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Item 7. Management’s Discussion and Analysis

2021-02-16 compared with 2020-02-25 · 71 added, 107 removed, 238 unchanged (43% of the section changed)

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

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K.

This section of this Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019.

For a comparison of our results of operations for the fiscal years ended December 31, 2019 and December 31, 2018, see “Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 25, 2020.

This item and the related discussion contain forward-looking statements reflecting current expectations that involve risks and uncertainties.

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We believe that we are a partner of choice for small- and mid-sized biopharmaceutical companies based on our ability to consistently utilize our full-service, disciplined operating model to deliver timely and high-quality results for our customers.

We focus on conducting clinical trials across all major therapeutic areas, with particular strength in Cardiology, Metabolic Disease, Oncology, Central Nervous System, or CNS and Antiviral and Anti-infective, or AVAI.

We focus on conducting clinical trials across all major therapeutic areas, with particular strength in Oncology, Metabolic Disease, Cardiology, Antiviral and Anti-infective, or AVAI, and Central Nervous System, or CNS.

Our global platform includes approximately 3,600 employees across 39 countries, providing our customers with broad access to diverse markets and patient populations as well as local regulatory expertise and market knowledge.

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These fees are typically discussed and agreed upon with the customer and are realized as revenue when we believe the amount can be estimated reliably and its realization is probable.

Changes in revenue from period to period are driven primarily by new business volume and task order execution activity, project cancellations, changes in estimated costs to complete performance obligations, and the mix of active studies during a given period that can vary based on therapeutic area and or study life cycle stage.

Changes in revenue from period to period are

driven primarily by new business volume and task order execution activity, project cancellations, changes in estimated costs to complete performance obligations, and the mix of active studies during a given period that can vary based on therapeutic area and or study life cycle stage.

Costs and Expenses

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Depreciation is provided on our property and equipment on the straight-line method at rates adequate to allocate the cost of the applicable assets over their estimated useful lives, which is three to five years for computer hardware, software, phone, and medical imaging equipment, five to seven years for furniture and fixtures and other equipment, and thirty to forty years for buildings.

Leasehold improvements and deemed assets from landlord building construction are amortized on a straight-line basis over the shorter of the estimated useful life of the improvement or the associated remaining lease term.

Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful life of the improvement or the associated remaining lease term.

Amortization relates to finite-lived intangible assets recognized as expense using the straight-line method or using an accelerated method over their estimated useful lives, which range in term from 5 to 15 years.

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New business awards represent the value of anticipated future net revenue that has been recognized in backlog during the period.

This value is recognized upon the signing of a contract or receipt of a written pre-contract confirmation from a customer that confirms an agreement in principle on budget and scope.

This value is recognized upon the signing of a contract or receipt of a written pre-contract

confirmation from a customer that confirms an agreement in principle on budget and scope.

New business awards also include contract amendments, or changes in scope, where the customer has provided written authorization for changes in budget and scope or has approved us to perform additional work as of the measurement date.

Awards may not be recognized as backlog after consideration of a number of factors, including whether (i) the relevant net

revenue is expected only after a pending regulatory hurdle, which might result in cancellation of the study, (ii) the customer funding needed for commencement of the study is not believed to have been secured or (iii) study timelines are uncertain or not well defined.

Awards may not be recognized as backlog after consideration of a number of factors, including whether (i) the relevant net revenue is expected only after a pending regulatory hurdle, which might result in cancellation of the study, (ii) the customer funding needed for commencement of the study is not believed to have been secured or (iii) study timelines are uncertain or not well defined.

In addition, st udy a mounts that extend beyond three years from measurement date are not included in backlog.

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Net new business awards represent gross new business awards received in a period offset by total cancellations in that period.

On an Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”) basis, net new business awards were $1,094.4 million and $899.4 million for the years ended December 31, 2019 and 2018.

On an Accounting Standards Codification Topic 605, Revenue Recognition (“ASC 605”) basis, net new business awards were $581.0 million and $426.1 million for the years ended December 31, 2018 and 2017, respectively.

Net new business awards were $1,175.0 million, $1,094.4 million and $899.4 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Backlog represents anticipated future net revenue from net new business awards that have commenced, but have not been completed.

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Included within backlog as of December 31, 2020 was approximately $785 million to $805 million that we expect to convert to net revenue in 2021, with the remainder expected to convert to net revenue in years after 2021 .

