Edgar Filing: Syneos Health, Inc.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended September 30, 2018



¨	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.)

3201 Beechleaf Court, Suite 600, Raleigh, North Carolina 27604-1547

(Address of principal executive offices and Zip Code)

(919) 876-9300

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý 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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

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 ý

As of October 29, 2018, there were approximately 103,225,918 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, 2018 and 2017 (unaudited)	3
	Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2018 and 2017 (unaudited)	4
	Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54
Item 4.	Controls and Procedures	55

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	56
Item 1A.	Risk Factors	56
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	57
Item 5.	Other Information	57
Item 6.	Exhibits	58
	Signature	59
	Exhibit Index	60

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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,
	2018			2017			2018			2017
	(In thousands, except per share data)
Service revenue	$	1,114,918		$	592,207		$	3,244,644		$	1,102,372
Reimbursable out-of-pocket expenses	—			230,121			—			493,009
Total revenue	1,114,918			822,328			3,244,644			1,595,381

Costs and operating expenses:
Direct costs (exclusive of depreciation and amortization)	539,570			405,798			1,619,620			722,643
Reimbursable out-of-pocket expenses	332,644			230,121			940,882			493,009
Selling, general, and administrative	96,943			88,855			296,420			176,320
Restructuring and other costs	19,349			6,670			41,647			12,626
Transaction and integration-related expenses	18,561			84,340			61,804			108,081
Asset impairment charges	—			30,000			—			30,000
Depreciation	17,639			14,049			53,224			26,279
Amortization	50,395			51,383			150,333			70,309
Total operating expenses	1,075,101			911,216			3,163,930			1,639,267
Income (loss) from operations	39,817			(88,888		)	80,714			(43,886		)

Other expense, net:
Interest income	1,004			501			3,498			765
Interest expense	(33,097		)	(27,432		)	(97,727		)	(33,818		)
Loss on extinguishment of debt	(1,789		)	(102		)	(3,914		)	(102		)
Other (expense) income, net	(4,346		)	(5,953		)	15,101			(16,164		)
Total other expense, net	(38,228		)	(32,986		)	(83,042		)	(49,319		)
Income (loss) before provision for income taxes	1,589			(121,874		)	(2,328		)	(93,205		)
Income tax expense	(11,983		)	(26,124		)	(19,058		)	(30,217		)
Net loss	$	(10,394	)	$	(147,998	)	$	(21,386	)	$	(123,422	)

Loss per share:
Basic	$	(0.10	)	$	(1.70	)	$	(0.21	)	$	(1.90	)
Diluted	$	(0.10	)	$	(1.70	)	$	(0.21	)	$	(1.90	)
Weighted average common shares outstanding:
Basic	103,012			87,152			103,453			65,097
Diluted	103,012			87,152			103,453			65,097

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 COMPREHENSIVE LOSS

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(In thousands)
Net loss	$	(10,394	)	$	(147,998	)	$	(21,386	)	$	(123,422	)
Unrealized gain (loss) on derivative instruments, net of income tax (expense) benefit of ($475), $72, ($475), and $163, respectively	2,624			(115		)	1,341			(248		)
Foreign currency translation adjustments, net of income tax benefit (expense) of $2,868, ($5,873), $0 and ($5,873), respectively	(1,295		)	4,626			(36,541		)	16,958
Comprehensive loss	$	(9,065	)	$	(143,487	)	$	(56,586	)	$	(106,712	)

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, 2018			December 31, 2017
	(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	132,402		$	321,262
Restricted cash	2,202			714
Accounts receivable billed, net	656,682			642,985
Accounts receivable unbilled	347,894			373,003
Contract assets	136,824			—
Prepaid expenses and other current assets	80,418			84,215
Total current assets	1,356,422			1,422,179
Property and equipment, net	175,128			180,412
Goodwill	4,352,825			4,292,571
Intangible assets, net	1,189,665			1,286,050
Deferred income tax assets	32,702			20,159
Other long-term assets	102,951			84,496
Total assets	$	7,209,693		$	7,285,867

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	82,204		$	58,575
Accrued liabilities	527,225			500,303
Contract liabilities	709,027			559,270
Current portion of capital lease obligations	16,603			16,414
Current portion of long-term debt	62,050			25,000
Total current liabilities	1,397,109			1,159,562
Capital lease obligations, non-current	21,568			20,376
Long-term debt, non-current	2,775,631			2,945,934
Deferred income tax liabilities	58,612			37,807
Other long-term liabilities	123,745			99,609
Total liabilities	4,376,665			4,263,288

Commitments and contingencies (Note 17)

Shareholders' equity:
Preferred stock, $0.01 par value; 30,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively	—			—
Common stock, $0.01 par value; 600,000,000 shares authorized, 103,223,093 and 104,435,501 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively	1,032			1,044
Additional paid-in capital	3,390,734			3,414,389
Accumulated other comprehensive loss, net of tax	(53,735		)	(22,385		)
Accumulated deficit	(505,003		)	(370,469		)
Total shareholders' equity	2,833,028			3,022,579
Total liabilities and shareholders' equity	$	7,209,693		$	7,285,867

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,
	2018			2017
	(In thousands)
Cash flows from operating activities:
Net loss	$	(21,386	)	$	(123,422	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	203,557			96,588
Amortization of capitalized loan fees and original issue discount, net of Senior Notes premium	85			759
Share-based compensation	26,045			50,928
(Recovery of) provision for doubtful accounts	(3,453		)	1,477
(Benefit from) provision for deferred income taxes	(721		)	12,733
Foreign currency transaction adjustments	(14,927		)	6,264
Asset impairment charges	—			30,000
Fair value adjustment of contingent tax-sharing obligation	3,582			—
Loss on extinguishment of debt	3,914			102
Other non-cash items	3,084			1,404
Changes in operating assets and liabilities, net of effect of business combinations:
Accounts receivable, unbilled services, and advanced billings	(48,802		)	39,618
Accounts payable and accrued expenses	5,371			(10,132		)
Other assets and liabilities	34,651			3,427
Net cash provided by operating activities	191,000			109,746
Cash flows from investing activities:
Payments associated with business acquisitions, net of cash acquired	(90,890		)	(1,678,381		)
Purchases of property and equipment	(42,963		)	(28,153		)
Other, net	—			107
Net cash used in investing activities	(133,853		)	(1,706,427		)
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net of discount	—			2,598,000
Payments of debt financing costs	(3,062		)	(25,476		)
Repayments of long-term debt	(354,396		)	(475,097		)
Proceeds from accounts receivable financing agreement	183,600			—
Proceeds from revolving line of credit	—			15,000
Repayments of revolving line of credit	—			(40,000		)
Redemption of Senior Notes and associated breakage fees	—			(290,250		)
Payments of capital leases	(12,664		)	(3,586		)
Payments for repurchase of common stock	(74,985		)	—
Proceeds from exercise of stock options	18,042			17,048
Payments related to tax withholding for share-based compensation	(3,212		)	(5,391		)
Net cash (used in) provided by financing activities	(246,677		)	1,790,248
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	2,158			8,883
Net change in cash, cash equivalents, and restricted cash	(187,372		)	202,450
Cash, cash equivalents, and restricted cash - beginning of period	321,976			103,078
Cash, cash equivalents, and restricted cash - end of period	$	134,604		$	305,528

Supplemental disclosures of non-cash investing activities:
Fair value of shares issued and share-based awards assumed in business combinations	$	—		$	2,769,471
Fair value of contingent consideration related to business combinations	$	4,353		$	—
Purchases of property and equipment included in liabilities	$	7,589		$	706
Vehicles acquired through capital lease agreements	$	24,000		$	7,101

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-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.

