulting in higher backlog as we entered each period, the startup of new work in backlog, and growth in reimbursable out-of-pocket expenses, partially offset by the negative impact of fluctuations in foreign currency exchange rates of $8.5 million and $32.4 million for the respective periods.

Commercial Solutions

For the three and nine months ended September 30, 2019, revenue attributable to our Commercial Solutions segment increased compared to the same periods in the prior year due to net new business awards that resulted in higher backlog as we entered each period, as well as revenue from our acquisition of Kinapse Topco Limited (“Kinapse”) during the third quarter of 2018. These revenue increases were partially offset by a decline in medication adherence services revenue due to project delays and cancellations and the negative impact of fluctuations in foreign currency exchange rates of $1.1 million and $5.0 million for the respective periods.

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, particularly on our Clinical Solutions projects. In addition, as global projects wind down or as delays and cancellations occur, staffing levels in certain countries or functional areas can become misaligned with the current business volume.

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


	Three Months Ended September 30,
	2019			2018			Change
Direct costs (exclusive of depreciation and amortization)	$	913,674		$	872,214		$	41,460	4.8	%


% of revenue	77.6		%	78.2		%
Gross margin %	22.4		%	21.8		%


	Nine Months Ended September 30,
	2019			2018			Change
Direct costs (exclusive of depreciation and amortization)	$	2,718,005		$	2,560,502		$	157,503	6.2	%


% of revenue	78.5		%	78.9		%
Gross margin %	21.5		%	21.1		%

For the three months ended September 30, 2019, our direct costs increased by $41.5 million, or 4.8%, compared to the three months ended September 30, 2018. For the nine months ended September 30, 2019, our direct costs increased by $157.5 million, or 6.2%, compared to the nine months ended September 30, 2018. The increases were primarily driven by an increase in compensation and related costs (including share-based compensation), reimbursable out-of-pocket expenses, as well as direct costs from Kinapse, which was acquired in the third quarter of 2018.

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,
	2019			2018			Change
Direct costs	$	655,851		$	633,258		$	22,593	3.6	%


% of segment revenue	75.6		%	77.3		%
Segment gross margin %	24.4		%	22.7		%


	Nine Months Ended September 30,
	2019			2018			Change
Direct costs	$	1,936,021		$	1,857,623		$	78,398	4.2	%


% of segment revenue	76.8		%	77.7		%
Segment gross margin %	23.2		%	22.3		%

For the three months ended September 30, 2019, our Clinical Solutions segment direct costs increased by $22.6 million, or 3.6%, compared to the three months ended September 30, 2018. For the nine months ended September 30, 2019, our Clinical Solutions segment direct costs increased by $78.4 million, or 4.2%, compared to the nine months ended September 30, 2018. These increases were primarily due to higher reimbursable out-of-pocket expenses and an increase in compensation and related costs due to higher billable headcount to support revenue growth.

Gross margin for our Clinical Solutions segment was 24.4% for the three months ended September 30, 2019, compared to 22.7% for the three months ended September 30, 2018. Gross margin for our Clinical Solutions segment was 23.2% for the nine months ended September 30, 2019, compared to 22.3% for the nine months ended September 30, 2018. Gross margins were higher during the current year periods as compared to the same periods in 2018 primarily due to revenue growth and favorable revenue mix, net realized cost synergies, and a favorable impact from foreign currency exchange rate fluctuations, partially offset by costs associated with certain new strategic relationships with large pharmaceutical customers.

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,
	2019			2018			Change
Direct costs	$	250,904		$	233,740		$	17,164	7.3	%


% of segment revenue	81.0		%	79.0		%
Segment gross margin %	19.0		%	21.0		%


	Nine Months Ended September 30,
	2019			2018			Change
Direct costs	$	759,591		$	688,339		$	71,252	10.4	%


% of segment revenue	80.8		%	80.5		%
Segment gross margin %	19.2		%	19.5		%

For the three months ended September 30, 2019, our Commercial Solutions segment direct costs increased by $17.2 million, or 7.3%, compared to the three months ended September 30, 2018. For the nine months ended September 30, 2019, our Commercial Solutions segment direct costs increased by $71.3 million, or 10.4%, compared to the nine months ended September 30, 2018. These increases were primarily related to an increase in compensation and related costs due to higher billable headcount to support revenue growth, as well as direct costs from Kinapse, which was acquired in the third quarter of 2018. Direct costs for the nine months ended September 30, 2019 were also negatively impacted by higher reimbursable out-of-pocket expenses.