On an ASC 606 basis, the effect of foreign currency adjustments on backlog was as follows:

unfavorable foreign currency adjustments of $6.6 million for the year ended December 31, 2019 and unfavorable foreign currency adjustments of $2.3 million for the year ended December 31, 2018.

On an ASC 605 basis, the effect of foreign currency adjustments on backlog resulted in unfavorable foreign currency adjustments of $1.1 million for the year ended December 31, 2018 and favorable foreign currency adjustments of $3.2 million for the year ended December 31, 2017.

The effect of foreign currency adjustments on backlog was as follows:

favorable foreign currency adjustments of $14.3 million for the year ended December 31, 2020, unfavorable foreign currency adjustments of $6.6 million for the year ended December 31, 2019 and unfavorable foreign currency adjustments of $2.3 million for the year ended December 31, 2018.

Backlog and net new business award metrics may not be reliable indicators of our future period revenue as they are subject to a variety of factors that may cause material fluctuations from period to period.

These factors include, but are not limited to, changes in the scope of projects, cancellations, and duration and timing of services provided.

Coronavirus (COVID-19)

On March 11, 2020, the World Health Organization declared the coronavirus COVID-19 outbreak to be a pandemic.

This pandemic has resulted in increased travel restrictions and caused the shutdown of many businesses in countries in which we operate.

While we continue to operate globally, the level of activity at each of our locations varies depending on the local governmental requirements and guidelines.

Our office staff are effectively working in the office or remotely and our labs are fully operational with modifications made to ensure the safety of our employees.

The diversion of resources to treat COVID-19 patients has significantly impacted the operations at most of the investigative sites where patients in our clinical trials are recruited and treated.

This has resulted in reduced trial starts and slowed new business awards, each of which results in decreased revenues.

Depending on the duration of the disruption, ongoing studies may be cancelled and some of our clients may lack the funding to complete trials which are extended due to slowed recruitment of patients.

We work with many smaller clients with limited financial resources and market disruptions may make raising additional funds difficult for those clients.

Travel restrictions and business closures have also impacted study participants and clinical sites which affects our ability to efficiently provide clinical trial services.

As a result, we are working with our customers to develop solutions to limit disruption to clinical trials while following required regulatory guidelines and maintaining quality to ensure the health and well-being of study participants.

These include alternative assessment methods such as virtual monitoring visits.

The COVID-19 outbreak had a significant adverse effect on fiscal year 2020 and we believe that the outbreak may have

a continued adverse impact on our results of operations in the future.

In connection with this adverse impact in 2020, we evaluated our headcount needs in a number of geographies and implemented some staff reductions where appropriate.

As we cannot predict the duration or scope of the pandemic, the future financial impact on our results of operations and financial condition cannot be reasonably estimated.

Exchange Rate Fluctuations

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Income from operations

Miscellaneous (expense) income, net

Interest expense, net

Miscellaneous income (expense), net

Interest income (expense), net

Income before income taxes

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Total revenue increased by $65.0 million to $925.9 million for the year ended December 31, 2020, from $861.0 million for the year ended December 31, 2019.

The increase was primarily driven by strong activity within the Oncology and other uncategorized therapeutic areas.

The increase was primarily driven by strong activity within the Oncology , AVAI and other uncategorized therapeutic areas.

Total direct costs

Total direct costs increased by $31.9 million, to $647.2 million for the year ended December 31, 2020 from $615.3 million for the year ended December 31, 2019.

The increase was primarily attributed to higher reimbursed out-of-pocket expenses and higher personnel costs, outsourced services, and service-related supply costs to support the growth in service activities.

Reimbursed out-of-pocket expenses, which can fluctuate significantly from period to period based on the timing of the program initiation or closeout, increased $57.5 million for the year ended December 31, 2019, compared to the same period in the prior year.

The remaining increase was primarily attributed to higher personnel costs of $45.1 million, outsourced service costs of $7.1 million, and service-related supply costs of $5.7 million in the year ended December 31, 2019, compared to the same period in the prior year.

The increase was primarily attributed to personnel costs to support the growth in service activities.

The higher personnel costs portion, including severance, increased by $30.7 million in the year ended December 31, 2020, compared to the same period in the prior year.

Selling, general and administrative

Selling, general and administrative expenses increased by $19.6 million, to $95.2 million for the year ended December 31, 2019 from $75.7 million for the year ended December 31, 2018.