Merger

On August 1, 2017, the Company completed the merger (the “Merger”) with Double Eagle Parent, Inc. (“inVentiv”), the parent company of inVentiv Health, Inc. Upon closing, inVentiv was merged with and into the Company, with the Company continuing as the surviving corporation. Beginning August 1, 2017, inVentiv’s results of operations are included in the accompanying unaudited condensed consolidated financial statements. For additional information related to the Merger, refer to “Note 3 - Business Combinations.”

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, 2017, filed with the Securities and Exchange Commission on February 28, 2018. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year ending December 31, 2018 or any other future period. The unaudited condensed consolidated balance sheet at December 31, 2017 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, 2017.

Recently Adopted Accounting Standards

Revenue from Contracts with Customers. The Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASC 606”) on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for the three and nine months ended September 30, 2018 reflect the application of ASC 606, while the reported results for the three and nine months ended September 30, 2017 were prepared under ASC 605, Revenue Recognition (“ASC 605”). For additional information related to the impact of adopting this standard, refer to “Note 12 - Revenue from Contracts with Customers.”

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Statement of Cash Flows - Restricted Cash. Effective January 1, 2018, the Company adopted ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash using the retrospective transition method, as required by the new standard. The adoption of this ASU had an insignificant impact to the Company’s unaudited condensed consolidated statements of cash flows. The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the unaudited condensed consolidated balance sheets at September 30, 2018 and December 31, 2017, which sum to the total of such amounts in the consolidated statements of cash flows (in thousands):



	September 30, 2018		December 31, 2017
Cash and cash equivalents	$	132,402	$	321,262
Restricted cash	2,202		714
Total cash and cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows	$	134,604	$	321,976

Comprehensive Income - Reclassifications of Certain Tax Effects. Effective January 1, 2018, the Company elected to early adopt ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. Under the updated accounting guidance, the Company is allowed to reclassify the stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate resulting from the Tax Cuts and Jobs Act of 2017 (“Tax Act”) is recorded. Upon adoption, the Company recorded an increase to other comprehensive income of $3.9 million and a reduction in retained earnings of $3.9 million. There was no impact on prior periods.

Recently Issued Accounting Standards Not Yet Adopted

Leases. In February 2016, the Financial Accounting Standards board (“FASB”) issued ASU No. 2016-02, Leases. ASU 2016-02 requires organizations to recognize lease assets and lease liabilities on the balance sheet, including leases that were previously classified as operating leases. The ASU also requires additional disclosures about leasing arrangements related to the amount, timing, and uncertainty of cash flows arising from leases. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments is permitted and the new guidance will be applied using a modified retrospective approach. The Company continues to evaluate the impact of adopting this standard on its accounting policies, financial statements, business processes, systems and internal controls. Additionally, the Company has established a project management and implementation team consisting of internal resources and external advisors. These evaluation and implementation processes are expected to continue through 2018. The Company expects to recognize substantially all of its leases on the balance sheet by recording a right-to-use asset and a corresponding lease liability. The Company plans to adopt the standard on January 1, 2019.

2. Financial Statement Details

Cash and Cash Equivalents

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 the “Cash and cash equivalents” line item in the unaudited condensed consolidated balance sheet. The Company’s net cash pool position consisted of the following (in thousands):



	September 30, 2018			December 31, 2017
Gross cash position	$	130,510		$	195,376
Less: cash borrowings	(105,708		)	(88,226		)
Net cash position	$	24,802		$	107,150

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Billed Accounts Receivable, Net

Billed accounts receivable, net consisted of the following (in thousands):



	September 30, 2018			December 31, 2017
Accounts receivable billed	$	662,138		$	652,061
Allowance for doubtful accounts	(5,456		)	(9,076		)
Accounts receivable billed, net	$	656,682		$	642,985

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, 2018, the Company factored $197.4 million of trade accounts receivable on a non-recourse basis and received $196.4 million in cash proceeds from the sale. The fees associated with this transaction were insignificant. The Company did not sell any trade accounts receivables under this agreement during the year ended December 31, 2017.

Goodwill and Intangible Assets

Changes in the carrying amount of goodwill by segment for the nine months ended September 30, 2018 were as follows (in thousands):



	Total			Clinical Solutions			Commercial Solutions
Balance at December 31, 2017:
Gross carrying amount	$	4,308,737		$	2,808,975		$	1,499,762
Accumulated impairment losses ^(a)	(16,166		)	(8,142		)	(8,024		)
Goodwill net of accumulated impairment losses	4,292,571			2,800,833			1,491,738
2018 Activity:
Business combinations^(b)	73,901			(5,692		)	79,593
Impact of foreign currency translation	(13,647		)	(12,950		)	(697		)
Balance at September 30, 2018:
Gross carrying amount	4,368,991			2,790,333			1,578,658
Accumulated impairment losses ^(a)	(16,166		)	(8,142		)	(8,024		)
Goodwill net of accumulated impairment losses	$	4,352,825		$	2,782,191		$	1,570,634

^(a)Accumulated impairment losses associated with the Clinical Solutions segment were recorded prior to 2018 and related to the former Phase I Services segment, now a component of the Clinical Solutions segment. Accumulated impairment losses associated with the Commercial Solutions segment were recorded prior to 2018 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, 2018.

^(b) Amount represents measurement period adjustments to goodwill recognized in connection with the Merger and goodwill recognized in connection with an acquisition. Goodwill associated with these transactions is not deductible for income tax purposes. Refer to “Note 3 - Business Combinations” for further information.

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Intangible assets, net consisted of the following (in thousands):



	September 30, 2018							December 31, 2017
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Intangible assets with finite lives:
Customer relationships	$	1,489,824	$	(368,905	)	$	1,120,919	$	1,440,178	$	(266,158	)	$	1,174,020
Acquired backlog	136,847		(86,329		)	50,518		137,442		(42,095		)	95,347
Trademarks	31,290		(13,062		)	18,228		32,428		(15,745		)	16,683
Total	$	1,657,961	$	(468,296	)	$	1,189,665	$	1,610,048	$	(323,998	)	$	1,286,050

The fair value of the intangible assets acquired during the three months ended September 30, 2018 are amortized over an estimated useful life of 5 to 10 years. The future estimated amortization expense for the Company’s intangible assets is expected to be as follows (in thousands):



Fiscal Year Ending:
2018 (remaining 3 months)	$	51,280
2019	166,353
2020	149,620
2021	132,261
2022	126,856
2023 and thereafter	563,295
Total	$	1,189,665

Accumulated Other Comprehensive Loss, Net of Tax

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



	September 30, 2018			December 31, 2017
Foreign currency translation adjustments, net of tax	$	(56,461	)	$	(23,514	)
Unrealized gains on derivative instruments, net of tax	2,726			1,129
Accumulated other comprehensive loss, net of tax	$	(53,735	)	$	(22,385	)