Gross margin for our Commercial Solutions segment was 19.0% for the three months ended September 30, 2019, compared to 21.0% for the three months ended September 30, 2018. Gross margin for our Commercial Solutions segment was 19.2% for the nine months ended September 30, 2019, compared to 19.5% for the nine months ended September 30, 2018. Gross margins were lower during the current year periods compared to the same periods in 2018 primarily due to an unfavorable revenue mix and a negative impact from foreign currency exchange rate fluctuations.

Selling, General, and Administrative Expenses

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


	Three Months Ended September 30,
	2019			2018			Change
Selling, general, and administrative expenses	$	109,864		$	96,943		$	12,921	13.3	%
% of total revenue	9.3		%	8.7		%


	Nine Months Ended September 30,
	2019			2018			Change
Selling, general, and administrative expenses	$	333,860		$	296,420		$	37,440	12.6	%
% of total revenue	9.6		%	9.1		%

The increases in selling, general, and administrative expenses for the three and nine months ended September 30, 2019 as compared to the same periods in 2018 were primarily caused by higher compensation-related expenses (including share-based and incentive compensation), incremental costs from Kinapse, which was acquired during the third quarter of 2018, and incremental costs from a strategic partnership agreement entered into during the fourth quarter of 2018.

Restructuring and Other Costs

Restructuring and other costs were $13.5 million and $19.3 million for the three months ended September 30, 2019 and September 30, 2018, respectively, and $39.8 million and $41.6 million for the nine months ended September 30, 2019 and 2018, respectively. During 2017, in connection with the Merger, we established a restructuring plan to eliminate redundant positions and reduce our facility footprint worldwide. We expect to continue the ongoing evaluations of our workforce and facilities infrastructure needs through 2020 and beyond in an effort to optimize our resources. Additionally, for the three and nine months ended September 30, 2019 and 2018, we incurred employee severance costs and facility closure costs for non-Merger related restructuring activities.

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Merger-related restructuring and other costs:
Employee severance and benefit costs	$	2,288	$	1,936	$	14,537	$	13,229
Facility and lease termination costs	2,283		15,794		10,741		20,592
Other merger-related costs	—		33		—		548
Non-merger related restructuring and other costs:
Employee severance and benefit costs	5,797		713		11,070		1,690
Facility and lease termination costs	2,855		—		3,130		1,438
Consulting fees	—		695		—		3,176
Other costs	233		178		273		974
Total restructuring and other costs	$	13,456	$	19,349	$	39,751	$	41,647

We expect to continue to incur significant costs related to the restructuring of our operations in order to achieve our targeted synergies as a result of the Merger. However, the timing and the amount of these costs depends on various factors, including, but not limited to, identifying and realizing synergy opportunities and executing the integration of our combined operations.

Transaction and Integration-Related Expenses

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Professional fees	$	7,108	$	14,851	$	26,632	$	40,624

Debt modification and related expenses	1,582		409		5,555		1,726
Integration and personnel retention-related costs	1,394		2,107		3,150		15,847
Fair value adjustments to contingent obligations	370		1,194		(571)		3,582
Other	—		—		—		25
Total transaction and integration-related expenses	$	10,454	$	18,561	$	34,766	$	61,804

We expect to incur additional integration-related expenses associated with the Merger. The timing and amount of these expenses will depend on the identification of synergy opportunities and the timing and execution of our integration activities.