The increase was primarily driven by higher personnel costs of $16.7 million in the year ended December 31, 2019, compared to the same period in the prior year, to support growth in project activities.

Selling, general and administrative expenses decreased by $3.1 million, to $92.2 million for the year ended December 31, 2020 from $95.2 million for the year ended December 31, 2019.

The decrease was primarily driven by lower travel related costs of $2.5 million in the year ended December 31, 2020, compared to the same period in the prior year, due to travel restrictions related to COVID-19.

Depreciation and Amortization

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The decrease in depreciation and amortization was primarily related to the amortization of our definite lived intangible assets, which are amortized on an accelerated basis.

Miscellaneous ( expense ) income , net

Miscellaneous (expense) income, net decreased by $1.9 million to $0.9 million of expense for the year ended December 31, 2019 from $1.1 million of income for the year ended December 31, 2018.

Miscellaneous income (expense), net

Miscellaneous income (expense), net increased by $2.0 million to $1.2 million of income for the year ended December 31, 2020 from $0.9 million of expense for the year ended December 31, 2019.

These changes were mainly attributable to foreign exchange gains or losses that arise in connection with the revaluation of short-term inter-company balances between our domestic and international subsidiaries, gains or losses from foreign currency transactions, such as those resulting from the settlement of third-party accounts receivables and payables denominated in a currency other than the local currency of the entity making the payment.

Interest expense, net

Interest expense, net decreased by $6.6 million to $1.6 million for the year ended December 31, 2019 from $8.2 million for the year ended December 31, 2018.

The decrease in interest expense, net was related to a lower average outstanding balance in the year ended December 31, 2019 under our Prior Senior Secured Revolving Credit Facility (as defined below).

Interest income (expense), net

Interest income (expense), net increased by $1.9 million to $0.3 million of income for the year ended December 31, 2020 from $1.6 million of expense for the year ended December 31, 2019.

The increase in interest income (expense), net was related to a lower average outstanding balance in the year ended December 31, 2020 under our credit facility.

Income tax provision

Income tax provision increased by $3.6 million, to $24.4 million for the year ended December 31, 2019 from $20.8 million for the year ended December 31, 2018.

Income tax provision decreased by $1.2 million, to $23.1 million for the year ended December 31, 2020 from $24.4 million for the year ended December 31, 2019.

The overall effective tax rates for the years ended December 31, 2020 and 2019 were 13.7% and 19.5%, respectively.

The decrease in the effective tax rate for year ended December 31, 2019 was primarily attributable to a notable amount of excess tax benefits recognized from share-based compensation and tax benefits related to Foreign Derived Intangible Income (FDII).

The increase in the income tax provision for the year ended December 31, 2019 was primarily due to an increase in pre-tax book income compared to the same period in the prior year, which was partially offset by excess tax benefits recognized from share-based compensation and tax benefits related to the FDII.

The decrease in the income tax provision and overall effective rate was primarily attributable to an increase in excess tax benefits recognized from share-based compensation and an increase in tax benefits due to foreign tax credits and the benefit of uncertain tax positions.

Year ended December 31, 2019 compared to Year ended December 31, 2018

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We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities.

Our principal sources of liquidity are operating cash flows and funds available for borrowing under our new unsecured credit facility (the “Credit Facility”) .

Our principal sources of liquidity are operating cash flows and funds available for borrowing under our unsecured credit facility (the “Credit Facility”) .

As of December 31, 2020, we had cash and cash equivalents of $277.8 million.

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The Credit Facility replaced a Senior Secured Term Loan Facility of $165.0 million (the “Prior Senior Secured Term Loan Facility”) and a Senior Secured Revolving Credit Facility of $150.0 million (the “Prior Senior Secured Revolving Credit Facility” and, together with the Prior Senior Secured Term Loan Facility, the “Prior Senior Secured Credit Facilities” ) which were set to expire in December 2021.

In relation to the termination of the Prior Senior Secured Credit Facilities, we repaid all outstanding obligations.

to the termination of the Prior Senior Secured Cre dit Facilities, we repaid all outstanding obligations.

As a result, no amounts remain outstanding under the Prior Senior Secured Credit Facilities.

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We expect these activities will be funded from existing cash, cash flow from operations and, if necessary, borrowings under our existing or future credit facilities or other debt.