Changes in accumulated other comprehensive gain (loss), net of tax for the three months ended September 30, 2018 were as follows (in thousands):



	Unrealized gain on derivative instruments, net of tax		Foreign currency translation adjustments, net of tax			Total
Balance at June 30, 2018	$	102	$	(55,166	)	$	(55,064	)
Other comprehensive gain (loss) before reclassifications	2,397		(1,295		)	1,102
Amount of loss reclassified from accumulated other comprehensive loss into statement of operations	227		—			227
Net current period other comprehensive gain (loss), net of tax	2,624		(1,295		)	1,329
Balance at September 30, 2018	$	2,726	$	(56,461	)	$	(53,735	)

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Changes in accumulated other comprehensive gain (loss), net of tax for the nine months ended September 30, 2018 were as follows (in thousands):



	Unrealized gain on derivative instruments, net of tax			Foreign currency translation adjustments, net of tax			Total
Balance at December 31, 2017	$	1,129		$	(23,514	)	$	(22,385	)
Reclassification of income tax benefit due to adoption of ASU 2018-02	256			3,594			3,850
Balance at January 1, 2018	1,385			(19,920		)	(18,535		)
Other comprehensive gain (loss) before reclassifications	1,712			(36,541		)	(34,829		)
Amount of gain reclassified from accumulated other comprehensive loss into the statement of operations	(371		)	—			(371		)
Net current period other comprehensive gain (loss), net of tax	1,341			(36,541		)	(35,200		)
Balance at September 30, 2018	$	2,726		$	(56,461	)	$	(53,735	)

Unrealized gains on derivative instruments represent the effective portion of gains associated with interest rate swaps. Designated as cash flow hedges, the interest rate swaps limit the variable interest rate exposure associated with the Company’s term loans. The Company reclassifies amounts into net income (loss) as it makes interest payments on its term loan. Amounts to be reclassified to net income (loss) in the next 12 months are expected to be inconsequential.

The tax effects allocated to each component of other comprehensive loss for the three months ended September 30, 2018 were as follows (in thousands):



	Before-Tax Amount			Tax (Expense) or Benefit			Net-of-Tax Amount
Foreign currency translation adjustments	$	(4,163	)	$	2,868		$	(1,295	)
Unrealized gain on derivative instruments:
Unrealized gain arising during period	2,863			(466		)	2,397
Reclassification adjustment for losses realized in net loss	236			(9		)	227
Net unrealized gain on derivative instruments	3,099			(475		)	2,624
Other comprehensive (loss) income	$	(1,064	)	$	2,393		$	1,329

The tax effects allocated to each component of other comprehensive loss for the nine months ended September 30, 2018 were as follows (in thousands):



	Before-Tax Amount			Tax Expense			Net-of-Tax Amount
Foreign currency translation adjustments	$	(36,541	)	$	—		$	(36,541	)
Unrealized gain on derivative instruments:
Unrealized gain arising during period	2,178			(466		)	1,712
Reclassification adjustment of realized gains to net loss	(362		)	(9		)	(371		)
Net unrealized gain on derivative instruments	1,816			(475		)	1,341
Other comprehensive loss	$	(34,725	)	$	(475	)	$	(35,200	)

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The tax effects allocated to each component of other comprehensive income for the three months ended September 30, 2017 were as follows (in thousands):



	Before-Tax Amount			Tax (Expense) or Benefit			Net-of-Tax Amount
Foreign currency translation adjustments	$	10,499		$	(5,873	)	$	4,626
Unrealized gain on derivative instruments:
Unrealized gain arising during period	34			(14		)	20
Reclassification adjustment for gains realized in net loss	(221		)	86			(135		)
Net unrealized loss on derivative instruments	(187		)	72			(115		)
Other comprehensive income	$	10,312		$	(5,801	)	$	4,511

The tax effects allocated to each component of other comprehensive income for the nine months ended September 30, 2017 were as follows (in thousands):



	Before-Tax Amount			Tax Expense			Net-of-Tax Amount
Foreign currency translation adjustments	$	22,831		$	(5,873	)	$	16,958
Unrealized gain on derivative instruments:
Unrealized gain arising during the period	67			(21		)	46
Reclassification adjustment of realized gains to net loss	(478		)	184			(294		)
Net unrealized loss on derivative instruments	(411		)	163			(248		)
Other comprehensive income	$	22,420		$	(5,710	)	$	16,710

Other (Expense) Income, Net

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Net realized foreign currency gain (loss)	$	1,978		$	(5,147	)	$	2,146		$	(9,298	)
Net unrealized foreign currency (loss) gain	(4,706		)	(381		)	14,927			(6,264		)
Other, net	(1,618		)	(425		)	(1,972		)	(602		)
Total other (expense) income, net	$	(4,346	)	$	(5,953	)	$	15,101		$	(16,164	)

3. Business Combinations

inVentiv Health Merger

On August 1, 2017 (the “Merger Date”), the Company completed the Merger with inVentiv 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 obligation liability was $54.1 million and $50.5 million as

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of September 30, 2018 and December 31, 2017, respectively. The liability is included in the “Accrued liabilities” and “Other long-term liabilities” line items of the accompanying unaudited condensed consolidated balance sheets.

The results of inVentiv’s operations have been included in the Company’s statements of operations since the Merger Date. Computing separate measures of inVentiv’s stand-alone revenue and profitability for the period after the Merger Date is impracticable.

Allocation of Consideration Transferred

The fair value of the consideration transferred on the Merger Date was $4.51 billion. The following table summarizes the allocation of the consideration transferred based on management’s estimates of Merger Date fair values of assets acquired and liabilities assumed, with the excess of the purchase price over the estimated fair values of the identifiable net assets acquired recorded as goodwill (in thousands):



Assets acquired:
Cash and cash equivalents	$	57,338
Restricted cash	433
Accounts receivable	367,595
Unbilled accounts receivable	262,944
Other current assets	97,922
Property and equipment	114,041
Intangible assets	1,334,200
Other assets	50,052
Total assets acquired	2,284,525
Liabilities assumed:
Accounts payable	38,072
Accrued liabilities	304,341
Contract liabilities	247,474
Capital leases	40,928
Long-term debt, current and non-current	737,872
Deferred income taxes, net	14,751
Other liabilities	119,480
Total liabilities assumed	1,502,918
Total identifiable assets acquired, net	781,607
Goodwill	$	3,724,016

The goodwill recognized in connection with the Merger was $3.72 billion, with $2.23 billion of the goodwill assigned to the Clinical Solutions segment and $1.49 billion assigned to the Commercial Solutions segment. Goodwill generated in the Merger is not deductible for income tax purposes. During the nine months ended September 30, 2018, the Company made adjustments to the preliminary fair value of acquired assets and assumed liabilities to reflect additional information obtained in connection with the Merger. The net effect of these adjustments resulted in a $9.5 million decrease in goodwill.