Depreciation and Amortization Expense

Total depreciation and amortization expense was $60.1 million and $68.0 million for the three months ended September 30, 2019 and 2018, respectively, and $182.1 million and $203.6 million for the nine months ended September 30, 2019 and 2018, respectively. The decreases in total depreciation and amortization expense were primarily due to a decrease in amortization expense from intangible assets resulting from business combinations completed in prior periods, partially offset by an increase in depreciation expense from continued investment in information technology and facilities to support growth in our operational capabilities and optimization of our infrastructure.

Other Expense, Net

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


	Three Months Ended September 30,
	2019		2018		Change
Interest income	$	2,426	$	1,004	$	1,422	141.6	%
Interest expense	(32,607)		(33,097)		490		1.5	%
Loss on extinguishment of debt	—		(1,789)		1,789		100.0	%
Other income (expense), net	30,713		(4,346)		35,059		n/m
Total other income (expense), net	$	532	$	(38,228)	$	38,760	n/m


	Nine Months Ended September 30,
	2019		2018		Change
Interest income	$	6,061	$	3,498	$	2,563	73.3	%
Interest expense	(101,500)		(97,727)		(3,773)		(3.9)	%
Loss on extinguishment of debt	(4,355)		(3,914)		(441)		(11.3)	%
Other income, net	29,365		15,101		14,264		94.5	%
Total other income (expense), net	$	(70,429)	$	(83,042)	$	12,613	15.2	%

Total other income (expense), net was $0.5 million and $(38.2) million for the three months ended September 30, 2019 and 2018, respectively, and $(70.4) million and $(83.0) million for the nine months ended September 30, 2019 and 2018, respectively. These changes were primarily due to higher other income, net, in the current periods as compared to the prior periods, which primarily consists of foreign currency gains and losses that result from exchange rate fluctuations on our monetary asset balances denominated in currencies other than our functional currency.

Income Tax Expense

For the three and nine months ended September 30, 2019, we recorded income tax expense of $11.1 million and $43.8 million, respectively, compared to pre-tax income of $70.0 million and $84.0 million, respectively. The effective tax rate for the three and nine months ended September 30, 2019 varied from the U.S. federal statutory income tax rate of 21.0% primarily due to: (i) base erosion and anti-abuse minimum tax, (ii) foreign income inclusions such as the Global Intangible Low-Taxed Income provisions, and (iii) valuation allowance change on domestic deferred tax assets.

For the three and nine months ended September 30, 2018, we recorded an income tax expense of $12.0 million and $19.1 million, respectively, compared to pre-tax income of $1.6 million and pre-tax loss of $2.3 million, respectively. The effective tax rate for the three and nine months ended September 30, 2018 varied from the U.S. federal statutory income tax rate of 21.0% primarily due to: (i) the recognition of unfavorable discrete adjustments related to foreign currency exchange; (ii) the geographical split of pre-tax income; and (iii) deferred expense related to hanging credits on domestic indefinite-lived intangibles.

We currently maintain a valuation allowance against a material portion of our domestic deferred tax assets and a portion of our foreign deferred tax assets as of September 30, 2019. 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. However, given our recent earnings and anticipated future earnings, we believe that there is a reasonable possibility that, within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion that approximately $50.0 million to $70.0 million of our valuation allowance against our domestic deferred tax assets will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense in the period the release is recorded. However, the exact timing and amount of any valuation allowance release are subject to change on the basis of the level of profitability that we are able to achieve.

Liquidity and Capital Resources

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


	September 30, 2019		December 31, 2018
Balance sheet statistics:
Cash and cash equivalents	$	127,368	$	153,863
Restricted cash	1,836		2,069
Working capital (excluding restricted cash)	38,942		(13,305)

As of September 30, 2019, we had $129.2 million of cash, cash equivalents, and restricted cash. As of September 30, 2019, substantially all of our cash, cash equivalents, and restricted cash was held within the United States. In addition, we had $580.2 million (net of $19.8 million in outstanding letters of credit) available for borrowing under our $600.0 million Revolver facility.