We have deemed that foreign earnings will be indefinitely reinvested and therefore we have not

provided taxes on these earnings.

We have deemed that foreign earnings will be indefinitely reinvested and therefore we have not provided taxes on these earnings.

While we do not anticipate the need to repatriate these foreign earnings for liquidity purposes given our cash flows from operations and available borrowings under existing and future credit facilities, we would incur taxes on these earnings if the need for repatriation due to liquidity purposes arises.

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Net cash flows provided by operating activities were $258.7 million for the year ended December 31, 2020 consisting of net income of $145.4 million.

Adjustments to reconcile net income to net cash provided by operating activities were $65.9 million, primarily related to amortization of intangibles of $14.8 million, depreciation of $8.4 million, stock based compensation expense of $20.7 million, deferred income tax provision of $10.1 million, and noncash lease expense of $9.9 million.

Changes in operating assets and liabilities provided $35.6 million in operating cash flows and were primarily driven by increased accrued expenses of $21.8 million and increased advanced billings of $44.6 million, offset by increased accounts receivable and unbilled, net of $21.3 million.

Net cash flows provided by operating activities were $156.6 million for the year ended December 31, 2018 consisting of net income of $73.2 million.

Adjustments to reconcile net income to net cash provided by operating activities were $43.8 million, primarily related to amortization of intangibles of $29.6 million, depreciation of $9.2 million, stock based compensation expense of $6.5 million, and deferred income tax provision of $3.9 million, offset by $7.7 million of amortization and adjustment of deferred credit.

Changes in operating assets and liabilities provided $39.6 million in operating cash flows and were primarily driven by increased accrued expenses of $29.0 million and increased advanced billings of $35.6 million, offset by increased accounts receivable and unbilled, net of $27.0 million.

Adjustments to reconcile net income to net cash provided by operating activities were $47.0 million, primarily related to noncash lease expense of $13.9 million, stock based compensation expense of $13.8 million, depreciation of $11.7 million, amortization of intangibles of $7.9 million, and deferred income tax provision of $0.5 million.

Changes in operating assets and liabilities provided $66.3 million in operating cash flows and were primarily driven by increased advanced billings of $63.4 million and increased accrued expenses of $24.2 million, offset by decreased lease liabilities of $11.5 million and increased accounts receivable and unbilled, net of $5.5 million.

Net cash flows provided by operating activities were $201.9 million for the year ended December 31, 2019 consisting of net income of $100.4 million.

Adjustments to reconcile net income to net cash provided by operating activities were $65.9 million, primarily related to stock based compensation expense of $20.7 million, amortization of intangibles of $14.8 million, deferred income tax provision of $10.1 million, noncash lease expense of $9.9 million, and depreciation of $8.4 million.

Changes in operating assets and liabilities provided $35.6 million in operating cash flows and were primarily driven by increased advanced billings of $44.6 million and increased accrued expenses of $21.8 million, offset by increased accounts receivable and unbilled, net of $21.3 million .

Net cash flows provided by operating activities were $156.6 million for the year ended December 31, 2018 c onsisting of net income of $73.2 million.

Changes in operating assets and liabilities provided $12.9 million in operating cash flows and were primarily driven by increased accounts payable of $4.8 million, increased advanced billings of $7.7 million, and increased pre-funded study costs of $5.3 million, offset by increased prepaid expenses and other current assets of $3.5 million.

Changes in operating assets and liabilities provided $39.6 million in operating cash flows and were primarily driven by increased advanced billings of $35.6 million and increased accrued expenses of $29.0 million, offset by increased accounts receivable and unbilled, net of $27.0 million .

Cash Flow from Investing Activities

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Cash Flow from Financing Activities

Net cash used in financing activities was $73.9 million in the year ended December 31, 2019, primarily related to $80.4 million in principal payments on our Prior Senior Secured Term Loan Facility, offset by $6.5 million in proceeds from stock option exercises.

Net cash used in financing activities was $82.3 million in the year ended December 31, 2020, primarily related to $98.3 million in repurchases of common stock, offset by proceeds from stock options exercises of $16.0 million.

Net cash used in financing activities was $73.9 million in the year ended December 31, 2019, primarily related to $80.4 million in principal payments on our Prior Senior Secured Term Loan Facility, offset by proceeds from stock options exercises of $6.5 million.