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Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information was derived from the historical financial statements of the Company and inVentiv and presents the combined results of operations as if the Merger had occurred on January 1, 2016. The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results that would have actually occurred had the Merger been completed on January 1, 2016. In addition, the unaudited pro forma financial information does not give effect to any anticipated cost savings, operating efficiencies or other synergies that may result from the Merger, or any estimated costs that have been or will be incurred by the Company to integrate the assets and operations of inVentiv. Consequently, actual future results of the Company will differ from the unaudited pro forma financial information presented.



	Three Months Ended September 30, 2017			Nine Months Ended September 30, 2017
	(In thousands, except per share data)
Pro forma total revenue	$	1,025,942		$	3,145,253
Pro forma net loss	(85,223		)	(77,925		)
Pro forma loss per share:
Basic	$	(0.82	)	$	(0.75	)
Diluted	$	(0.82	)	$	(0.75	)

The unaudited pro forma adjustments primarily relate to the depreciation of acquired property and equipment, amortization of acquired intangible assets and interest expense and amortization of deferred financing costs related to the new financing arrangements. In addition, the unaudited pro forma net loss for the three and nine months ended September 30, 2017 was adjusted to exclude $68.2 million and $90.9 million, respectively, net of tax effects, of nonrecurring merger-related transaction costs.

Kinapse Limited Acquisition

In August 2018, the Company completed its acquisition of Kinapse Topco Limited (“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 includes cash acquired of $4.9 million. The Company recognized $83.4 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 Company’s assessment of fair value and the purchase price allocation related to this acquisition is preliminary and further adjustments may be necessary as additional information related to the fair values of assets acquired and liabilities assumed is assessed during the measurement period (up to one year from the acquisition date).

The operating results from the Kinapse acquisition have been included in the Company’s Commercial Solutions segment from the date of acquisition. The unaudited pro forma financial information was not updated to include this acquisition as the impact would have been insignificant.

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4. Long-Term Debt Obligations

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



	September 30, 2018			December 31, 2017
Secured Debt
Term Loan A due August 2022	$	981,250		$	1,000,000
Term Loan B due August 2024	1,251,000			1,550,000
Revolving credit facility due August 2022	—			—
Accounts receivable financing agreement due June 2020	183,600			—
Total secured debt	2,415,850			2,550,000
Unsecured Debt
7.5% Senior Unsecured Notes due 2024	403,000			403,000
Total debt obligations	2,818,850			2,953,000
Add: unamortized Senior Notes premium, net of original issue debt discount	33,360			38,656
Less: unamortized deferred issuance costs	(14,529		)	(20,722		)
Less: current portion of debt	(62,050		)	(25,000		)
Total debt obligations, non-current portion	$	2,775,631		$	2,945,934

During the nine months ended September 30, 2018, the Company voluntarily prepaid $299.0 million towards reducing its outstanding Term Loan B balance, which was applied against the regularly-scheduled quarterly principal payments. As a result, the Company is 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, 2018, the Company made mandatory principal repayments of $18.8 million towards its Term Loan A and settled $36.6 million of debt upon the closing of an acquisition.

Repricing Amendment to Credit Agreement

On May 4, 2018, the Company entered into Amendment No. 1 (the “Repricing Amendment”) to the Credit Agreement dated August 1, 2017 (the “2017 Credit Agreement”), which, among other things, modified the terms of the 2017 Credit Agreement to: (i) reduce by 0.25% overall the applicable margins for alternate base rate (“Base Rate”) loans and Adjusted Eurocurrency Rate (“Eurocurrency Rate”) loans with respect to both Term Loan A and Term Loan B; and (ii) reset the period in which a prepayment premium with respect to Term Loan B is required for a “Repricing Transaction” (as defined in the Credit Agreement) to six months after the closing date of the Repricing Amendment.

The applicable margins with respect to Base Rate and Eurocurrency Rate borrowings are determined depending on the “First Lien Leverage Ratio” or the "Secured Net Leverage Ratio" (as defined in the Repricing Amendment) and range as follows:



	Base Rate				Eurocurrency Rate
Term Loan A	0.25	%	-	0.50%	1.25	%	-	1.50%
Term Loan B	0.75	%	-	1.00%	1.75	%	-	2.00%

Accounts Receivable Financing Agreement

On June 29, 2018 the Company entered into an accounts receivable financing agreement (as amended) with a termination date of June 29, 2020, unless terminated earlier pursuant to its terms. Under this agreement, certain of the Company’s consolidated subsidiaries will sell accounts receivable and unbilled services (including contract assets) balances to a wholly-owned, bankruptcy-remote special purpose entity (“SPE”). The SPE can borrow up to $250.0 million from a third-party lender, 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

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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 highest 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 prior notice and may terminate or reduce the facility limit of the accounts receivable financing agreement with 15 days’ prior notice.

As of September 30, 2018, the Company had $183.6 million of outstanding borrowings under the accounts receivable financing agreement, which is recorded in the “Current portion of long term debt” and “Long term debt, noncurrent” line items on the accompanying unaudited condensed consolidated balance sheet. The remaining maximum capacity available for borrowing under this agreement was $66.4 million as of September 30, 2018.

5. Derivative Financial Instruments

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. Interest began accruing on the swaps 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, 2018, the remaining notional value of these interest rate swaps was $100.0 million.

In June 2018, the Company entered into two new interest rate swaps with multiple counterparties in an effort to limit its exposure to variable interest rates on its Term Loans. The first interest rate swap has an aggregate notional value of $1.22 billion, began accruing interest on June 29, 2018, and will expire on December 31, 2018. As of September 30, 2018, the remaining notional value of this interest rate swap was $1.07 billion. The second interest rate swap has an aggregate notional value of $1.01 billion, an effective date of December 31, 2018, and will expire on June 30, 2021.

The material terms of these derivatives are substantially the same as those contained within the 2017 Credit Agreement, including monthly settlements with the swap counterparty. Interest rate swaps are designated as hedging instruments. The amounts of hedge ineffectiveness recorded in net loss during the three and nine months ended September 30, 2018 and September 30, 2017 were insignificant and were attributable to inconsistencies in certain terms between the interest rate swaps and the 2017 Credit Agreement.

The Company became a party to certain foreign currency exchange rate forward contracts as a result of an acquisition that have expiration dates through April 2019. During the three and nine months ended September 30, 2018, the amount of loss recognized in other income (expense), net with respect to these contracts was inconsequential.

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 are as follows (in thousands):



	Balance Sheet Classification	September 30, 2018			December 31, 2017
Foreign currency exchange rate swaps - current	Prepaid expenses and other current assets	$	138		$	—
Interest rate swaps - current	Prepaid expenses and other current assets	$	1,640		$	916
Interest rate swaps - non-current	Other long-term assets	$	3,365		$	1,263
Interest rate swaps - current	Accrued liabilities	$	(1,028	)	$	—

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6. Fair Value Measurements

Assets and Liabilities Carried at Fair Value

As of September 30, 2018 and December 31, 2017, 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, contract assets, accounts payable, accrued liabilities, contract liabilities, assumed contingent obligations, capital leases, liabilities under the accounts receivable financing agreement, and derivative instruments.