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. Based on past performance and current expectations, we believe our cash and cash equivalents, cash generated from operations, and funds available under our revolving credit facility 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, 2019, we had approximately $2.75 billion of total principal indebtedness, comprised of $2.01 billion in term loan debt, $403.0 million in Senior Unsecured Notes due 2024 (the “Senior Notes”), $275.0 million in borrowings against the accounts receivable financing agreement and $54.6 million in current and non-current finance lease obligations. In addition, as of September 30, 2019 we had $580.2 million (net of $19.8 million in outstanding letters of credit) of available borrowings for working capital and other purposes under the Revolver, and $0.7 million of letters of credit that were not secured by the Revolver. During the nine months ended September 30, 2019, we made voluntary prepayments of $179.8 million, which were applied against the regularly-scheduled quarterly principal payments of the Term Loan B. As a result of these and previous voluntary prepayments, we are not required to make a mandatory payment against the Term Loan B principal balance until maturity in August 2024. Additionally, during the nine months ended September 30, 2019, we made mandatory principal payments of $12.5 million towards our Term Loan A.

Amendment No. 2 to the Credit Agreement

On March 26, 2019, we entered into Amendment No. 2 to the Credit Agreement (“the Second Amendment”). The Second Amendment, among other things, modifies the terms of the Credit Agreement to refinance the existing Term Loan A facility and the Revolver as follows:

(a) to increase the existing Term Loan A facility by $587.5 million to $1.55 billion. $187.5 million of such increase was applied at closing to repay a portion of our existing Term Loan B facility and the fees and expenses incurred in connection with the Second Amendment, and the remaining $400.0 million will be available to be funded in multiple draws within nine months of closing;

(b) to increase the existing Revolver commitments available by $100.0 million to $600.0 million, and reduce the margin spread by 0.25% overall, resulting in (i) for Adjusted Eurocurrency Rate (as defined in the Credit Agreement) loans, a margin spread of 1.50% and (ii) for Alternate Base Rate (as defined in the Credit Agreement) loans, a margin spread of 0.50%, with a single 0.25% step-down based on the achievement of certain leverage ratios; and

The Term Loan A facility and the Revolver will continue to be subject to the same affirmative covenants and negative covenants. The financial covenant will be set at a First Lien Leverage Ratio (as defined in the Credit Agreement) of 5.00:1.00 with a single step-down to 4.50:1.00 commencing with the fiscal quarter ending March 31, 2020. We were in compliance with all covenants of the Credit Agreement as of September 30, 2019.

In connection with the Second Amendment, during the three months ended March 31, 2019, we recorded a $4.4 million loss on extinguishment of debt, mainly due to the write-off of the deferred issuance costs and debt discount.

We recorded debt issuance costs and related fees in connection with the Revolver and the unfunded amount of the Term Loan A facility of approximately $3.5 million, which are included in other assets in the unaudited condensed consolidated balance sheet. These costs are amortized as a component of interest expense on a straight-line basis over the related terms.

Redemption of Senior Notes

On October 2, 2019, we drew down the $400.0 million Term Loan A balance and used the proceeds and cash on hand to redeem all of the Senior Notes for $403.0 million and paid a $15.1 million premium related to the early redemption.

Interest Rates

In June 2018, we entered into an interest rate swap that has an aggregate notional value of $1.01 billion, has an effective date of December 31, 2018, and expires on June 30, 2021. As a result, as of September 30, 2019, the percentage of our total principal debt (excluding leases) that is subject to fixed interest rates was approximately 53.7%. Each quarter-point increase or decrease in the applicable interest rate at September 30, 2019 would change our annual interest expense by approximately $3.1 million.

Covenant Restrictions under our Lease Agreement

The lease agreement for our new corporate headquarters in Morrisville, North Carolina includes a provision that requires us to issue a letter of credit in certain amounts to the landlord based on our debt rating issued by Moody’s Investors Service (or other nationally-recognized debt rating agency). As of September 30, 2019 (and through the date of this filing), our credit rating was Ba3. As such, no letter of credit was required through the date of this filing. Any letters of credit issued in accordance with the aforementioned requirements could be issued under our Revolver, and, if issued under our Revolver, would reduce its available borrowing capacity by the same amount.