Net cash used in financing activities was $141.6 million in the year ended December 31, 2018, primarily related to $72.2 million in principal payments on our Prior Senior Secured Term Loan Facility and $70.0 million in principal payments on our Prior Senior Secured Revolving Credit Facility .

Net cash used in financing activities was $97.8 million in the year ended December 31, 2017, primarily related to $155.6 million in repurchases of common stock and $42.4 million in payments on our Prior Senior Secured Credit Facilities, offset by $100.0 million in proceeds from the Prior Senior Secured Revolving Credit Facility.

Share Repurchases

In November 2017, the Board members who are not affiliated with Cinven (the “Disinterested Directors”) approved an agreement to repurchase 2,000,000 shares of the Company’s common stock from Cinven in connection with a Secondary Offering (as described in Note 1 of the Notes to the Consolidated Financial Statements) for aggregate consideration of approximately $60.3 million, representing a purchase price of $30.16 per share.

The Company funded the repurchase with approximately $60.0 million in borrowings under the Prior Senior Secured Revolving Credit Facility and cash on hand.

In August 2017, the Disinterested Directors of the Company approved a stock repurchase agreement with Medpace Limited Partnership, a Guernsey limited partnership (the “Limited Partnership” acting through its general partner, Medpace GP Limited, a Guernsey company, the “General Partner” and, the Limited Partnership acting through the General Partner, “Cinven”), pursuant to which the Company repurchased 2,000,000 shares of the Company’s common stock from Cinven for aggregate consideration of approximately $60.5 million, representing a purchase price of $30.27 per share.

The Company funded the repurchase with cash on hand and $40.0 million in borrowings under our Prior Senior Secured Revolving Credit Facility.

In April 2017, the Board of the Company authorized a share repurchase program with an authorized repurchase level of $50.0 million.

The share repurchase program was cancelled in the fourth quarter of 2017.

Repurchases under the repurchase program took place in the open market or negotiated transactions, at the discretion of the Company’s management.

During the year ended December 31, 2017, the Company repurchased 1,342,786 shares of its outstanding common stock for $34.7 million under this share repurchase program.

The Company has elected to constructively retire all repurchased shares with all amounts paid in excess of Common stock par value reflected within Accumulated deficit in the Company’s consolidated balance sheets, except for 200,000 shares, which are reflected within treasury stock in the Company’s consolidated balance sheets.

In the first quarter of 2018, the Board of the Company authorized a share repurchase program with an authorized repurchase level of $50.0 million.

There have been no share repurchases under this program.

On September 30, 2019 (the “Closing Date”), Medpace Inc., as borrower (the “Borrower”), and Medpace IntermediateCo, Inc., a wholly-owned subsidiary of the Company, as guarantor (the “Guarantor”), entered into the new loan agreement (the “Loan Agreement”), which provides for a new unsecured credit facility (the “Credit Facility”) in an aggregate principal amount up to $50.0 million .

In the first quarter of 2018, the Board of Directors approved a share repurchase program authorizing up to $50.0 million in share repurchases.

In the first quarter of 2020, the Board of Directors approved an increase in the stock repurchase authorization by $50.0 million.

In the fourth quarter of 2020, the Board approved the stock repurchase authorization up to $150.0 million.

For the year ended December 31, 2020, the Company repurchased 1,183,095 shares for $98.3 million.

As of December 31, 2020, we have remaining authorization of $102.6 million remaining under the repurchases program.

Repurchases under the share repurchase program are executed in the open market or negotiated transactions under trading plans established pursuant to Rule 10b5-1.

The Company constructively retired the repurchased shares associated with these approved share repurchase programs, with all amounts paid in excess of par value reflected within Retained earnings in the Company’s consolidated balance sheets.

The repurchase program may be suspended or discontinued at any time without notice.

On September 30, 2019 (the “Closing Date”), Medpace Inc., as borrower (the “Borrower”), and Medpace IntermediateCo, Inc., a wholly-owned subsidiary of the Company, as guarantor (the “Guarantor”), entered into the new loan agreement (the “Loan Agreement”), which provides for an unsecured credit facility (the “Credit Facility”) in an aggregate principal amount up to $50.0 million .

The Credit Facility provides that outstanding balances will bear interest at a rate of LIBOR plus 100 basis points (1.00%).

The Loan Agreement also provides that the Credit Facility will expire in 364 days from the Closing Date.