The fair value of cash and cash equivalents, restricted cash, billed and unbilled accounts receivable, contract assets, accounts payable, accrued liabilities, contract liabilities, and the liabilities under the accounts receivable financing agreement approximates 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, 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	$	17,113	$	—	$	—	$	17,113
Derivative instruments	—		5,143		—		5,143
Total assets	$	17,113	$	5,143	$	—	$	22,256

Liabilities:
Derivative instruments	$	—	$	1,028	$	—	$	1,028
Contingent obligations related to business combinations	—		—		58,530		58,530
Total liabilities	$	—	$	1,028	$	58,530	$	59,558

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As of December 31, 2017, 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	$	16,318	$	—	$	—	$	16,318
Derivative instruments	—		2,179		—		2,179
Total assets	$	16,318	$	2,179	$	—	$	18,497

Liabilities:
Contingent obligations related to business combinations	$	—	$	—	$	50,480	$	50,480
Total liabilities	$	—	$	—	$	50,480	$	50,480

The following table presents changes in the carrying amount of obligations classified as Level 3 category within the fair value hierarchy for the nine months ended September 30, 2018 (in thousands):



Balance at December 31, 2017	$	50,480
Additions	4,353
Changes in fair value recognized in earnings	3,697
Balance at September 30, 2018	$	58,530

During the nine months ended September 30, 2018, there were no transfers of assets or liabilities between Level 1, Level 2 or Level 3 fair value measurements.

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, 2018 and December 31, 2017, assets subject to non-recurring fair value measurements totaled $5.54 billion and $5.58 billion, respectively.

Fair Value Disclosures for Debt Not Carried at Fair Value

The estimated fair value of the outstanding term loans and Senior Unsecured 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 Unsecured Notes were as follows (in thousands):



	September 30, 2018				December 31, 2017
	Carrying Value (a)		Estimated Fair Value		Carrying Value (a)		Estimated Fair Value
Term Loan A due August 2022	$	979,333	$	981,250	$	1,000,000	$	1,000,000
Term Loan B due August 2024	$	1,249,673	$	1,251,000	$	1,548,149	$	1,550,000
7.5% Senior Unsecured Notes due 2024	$	439,604	$	429,195	$	443,507	$	433,729

^(a)The carrying value of the term loan debt is shown net of original issue debt discounts. The carrying value of the 7.5% Senior Unsecured Notes is inclusive of unamortized premiums.

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7. 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, 2018, the Company recognized approximately: (i) $13.2 million of employee severance and benefits related costs; (ii) $20.6 million of facility closure and lease termination costs; and (iii) $0.5 million of other costs related to the Merger. Over the next several years, the Company expects to incur significant costs related to the restructuring of its operations in order to achieve targeted synergies from the Merger. The timing and the amount of these costs and related benefits may differ significantly from current management’s estimates and depends on various factors, including, but not limited to, identifying and realizing synergy opportunities and executing the integration of the Company’s operations.

Other Restructuring

During the nine months ended September 30, 2018, the Company incurred $1.4 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, 2018, the Company recognized: (i) approximately $3.2 million of consulting costs related to the restructuring of its contract management processes to meet the requirements of the newly adopted revenue recognition accounting standard; (ii) $1.7 million of employee severance and benefits related costs; and (iii) $1.0 million of other restructuring 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, 2018 (in thousands):



	Employee Severance Costs, Including Executive Transition Costs			Facility Closure and Lease Termination Costs			Other Costs			Total
Balance at December 31, 2017	$	8,858		$	7,411		$	524		$	16,793
Expenses incurred^(a)	14,829			18,633			4,148			37,610
Cash payments made	(18,208		)	(5,301		)	(4,594		)	(28,103		)
Balance at September 30, 2018	$	5,479		$	20,743		$	78		$	26,300

^(a) The amount of expenses incurred presented in the reconciliation of accrued restructuring liabilities excludes $4.0 million of non-cash restructuring and other expenses incurred for the nine months ended September 30, 2018 because these expenses were not subject to accrual prior to the period in which they were incurred.

The Company expects that substantially all of the employee severance costs accrued as of September 30, 2018 will be paid within the next twelve months. Certain facility costs will be paid over the remaining terms of exited facility leases, which range from 2018 through 2027. Liabilities associated with these costs are included in the “Accrued liabilities” and “Other long-term liabilities” line items in the accompanying unaudited condensed consolidated balance sheets. Restructuring and other costs included in net loss for the three and nine months ended September 30, 2018 are presented in the “Restructuring and other costs” line item in the unaudited condensed consolidated statements of operations.

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8. Shareholders' Equity

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, par value $0.01 per share, to be executed from time to time in open market transactions effected through a broker at prevailing market prices, in block trades or through privately negotiated transactions (“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 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 stock repurchase program will be subject to applicable legal requirements, including federal and state securities laws. 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. 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 par was applied on a pro rata basis against additional paid-in-capital, with the remainder applied to accumulated deficit.

As of September 30, 2018, the Company has remaining authorization to repurchase up to approximately $175.0 million of shares of its common stock under the 2018 stock repurchase program.

9. Share-Based Compensation

Restricted Stock Unit Award Activity

The following table summarizes the Restricted Stock Unit (“RSU”) activity during the nine months ended September 30, 2018:



	Number of Shares		Weighted Average Grant Date Fair Value
Non-vested at December 31, 2017	907,580		$	49.30
Granted	1,897,581		$	38.55
Vested	(242,315	)	$	48.53
Forfeited	(295,697	)	$	45.10
Non-vested at September 30, 2018	2,267,149		$	40.93

At September 30, 2018, total unrecognized compensation expense related to unvested RSUs was $67.4 million, which is expected to be recognized over a weighted average period of 2.2 years.

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2018 Performance-Based RSU Awards

During 2018, the Compensation Committee of the Company’s Board of Directors granted performance-based RSU awards (“PRSUs”) to certain executive officers. The total target number of PRSUs granted was 198,382 which will vest in a percentage ranging from 0% to 150% depending on the level of achievement of the performance targets. Each award is scheduled to cliff-vest approximately three years from the grant date and consists of three equal tranches with each tranche being conditional upon: (i) the attainment of performance targets related to the Company’s revenue growth for fiscal years 2018, 2019, and 2020; and (ii) the continued employment and service of the employee from the grant date through the date when determination of the target attainment level for the last performance period is made. The Company recognizes share-based compensation expense for PRSUs when attainment of each performance target becomes probable.

Share-based Compensation Expense

The total amount of share-based compensation expense recognized in the unaudited condensed consolidated statements of operations was as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
Statement of Operations Classification	2018		2017		2018		2017
Direct costs	$	5,216	$	5,388	$	14,540	$	11,055
Selling, general, and administrative expenses	4,575		2,165		11,414		8,546
Restructuring and other costs	—		—		91		—
Transaction and integration-related expenses	—		31,327		—		31,327
Total share-based compensation expense	$	9,791	$	38,880	$	26,045	$	50,928

10. Earnings Per Share

Basic earnings per share is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed based on the weighted average number of common shares outstanding plus the effect of dilutive potential common shares outstanding during the period. A reconciliation of the numerators and denominators of the basic and diluted per share computations of weighted average common shares outstanding based on the Company’s consolidated net loss is as follows (in thousands, except per share amounts):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Numerator:
Net loss	$	(10,394	)	$	(147,998	)	$	(21,386	)	$	(123,422	)
Denominator:
Basic weighted average common shares outstanding	103,012			87,152			103,453			65,097
Effect of dilutive securities:
Stock options and other awards under deferred share-based compensation programs	—			—			—			—
Diluted weighted average common shares outstanding	103,012			87,152			103,453			65,097
Loss per share:
Basic	$	(0.10	)	$	(1.70	)	$	(0.21	)	$	(1.90	)
Diluted	$	(0.10	)	$	(1.70	)	$	(0.21	)	$	(1.90	)

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

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



	Three Months Ended September 30,		Nine Months Ended September 30,
	2018	2017	2018	2017
Anti-dilutive stock options and other awards	335	126	1,224	488
Anti-dilutive stock options and other awards under deferred share-based compensation programs excluded based on reporting a net loss for the period	1,621	1,534	1,208	1,275
Total common stock equivalents excluded from diluted earnings per share computation	1,956	1,660	2,432	1,763

11. Income Taxes

Income Tax Expense

For the three and nine months ended September 30, 2018, the Company recorded income tax expense of $12.0 million and $19.1 million, 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.

For the three and nine months ended September 30, 2017, the Company recorded an income tax expense of $26.1 million and $30.2 million, respectively, compared to pre-tax losses of $121.9 million and $93.2 million, respectively. The Company’s effective tax rate for the three and nine months ended September 30, 2017 varied from the U.S. federal statutory income tax rate of 35.0% primarily due to: (i) a discrete tax expense related to a change in the Company’s method of accounting for undistributed foreign earnings; (ii) the relative amount of income from operations earned in international jurisdictions with lower statutory income tax rates than the United States; and (iii) discrete tax adjustments related to excess tax benefits on share-based compensation.

Unrecognized Tax Benefits

The Company's gross unrecognized tax benefits, exclusive of associated interest and penalties, were $19.7 million and $43.7 million as of September 30, 2018 and December 31, 2017, respectively. The decrease of $24.0 million was primarily due to: (i) audit settlements in the United States and foreign jurisdictions, of which $1.4 million decreased tax expense; and (ii) remeasurement of acquired positions in relation to the Merger with inVentiv. The Company anticipates that during the next 12 months the unrecognized tax benefits will decrease by approximately $0.1 million.

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Tax Cuts and Jobs Act of 2017

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code, including requiring companies to pay a one-time transition tax on certain undistributed earnings of foreign subsidiaries. The deemed repatriation transition tax (“Transition Tax”) is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of the Company’s foreign subsidiaries. The Company was able to reasonably estimate the Transition Tax and recorded a provisional tax expense of $63.1 million for the year ended December 31, 2017. During the nine months ended September 30, 2018, the Company completed its accounting for the effects of the Transition Tax, with the exception of the state tax effects. On the basis of revised E&P computations that were completed during the reporting period, the final Transition Tax is $61.5 million. Due to the valuation allowance on the federal deferred tax assets, this decrease in the Transition Tax did not affect the 2018 effective tax rate for the period.

12. Revenue from Contracts with Customers

Service Revenue

The Company adopted ASC 606 - Revenue from Contracts with Customers and all related amendments (“new revenue standard” or “ASC 606”) on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for the three and nine months ended September 30, 2018 reflect the application of ASC 606, while the reported results for the three and nine months ended September 30, 2017 were prepared under ASC 605 - Revenue Recognition and other authoritative guidance in effect for those periods. In accordance with ASC 606, revenue is now recognized when, or as, a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services.

A performance obligation is a promise (or a combination of promises) in a contract to transfer distinct goods or services to a customer and is the unit of accounting under ASC 606 for the purposes of revenue recognition. A contract’s transaction price is allocated to each separate performance obligation based upon the standalone selling price and is recognized as revenue, when, or as, the performance obligation is satisfied. The majority of the Company’s contracts have a single performance obligation because the promise to transfer individual services is not separately identifiable from other promises in the contracts, and therefore, is not distinct. For contracts with multiple performance obligations, the contract’s transaction price is allocated to each performance obligation using the best estimate of the standalone selling price of each distinct good or service in the contract.

The majority of the Company's revenue arrangements are service contracts that range in duration from a few months to several years. Substantially all of the Company’s performance obligations, and associated revenue, are transferred to the customer over time. The Company generally receives compensation based on measuring progress toward completion using anticipated project budgets for direct labor and prices for each service offering. The Company is also reimbursed for certain third party pass-through and out-of-pocket costs. In addition, in certain instances a customer contract may include forms of variable consideration such as incentive fees, volume rebates or other provisions that can increase or decrease the transaction price. This variable consideration is generally awarded upon achievement of certain performance metrics, program milestones or cost targets. For the purposes of revenue recognition, variable consideration is assessed on a contract-by-contract basis and the amount to be recorded is estimated based on the assessment of the Company’s anticipated performance and consideration of all information that is reasonably available. Variable consideration is recognized as revenue if and when it is deemed probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved in the future.

Most of the Company's contracts can be terminated by the customer without cause with a 30-day notice. In the event of termination, the Company's contracts generally provide that the customer pay the Company for: (i) fees earned through the termination date; (ii) fees and expenses for winding down the

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project, which include both fees incurred and actual expenses; (iii) non-cancellable expenditures; and (iv) in some cases, a fee to cover a portion of the remaining professional fees on the project. The Company’s long term clinical trial contracts contain implied substantive termination penalties because of the significant wind-down cost of terminating a clinical trial. These provisions for termination penalties result in these types of contracts being treated as long-term for revenue recognition purposes.

Changes in the scope of work are common, especially under long-term contracts, and generally result in a renegotiation of future contract pricing terms and change in contract transaction price. If the customer does not agree to a contract modification, the Company could bear the risk of cost overruns. Most of the Company’s contract modifications are for services that are not distinct from the services under the existing contract due to the significant integration service provided in the context of the contract and therefore result in a cumulative catch-up adjustment to revenue at the date of contract modification.

Contract Assets and Liabilities

Contract assets include unbilled amounts typically resulting from revenue recognized in excess of the amounts billed to the customer for which the right to payment is subject to factors other than the passage of time. These amounts may not exceed their net realizable value. Contract assets are generally classified as current. Contract liabilities consist of customer payments received in advance of performance and billings in excess of revenue recognized, net of revenue recognized from the balance at the beginning of the period. Contract assets and liabilities are presented on the balance sheet on a net contract-by-contract basis at the end of each reporting period.

Capitalized Costs

The Company capitalizes certain costs associated with commissions and bonuses paid to its employees in the Clinical Solutions segment because these costs are incurred in obtaining contracts that have a term greater than one year. Capitalized costs are included in the “Prepaid expenses and other current assets” and “Other long-term assets” line items of the accompanying unaudited condensed consolidated balance sheets. The Company amortizes these costs in a manner that is consistent with the pattern of revenue recognition described below. The Company expenses obtainment costs for contracts that have a term of one year or less.

Additionally, certain recruiting and training costs within the selling solutions services offering are incurred prior to deployment of the contract field promotion teams that are reimbursed by the customer. These costs are capitalized and amortized ratably from the deployment date through the end of the accounting contract term. Capitalized costs and the related amortization are as follows (in thousands):



	September 30, 2018
Capitalized costs incurred to obtain or fulfill contracts with customers	$	19,003



	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Amortization of capitalized costs	$	5,209	$	12,911

Clinical Solutions

The Company’s Clinical Solutions segment provides solutions to address the clinical development needs of customers. The Company provides biopharmaceutical program development services through the Full Service Clinical Development (“Full Service”) platform, discrete services for any part of a customer clinical trial through a Functional Service Provider (“FSP”) offering, Early Stage services, and Real World and Late Phase (“RWLP”) services. The services provided via the Full Service and RWLP platforms generally span several years and a significant benefit to the customer is provided by integrating those services provided by the Company’s employees as well as those performed by third parties.

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Because the Company provides a significant benefit to the customer of integrating the services provided by the Full Service offering, there is one performance obligation for revenue recognition purposes. Revenue is recognized over time using an input measure of progress. The input measure reflects costs (including investigator payments and pass-through costs) incurred to date relative to total estimated costs to complete (“cost-to-cost measure of progress”). Under the cost-to-cost measure of progress methodology, revenue is recorded proportionally to costs incurred. Contract costs principally include direct labor, investigator payments, and pass-through costs.

The remaining service offerings within the Clinical Solutions segment are generally short-term, month-to-month contracts, time and materials basis contracts, or provide a series of distinct services that are substantially the same and have the same pattern of transfer to the customer (“series”). As such, revenue for these service offerings is generally recognized as services are performed for the amount the Company estimates it is entitled to for the period, similar to the pattern of recognition under ASC 605. For contracts billed on a fixed price basis, revenue is recognized over time based on the proportion of labor costs expended to total labor costs expected to complete the contract performance obligation.

The estimate of total revenue and costs at completion requires significant judgment. Contract estimates are based on various assumptions to project future outcomes of events that often span several years. These estimates are reviewed periodically and any adjustments are recognized on a cumulative catch up basis in the period they become known.

Unsatisfied Performance Obligations

As of September 30, 2018, the total aggregate transaction price allocated to the unsatisfied performance obligations under contracts with a contract term greater than one year and which are not accounted for as a series pursuant to ASC 606 was $5.22 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.

Commercial Solutions

The Company’s Commercial Solutions segment provides a broad suite of complementary commercialization services including selling solutions, communications (advertising and public relations), and consulting services. The largest of the service offerings within the Commercial Solutions segment relates to selling solutions. Selling solutions contracts are comprised of a single performance obligation that represents a series of daily outsourced detailing services to promote and sell commercial products on behalf of a customer.

The remaining Commercial Solutions contracts are generally short-term, month-to-month contracts or time and materials contracts. As such, Commercial Solutions revenue is generally recognized as services are performed for the amount the Company estimates it is entitled to for the period, similar to the pattern of recognition under ASC 605. For contracts billed on a fixed price basis, revenue is recognized over time based on the proportion of labor costs expended to total labor costs expected to complete the contract performance obligation.

Pass-through and out-of-pocket costs are recognized in service revenue in the unaudited condensed consolidated income statement as incurred. Certain media purchases and the related reimbursements are recorded on a net basis in the unaudited condensed consolidated income statement as such activities are controlled by the customer.

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The Commercial Solutions segment does not have material unsatisfied performance obligations that are required to be disclosed under ASC 606 because the contracts are short-term in nature or represent a series pursuant to ASC 606.

Timing of Billing and Performance

Differences in the timing of revenue recognition and associated billings and cash collections result in recording of billed accounts receivable, unbilled accounts receivable, contract assets and contract liabilities on the unaudited condensed consolidated balance sheet. Amounts are billed as work progresses in accordance with agreed-upon contractual terms either at periodic intervals or upon achievement of contractual milestones. Billings generally occur subsequent to revenue recognition, resulting in recording of: (i) unbilled accounts receivable in instances where the right to bill is contingent solely on the passage of time (e.g., in the following month); and (ii) contract assets in instances where the right to bill is associated with a contingency (e.g., achievement of a milestone). Cash payments received in advance of the Company’s performance result in recording of contract liabilities, which are liquidated as revenue is recognized.

Contract assets and liabilities are recorded net on a contract-by-contract basis at the end of each reporting period.

During the three and nine months ended September 30, 2018, the Company recognized approximately $363.7 million and $481.8 million, respectively, of revenue that was included in the contract liabilities balance at the beginning of the period. In order to determine revenue recognized in the period from contract liabilities, the Company first allocates revenue to the individual contract liability balance outstanding at the beginning of the period until the revenue exceeds that balance. During the three and nine months ended September 30, 2018, approximately $2.9 million and $(6.1) million 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 liabilities balances during the three and nine months ended September 30, 2018 were not materially impacted by any other factors.

Impact of Adopting ASC 606

The Company adopted ASC 606 using the modified retrospective method. The cumulative effect of applying the new guidance to all contracts with customers that were not completed as of January 1, 2018 was recorded as an adjustment to accumulated deficit as of the adoption date, with the impact primarily related to the performance obligations related to the Full Service customer clinical trials in the Clinical Solutions segment.

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As a result of applying the modified retrospective method to adopt the new accounting guidance, the following adjustments were made to the unaudited condensed consolidated balance sheet as of January 1, 2018 (in thousands):



	As Reported			Adjustments			Adjusted
	December 31, 2017			ASC 606 Adoption			January 1, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	321,262		$	—		$	321,262
Restricted cash	714			—			714
Accounts receivable billed, net	642,985			—			642,985
Accounts receivable unbilled	373,003			(152,644		)	220,359
Contract assets	—			94,567			94,567
Prepaid expenses and other current assets	84,215			19,452			103,667
Total current assets	1,422,179			(38,625		)	1,383,554
Property and equipment, net	180,412			—			180,412
Goodwill	4,292,571			—			4,292,571
Intangible assets, net	1,286,050			—			1,286,050
Deferred income tax assets	20,159			5,857			26,016
Other long-term assets	84,496			12,601			97,097
Total assets	$	7,285,867		$	(20,167	)	$	7,265,700

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	58,575		$	—		$	58,575
Accrued liabilities	500,303			49,611			549,914
Contract liabilities	559,270			34,075			593,345
Current portion of capital lease obligations	16,414			—			16,414
Current portion of long-term debt	25,000			—			25,000
Total current liabilities	1,159,562			83,686			1,243,248
Capital lease obligations, non-current	20,376			—			20,376
Long-term debt, non-current	2,945,934			—			2,945,934
Deferred income tax liabilities	37,807			(8,355		)	29,452
Other long-term liabilities	99,609			3,317			102,926
Total liabilities	4,263,288			78,648			4,341,936
Shareholders' equity:
Preferred stock	—			—			—
Common stock	1,044			—			1,044
Additional paid-in capital	3,414,389			—			3,414,389
Accumulated other comprehensive loss, net of tax	(22,385		)	—			(22,385		)
Accumulated deficit	(370,469		)	(98,815		)	(469,284		)
Total shareholders' equity	3,022,579			(98,815		)	2,923,764
Total liabilities and shareholders' equity	$	7,285,867		$	(20,167	)	$	7,265,700

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The following table compares the reported unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2018 to the amounts as if the previous revenue recognition guidance remained in effect for the three and nine months ended September 30, 2018 (in thousands, except per share amounts):



	Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
	ASC 606 As Reported			ASC 605 As Adjusted			ASC 606 As Reported			ASC 605 As Adjusted
Service revenue	$	1,114,918		$	787,502		$	3,244,644		$	2,344,021
Reimbursable out-of-pocket expenses	—			332,853			—			942,396
Total revenue	1,114,918			1,120,355			3,244,644			3,286,417
Direct costs (exclusive of depreciation and amortization)	539,570			539,239			1,619,620			1,624,249
Reimbursable out-of-pocket expenses	332,644			332,853			940,882			942,396
Selling, general, and administrative	96,943			97,737			296,420			298,266
Restructuring and other costs	19,349			19,349			41,647			41,647
Transaction and integration-related expenses	18,561			18,561			61,804			61,804
Depreciation	17,639			17,639			53,224			53,224
Amortization	50,395			50,395			150,333			150,333
Total operating expenses	1,075,101			1,075,773			3,163,930			3,171,919
Income (loss) from operations	39,817			44,582			80,714			114,498
Other expense, net:
Interest income	1,004			1,004			3,498			3,498
Interest expense	(33,097		)	(33,097		)	(97,727		)	(97,727		)
Loss on extinguishment of debt	(1,789		)	(1,789		)	(3,914		)	(3,914		)
Other (expense) income, net	(4,346		)	(4,346		)	15,101			15,101
Total other expense, net	(38,228		)	(38,228		)	(83,042		)	(83,042		)
Income (loss) before provision for income taxes	1,589			6,354			(2,328		)	31,456
Income tax expense	(11,983		)	(8,129		)	(19,058		)	(21,505		)
Net (loss) income	(10,394		)	(1,775		)	(21,386		)	9,951
Earnings (loss) per share attributable to common shareholders:
Basic	$	(0.10	)	$	(0.02	)	$	(0.21	)	$	0.10
Diluted	$	(0.10	)	$	(0.02	)	$	(0.21	)	$	0.10
Weighted average common shares outstanding:
Basic	103,012			103,012			103,453			103,453
Diluted	103,012			103,012			103,453			104,661

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The following is a summary of the significant changes in the Company’s unaudited condensed consolidated statement of operations as a result of adopting ASC 606 on January 1, 2018, compared to the amounts as if the Company had continued to report its results under ASC 605:

•

ASC 606 delayed the recognition of revenue principally related to Full Service customer clinical trials in the Company’s Clinical Solutions segment for the three and nine months ended September 30, 2018 as revenue was previously recognized when contractual items (i.e. “units”) were delivered or on a proportional performance basis, generally using output measures of progress specific to the services provided, such as site or investigator recruitment, patient enrollment and data management. These measures excluded reimbursed investigator payments, other pass-through costs, and out-of-pocket expenses, which were recognized as incurred and presented separately as a component of total revenue in the unaudited condensed consolidated statement of operations. Pursuant to the adoption of ASC 606, the majority of revenue recognized related to Full Service customer clinical trials is accounted for using project costs as an input measure of progress, and includes reimbursable pass-through costs and out-of-pocket expenses.

•

ASC 606 delayed the recognition of revenue in the Company’s Commercial Solutions segment for the nine months ended September 30, 2018 as certain costs to recruit and train the contract field promotion teams, and revenue for the related reimbursements, are deferred and amortized over the contract term under ASC 606. These amounts were previously recognized as each separate service was delivered to the customer. These delays were partially offset by the acceleration of revenue recognition on certain incentive fee programs that were previously recognized upon customer approval. For the three months ended September 30, 2018 the recognition of revenue under ASC 606 and ASC 605 was comparatively similar.

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The following table compares the reported unaudited condensed consolidated balance sheet as of September 30, 2018 to the amounts as if the previous revenue recognition guidance remained in effect as of September 30, 2018 (in thousands):



	September 30, 2018
	ASC 606 As Reported			ASC 605 As Adjusted
ASSETS
Current assets:
Cash and cash equivalents	$	132,402		$	132,402
Restricted cash	2,202			2,202
Accounts receivable billed, net	656,682			656,682
Accounts receivable unbilled	347,894			496,003
Contract assets	136,824			—
Prepaid expenses and other current assets	80,418			62,638
Total current assets	1,356,422			1,349,927
Property and equipment, net	175,128			175,128
Goodwill	4,352,825			4,352,825
Intangible assets, net	1,189,665			1,189,665
Deferred income tax assets	32,702			27,047
Other long-term assets	102,951			93,085
Total assets	$	7,209,693		$	7,187,677

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	82,204		$	82,204
Accrued liabilities	527,225			479,118
Contract liabilities	709,027			600,871
Current portion of capital lease obligations	16,603			16,603
Current portion of long-term debt	62,050			62,050
Total current liabilities	1,397,109			1,240,846
Capital lease obligations, non-current	21,568			21,568
Long-term debt, non-current	2,775,631			2,775,631
Deferred income tax liabilities	58,612			67,914
Other long-term liabilities	123,745			120,387
Total liabilities	4,376,665			4,226,346
Shareholders' equity:
Preferred stock	—			—
Common stock	1,032			1,032
Additional paid-in capital	3,390,734			3,390,734
Accumulated other comprehensive loss, net of tax	(53,735		)	(55,585		)
Accumulated deficit	(505,003		)	(374,850		)
Total shareholders' equity	2,833,028			2,961,331
Total liabilities and shareholders' equity	$	7,209,693		$	7,187,677

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The following is a summary of the significant changes in the Company’s unaudited condensed consolidated balance sheets as a result of adopting ASC 606 on January 1, 2018, compared to the amounts as if the Company had continued to report its results under ASC 605:

•

The reported assets were greater than the total assets that would have been reported had the prior revenue recognition guidance remained in effect. This was largely due to the deferral of certain recruiting and training costs in Commercial Solutions contracts and capitalized sales commissions. The reported liabilities were greater than the total liabilities that would have been reported had the prior revenue recognition guidance remained in effect. This was largely due to advances and deferred revenue in excess of contract assets that are required to be presented net on a contract-by-contract basis.

•

The adoption of ASC 606 primarily resulted in a revenue recognition delay as of January 1, 2018, which resulted in an increase of the Company’s deferred tax asset position. As the Company records full reserves for its net federal deferred tax assets in the United States, a portion of the impact was offset by a corresponding increase to the valuation allowance against the deferred tax asset position.

The adoption of ASC 606 had no net impact on the Company’s cash flows from operations.

13. Segment Information

During the third quarter of 2017, the Company realigned its operating segments as a result of the Merger to reflect the current structure under which performance is evaluated, strategic decisions are made and resources are allocated. As a result of this realignment, effective August 1, 2017, the Company began evaluating its financial performance based on two reportable segments: Clinical Solutions and Commercial Solutions. Historical segment reporting has been revised to reflect these changes to the Company’s segment structure.

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 outsourced 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. Beginning in 2018, as a result of the Company’s adoption of ASC 606, revenue and costs for reimbursed out-of-pocket expenses are allocated to the Company’s segments. Prior to 2018, revenue and costs for reimbursed out-of-pocket expenses were not allocated to the Company’s segments. 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.

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

Three Months Ended September 30,

Nine Months Ended September 30,