Our ability to make payments on our indebtedness and to fund planned capital expenditures and necessary working capital will depend on our ability to generate cash in the future. Our ability to meet our cash needs through cash flows from operations will depend on the demand for our services, as well as general economic, financial, competitive, and other factors, many of which are beyond our control. Our business may not generate cash flow in an amount sufficient to enable us to pay the principal of, or interest on, our indebtedness, or to fund our other liquidity needs, including working capital, capital

expenditures, acquisitions, investments, and other general corporate requirements. If we cannot fund our liquidity needs, we will have to take actions such as reducing or delaying capital expenditures, acquisitions or investments, selling assets, restructuring or refinancing our debt, reducing the scope of our operations and growth plans, or seeking additional capital. We cannot assure you that any of these remedies could, if necessary, be affected on commercially reasonable terms, or at all, or that they would permit us to meet our scheduled debt service obligations. Our Credit Agreement contains covenant restrictions that limit our ability to direct the use of proceeds from any disposition of assets and, as a result, we may not be allowed to use the proceeds from any such dispositions to satisfy all current debt service obligations.

Accounts Receivable Financing Agreement

On June 29, 2018, we entered into an accounts receivable financing agreement (as amended) with an original termination date of June 29, 2020, unless terminated earlier pursuant to its terms. Under this agreement, we could previously borrow up to $250.0 million from a third-party lender, secured by liens on certain receivables and other assets. On September 30, 2019, we entered into an amendment that increased the amount we can borrow from $250.0 million to $275.0 million and extended the termination date to September 30, 2021. As of September 30, 2019, we had $275.0 million of outstanding borrowings under this agreement with no remaining borrowing capacity available.

2018 Stock Repurchase Program

On February 26, 2018, our Board of Directors authorized the repurchase of up to an aggregate of $250.0 million of our 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 privately negotiated transactions (“2018 stock repurchase program”). The 2018 stock repurchase program commenced on March 1, 2018 and will end no later than December 31, 2019. We intend to use cash on hand and future free cash flow to fund the 2018 stock repurchase program.

In January 2019, we repurchased 552,100 shares of our common stock in open market transactions at an average price of $39.16 per share, resulting in a total purchase price of approximately $21.6 million. In February 2019, we repurchased 120,600 shares of our common stock in open market transactions at an average price of $41.40 per share, resulting in a total purchase price of approximately $5.0 million. In June 2019, we repurchased 509,100 shares of our common stock in open market transactions at an average price of $45.29 per share, resulting in a total purchase price of approximately $23.1 million. In August 2019, we repurchased 141,100 shares of its common stock in open market transactions at an average price of $49.93 per share, resulting in a total purchase price of approximately $7.0 million. We immediately retired all of the repurchased common stock and charged the par value of the shares to common stock. The excess of the repurchase price over the par value was applied on a pro rata basis against additional paid-in-capital, with the remainder applied to accumulated deficit. As of September 30, 2019, we had remaining authorization to repurchase up to approximately $118.3 million of shares of our common stock under the 2018 stock repurchase program.

We are not obligated to repurchase any particular amount of our common stock, and the 2018 stock repurchase program may be modified, extended, suspended, or discontinued at any time. The timing and amount of repurchases is determined by our management based on a variety of factors such as our corporate requirements for cash, overall market conditions, and the market price of our common stock. The stock repurchase program is subject to applicable legal requirements, including federal and state securities laws and applicable Nasdaq rules.

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,
	2019		2018		Change
Net cash provided by operating activities	$	157,933	$	191,000	$	(33,067)
Net cash used in investing activities	(59,872)		(133,853)		73,981
Net cash used in financing activities	(123,885)		(246,677)		122,792

Cash Flows from Operating Activities

Cash flows provided by operating activities decreased by $33.1 million during the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018. The decrease is primarily due to changes in operating assets and liabilities partially offset by higher cash-related net income. Fluctuations in accounts receivable, unbilled services, contract assets, deferred revenue and contract liabilities 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, and deferred revenue can vary significantly from period to period.

As a result of our integration activities associated with the Merger and our acquisition activity, we have incurred substantial expenses that have negatively impacted our cash flow from operating activities. For example, during the nine months ended September 30, 2019, we incurred $35.3 million of expenses that impacted our operating cash flows in the current period or will impact operating cash flows in the future. We anticipate that we will continue to incur similar costs related to our integration efforts through 2020.

Cash Flows from Investing Activities

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

For the nine months ended September 30, 2018, we used $133.9 million in cash for investing activities. In particular, we paid $90.9 million, net of cash acquired for an acquisition and $43.0 million for purchases of property and equipment.

Cash Flows from Financing Activities

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

For the nine months ended September 30, 2018, we used $246.7 million in cash for financing activities, which consisted primarily of repayments of term loan debt and payments for the repurchase of our common stock. These payments were partially offset by proceeds from our accounts receivable financing agreement and proceeds received from the exercise of stock options.

Contractual Obligations and Commitments

There have been no material changes during the three months ended September 30, 2019, outside of the ordinary course of business, to our contractual obligations as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, except as described below.

In March 2019, we entered into Amendment No. 2 to the Credit Agreement, which, among other things, modified the terms of the Credit Agreement to refinance the existing Term Loan A facility and the Revolver. Please refer to “Note 4 - Long-Term Debt Obligations” for information regarding changes in the maturities of our contractual obligation related to principal balances and interest on our long-term debt.

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 and liabilities, revenues, and expenses during the period, as well as disclosures of contingent assets and liabilities at the date of the financial statements. We evaluate our estimates on an ongoing basis, including those related to revenue recognition, share-based compensation, valuation of goodwill and identifiable intangibles, tax-related contingencies and valuation allowances, allowance for doubtful accounts, and litigation contingencies, among others. These estimates are based on the information available to management at the time these estimates, judgments, and assumptions are made. Actual results may differ materially from these estimates. There have been no significant changes to our critical accounting policies and estimates. For additional information on all of our critical accounting policies and estimates, refer to Part II - Item 7 - Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

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 Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of such date, our disclosure controls and procedures were not 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

Other than the remediation efforts described below, 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.

In connection with management’s assessment of our internal control over financial reporting as of December 31, 2018, management concluded that material weaknesses existed in the design and operating effectiveness of internal controls within the Clinical Solutions segment in connection with the revenue recognition process under ASU 2014-09 “Revenue from Contracts with Customers” (ASC 606), which we adopted on January 1, 2018.

The following components of internal control over financial reporting were impacted: (i) control environment - the training process associated with ASC 606 was not sufficient in all cases to support the development of estimates of the costs necessary to complete the performance of contracts and related supporting documentation; (ii) risk assessment - our risk assessment process did not effectively evaluate risks resulting from changes in the external environment or business operations at a sufficient level of precision to identify errors; (iii) control activities - we did not have effective control activities related to the operation of process-level controls over revenue recognition; and (iv) monitoring - we did not have effective monitoring activities to assess the operation of internal controls, including the continued appropriateness of internal controls.

Remediation of the Material Weaknesses in Internal Control over Financial Reporting

Management is actively engaged in the implementation of remediation efforts to address the material weaknesses. The remediation plan includes: (i) the modification of certain internal controls designed to evaluate the appropriateness of revenue recognition in our Clinical Solutions segment; (ii) implementing new internal controls over recording revenue transactions; and (iii) additional training for staff involved in the related processes. During the nine months ended September 30, 2019, management has substantially completed its remediation activities in all three areas described above. Completion of ongoing testing of the design and operational effectiveness of modified and new controls is necessary to validate that the material weaknesses have been fully remediated.

As management continues to test and improve internal control over financial reporting, we may decide to take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the planned remediation measures.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

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.

On December 1, 2017, the first of two virtually identical actions alleging federal securities law claims was filed against us and certain of our officers on behalf of a putative class of our shareholders. The first action, captioned Bermudez v. INC Research, Inc., et al, No. 17-09457 (S.D.N.Y.), names as defendants us, Michael Bell, Alistair MacDonald, Michael Gilbertini, and Gregory S. Rush (the "Bermudez action"), and the second action, Vaitkuvienë v. Syneos Health, Inc., et al, No. 18-0029 (E.D.N.C.), filed on January 25, 2018 (the "Vaitkuvienë action"), names as defendants us, Alistair MacDonald, and Gregory S. Rush (the "Initial Defendants"). Both complaints allege similar claims under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of purchasers of our common stock between May 10, 2017 and November 8, 2017 and November 9, 2017. The complaints allege that we published inaccurate or incomplete information regarding, among other things, the financial performance and business outlook for inVentiv’s business prior to the Merger and with respect to the combined company following the Merger. On January 30, 2018, two alleged shareholders separately filed motions seeking to be appointed lead plaintiff and approving the selection of lead counsel. On March 30, 2018, Plaintiff Bermudez filed a notice of voluntary dismissal of the Bermudez action, without prejudice, and as to all defendants. On May 29, 2018, the Court in the Vaitkuvienë action appointed the San Antonio Fire & Police Pension Fund and El Paso Firemen & Policemen’s Pension Fund as Lead Plaintiffs and, on June 7, 2018, the Court entered a schedule providing for, among other things, Lead Plaintiffs to file an amended complaint by July 23, 2018 (later extended to July 30, 2018). Lead Plaintiffs filed their amended complaint on July 30, 2018, which also includes a claim against the Initial Defendants, as well as each member of the board of directors at the time of the INC Research - inVentiv Health merger vote in July 2017 (the “Defendants”), contending that the inVentiv merger proxy was misleading under Section 14(a) of the Act. Lead Plaintiffs seek, among other things, orders (i) declaring that the lawsuit is a proper class action and (ii) awarding compensatory damages in an amount to be proven at trial, including interest thereon, and reasonable costs and expenses incurred in this action, including attorneys’ fees and experts' fees, to Lead Plaintiffs and other class members. Defendants filed a Motion to Dismiss Plaintiffs’ Amended Complaint on September 20, 2018. Lead Plaintiffs filed a Response in Opposition to such motion on November 21, 2018, and Defendants filed a Reply to such response on December 5, 2018. On May 23, 2019, Lead Plaintiffs filed a Notice of Filings in Related Case regarding the New Jersey shareholder action filed on March 1, 2019 described below, and Defendants filed their response on May 31, 2019. On September 26, 2019, the Court ordered, among other things, that this action is stayed in light of the litigation filed on March 1, 2019 and described below, pending before the United States District Court for the District of New Jersey. We and the other defendants deny the allegations in these complaints and intend to defend vigorously against these claims. In our opinion, the ultimate outcome of this matter is not expected to have a material adverse effect on our financial position, results of operations, or cash flows.

On September 24, 2018, the Court unsealed a civil complaint captioned United States, et. al vs. AstraZeneca PLC, et. al, No. 2:17-cv-01328-RSL (W.D. Wa.) against inVentiv Health, Inc. and other co-defendants. The complaint alleges that we and co-defendants violated the Federal False Claims Act (and various state analogues) and Anti-Kickback Statute through the provision of clinical education services. On December 17, 2018, the United States moved to dismiss this lawsuit, as well as other similar lawsuits supported by the relator in this action. A hearing on such motion is scheduled for October 30, 2019. We deny the allegations in the complaint and intend to defend vigorously against these claims. In our opinion, the ultimate outcome of this matter is not expected to have a material adverse effect on our financial position, results of operations, or cash flows.

On February 21, 2019, the Securities and Exchange Commission (“SEC”) notified us that it had commenced an investigation into our revenue accounting policies, internal controls, and related matters. On August 26, 2019, the SEC notified us that it had concluded its investigation and does not intend to recommend an enforcement action against us at this time.

On March 1, 2019, a complaint was filed in the United States District Court for the District of New Jersey on behalf of a putative class of shareholders who purchased our common stock during the period between May 10, 2017 and February 27, 2019. The action, captioned Murakami v. Syneos Health, Inc. et al, No. 19-7377 (D.N.J.), names us and certain of our executive officers as defendants and alleges violations of the Securities Exchange Act of 1934, as amended, based on allegedly false or misleading statements about our business, operations, and prospects. The plaintiffs seek awards of compensatory damages, among other relief, and their costs and attorneys’ and experts’ fees. On March 28, 2019, Lead Plaintiffs in the Vaitkuvienë action filed a motion to intervene and to transfer this action to the Eastern District of North Carolina, and we filed our response on April 22, 2019. On April 30, 2019, a shareholder filed a motion seeking to be appointed lead plaintiff and approving the selection of lead counsel. On October 16, 2019, the Court ordered that Plantiff, by November 8, 2019, file proof of service of the Complaint in Compliance with Rule 4, or otherwise show cause why the action should not be dismissed for failure to properly serve Defendants (the "Order to Show Cause"). The Court further ordered that the action is stayed and that both motions are administratively terminated pending the Court's resolution of the Order to Show Cause. We and the other defendants deny the allegations in the complaint and intend to defend vigorously against these claims. In our opinion, the ultimate outcome of this matter is not expected to have a material adverse effect on our financial position, results of operations, or cash flows.

We are presently unable to predict the duration, scope, or result of the foregoing putative class actions or any other related lawsuit.

Item 1A. Risk Factors.

There have been no significant changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018. Refer to “Risk Factors” in Part 1, Item 1A of that report for a detailed discussion of risk factors affecting us.

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

Recent Sales of Unregistered Securities

Not applicable.

Purchases of Equity Securities by the Issuer

During the three months ended September 30, 2019, we repurchased 141,100 shares of our Class A common stock under our previously announced stock repurchase program described below, for a total of approximately $7.0 million. As of September 30, 2019, we have remaining authorization to repurchase up to approximately $118.3 million of shares of our Class A common stock under the stock repurchase program.


Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs (1)	Approximate dollar value of shares that may yet be purchased under the plans or programs (in thousands)
July 1, 2019 - July 31, 2019	—	$	—	—	$	125,344
August 1, 2019 - August 31, 2019	141,100	$	49.93	141,100	$	118,299
September 1, 2019 - September 30, 2019	—	$	—	—	$	118,299
Total	141,100			141,100

(1) On February 26, 2018, the Board authorized the repurchase of up to an aggregate of $250.0 million of our Class A common stock, par value $0.01 per share, from time to time in open market transactions effected through a broker at prevailing market prices, in block trades, or privately negotiated transactions. The stock repurchase program commenced on March 1, 2018 and will end no later than December 31, 2019. We intend to use cash on hand and future free cash flow to fund the stock repurchase program. The stock repurchase program does not obligate us to repurchase any particular amount of our Class A common stock, and may be modified, extended, suspended or discontinued at any time. The timing and amount of repurchases is determined by our management based on a variety of factors such as the market price of our Class A common stock, our corporate requirements, and overall market conditions. The stock repurchase program is subject to applicable legal requirements, including federal and state securities laws. 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.

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

Item 5. Other Information.

Not applicable.

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Item 6. Exhibits


		Incorporated by Reference (Unless Otherwise Indicated)
Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date
10.1	Sixth Amendment to the Receivables Financing Agreement, dated September 30, 2019, among Syneos Health Receivables LLC, as borrow er , PNC Bank, National Association, as administrative agent and as lender and Syneos Health, LLC as initial servicer.	—	—	—	Filed herewith
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	—	—	—	Filed herewith
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	—	—	—	Filed herewith
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	—	—	—	Furnished herewith
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	—	—	—	Furnished herewith
101.INS	Inline XBRL Instance Document - the Instance Document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.	—	—	—	Filed herewith
101.SCH	Inline XBRL Taxonomy Extension Schema Document.	—	—	—	Filed herewith
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.	—	—	—	Filed herewith
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document.	—	—	—	Filed herewith
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document.	—	—	—	Filed herewith
101.PRE	Inline Taxonomy Extension Presentation Linkbase Document.	—	—	—	Filed herewith
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).	—	—	—	Filed herewith

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SIGNATURE

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