The Credit Facility replaced the Prior Senior Secured Term Loan Facility of $165.0 million and the Prior Senior Secured Revolving Credit Facility of $150.0 million, which were set to expire in December 2021.

In relation to the termination of the Prior Senior Secured Credit Facilities, we repaid all outstanding obligations.

As a result, no amounts remain outstanding under the Prior Senior Secured Credit Facilities.

On March 30, 2020, the Company amended the credit facility to extend its expiration date to March 31, 2021 and add provisions for alternative interest rates when certain interbank market offered rates are not available.

The Credit Facility is guaranteed by the Guarantor and its material, direct or indirect wholly owned domestic subsidiaries, with certain exceptions, including where providing such guarantees is not permitted by law, regulation or contract or would result in adverse tax consequences.

All of the obligations under the Credit Facility are unsecured.

As of December 31, 2019, there were no borrowings outstanding under the Credit Facility.

The Credit Facility provides that outstanding balances will bear interest at a rate of LIBOR plus 100 basis points (1.00%).

The Credit Facility is subject to customary negative covenants.

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We have various contractual obligations, which are recorded as liabilities in our consolidated financial statements.

Other items, such as operating lease obligations, are not recognized as liabilities in our consolidated financial statements but are required to be disclosed.

Other items are not recognized as liabilities in our consolidated financial statements but are required to be disclosed.

The following table summarizes our future payments for all contractual obligations and commercial commitments for the years subsequent to the year ended December 31, 2020:

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We have recorded a tax liability for unrecognized benefits for uncertain tax positions of $8.6 million, which has not been included in the above table due to the uncertainties in the timing of settlement of the income tax positions.

We are a party to certain vendor contracts related to clinical services that if cancelled may require payments for services performed and potentially additional services required to protect safety of subjects.

The value of these potential wind-down provisions is generally borne by our customers and is not practical to estimate.

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We have no off-balance sheet arrangements.

Jumpstart our Business Startups Act of 2012

As of the year ended December 31, 2019, we ceased to be an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, since the market value of our common stock held by non-affiliates exceeded $700 million as of June 30, 2019.

As a result, beginning with this Annual Report on Form 10-K for the year ended December 31, 2019, we are subject to Section 404(b) of the Sarbanes-Oxley Act, which requires that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting, included herein.

Critical Accounting Policies and Estimates

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Final settlement amounts are agreed to with the customer based on remaining work to be performed.

These amounts are included in revenue when we believe the amount can be estimated reliably and its realization is probable.

These amounts are included in revenue when we believe the amount can be estimated reliably an d its realization is probable.

In evaluating the probability of recognition, we consider the contractual basis for the settlement amount and the objective evidence available to support the amount.

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These relate to certain unitized contracts, and the Company recognizes revenue in the period in which the unit is delivered compared to total contracted units.

Lease Recognition

The Company enters into contracts to lease facilities and equipment to be used in its operations.

At contract inception, the Company determines whether a contract contains a lease within the scope of Accounting Standard Codification Topic 842, Leases (“ASC 842”), and determines the appropriate classification of the lease as either operating or finance.

Contracts containing operating leas es are recorded on the consolidated balance sheets within Operating lease right-of-use (“ROU”) assets, Other current liabilities, and Operating lease liabilities.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future lease payments over the lease term as of the lease commencement date.

In addition , operating ROU assets also include lease payments made and exclude lease incentives and initial direct costs incurred.

Operating lease expense for lease payments is recognized on a straight-line basis over the lease term within Total direct costs and Selling, general, and administrative expenses.

Variable lease costs are primarily related to adjustments for inflation, common area maintenance and property tax and are recognized within Total direct costs and Selling, general and administrative expenses.

Contracts containing finance leases are recognized initially in the same manner as Operating lease ROU assets and liabilities;

however, they are recorded on the consolidated balance sheets within Property and equipment, net, Other current liabilities, and Other long-term liabilities.

Finance lease assets are subsequently amortized on a straight line basis over the lease term within Depreciation expense, while the lease liability is accreted within Interest expense, net utilizing the discount rate determined at lease commencement and reduced by periodic lease payments over the lease term.

Currently, the Company does not have any finance leases.

The discount rate utilized in determining the present value of future payments for both operating and finance leases, unless implicit in the lease contract, is determined based on the Company’s collateralized incremental borrowing rate based on the information available at lease commencement.

Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option as determined at lease commencement.

Many of our lease agreements have both lease and non-lease components, which the Company has elected to treat as a single lease component for recognition purposes.

The Company may enter into short-term leases (leases with a lease term of less than one year), which it has elected not to capitalize as assets and liabilities on the consolidated balance sheets, but instead recognizes lease payments within Total direct costs and Selling, general, and administrative expenses on a straight line basis over the lease term.

Goodwill and Intangible Assets

Goodwill represents the excess of purchase price over the fair value of net assets acquired in business combinations.

Our reporting units are Phase I-IV clinical research services, or Phase I-IV and Laboratories.

The carrying value of goodwill is reviewed at least annually for impairment, or as indicators of potential impairment are identified, at the reporting unit level.

We perform our annual goodwill impairment test during the fourth quarter each year, comparing the fair value of each of our reporting units with its carrying amount, inclusive of goodwill.

A goodwill impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.

Reporting unit fair value is estimated using a combination of the income approach, a discounted cash flow analysis, and the market approach, utilizing the guideline company method.

The reporting unit’s discounted cash flow analysis requires significant management judgment with respect to net revenue, total direct costs and amortization, selling, general and administrative expenses, capital expenditures and the selection and use of an appropriate discount rate.

The projected revenue and expense assumptions and capital expenditures are based on our annual and long-term business plans.

Discount rates reflect market-based estimates of the risks associated with the projected cash flows directly resulting from the use of those assets in operations.

There was no indication of impairment related to goodwill based on the fourth quarter 2019 assessment as the fair value of the reporting units was substantially in excess of carrying value.

This process is inherently subjective and dependent upon estimates and assumptions we make.

In determining our expected future cash flows, we assume that we will continue to acquire and convert new business to contract, execute on these contracts with reasonable profit, collect customer receivables and thus generate positive cash flows.

However, future declines in the operating results of these reporting units could indicate a need to reevaluate the fair value of these components under accounting guidance governing goodwill and may ultimately result in future impairment.

We continue to monitor for any potential indicators of impairment.

Intangible Assets

The Company has an indefinite lived intangible asset related to its trade name valued at $31.6 million.

The carrying value of the trade name asset is reviewed at least annually for impairment, or as indicators of potential impairment are identified.

The Company performs its annual impairment test in the fourth quarter each year in conjunction with its annual assessment of goodwill.

The assessment consists of comparing the carrying value of the indefinite lived intangible asset to its estimated fair value, utilizing the relief from royalty method, an income approach valuation.

The relief from royalty method requires management judgment with respect to projected net revenue, profitability and growth and the selection and use of an appropriate discount rate.

There was no indication of impairment related to the trade name asset based on the fourth quarter 2019 assessment.

Our assessment of impairment charges on any assets classified currently as having indefinite lives could change in future periods if certain events were to occur, including, but not limited to, the following:

a significant change in business results, an increase in our discount rates due to a change in our weighted average cost of capital, a decrease in growth rates, economic deterioration that is more severe or longer in duration than anticipated or another significant economic event.

Finite-lived intangible assets consist mainly of the value assigned to customer relationships and developed technologies.

Finite-lived intangible assets are amortized straight-line or using an accelerated method over their estimated useful lives, which range in term from 5 to 15 years.

Amortization expense recognized related to finite lived intangible assets was $14.8 million, $29.6 million and $37.9 million, respectively, for the years ended December 31, 2019, 2018 and 2017.

We are subject to income taxes in the United States and numerous foreign jurisdictions.

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The assessment of recoverability is performed on a jurisdiction by jurisdiction basis.

Based on the analysis of the above factors, we determined that as of December 31, 2019 and 2018 a valuation allowance in the amount of $0.8 million and $0.2 million, respectively, was required relating to certain foreign operating loss carryforwards, and other deferred tax assets that are currently not expected to be realized.

Based on the analysis of the above factors, we determined that as of December 31, 2020 and 2019 a valuation

allowance in the amount of $ 0.6 million and $ 0.8 million, respectively, was required relating to certain foreign operating loss carryforwards, and other deferred tax assets that are currently not expected to be realized .

Differences in actual results compared to our estimates and changes in our assumptions could result in an adjustment to the valuation allowance in the future and would generally impact earnings or other comprehensive income depending on the nature of the respective deferred asset for which the valuation allowance exists.

37 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis