What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-27 compared with 2020-10-27 · 70 added, 103 removed, 153 unchanged (53% of the section changed)

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Actual results and the timing of events may differ materially from those indicated in such forward-looking statements.

Important factors that may cause such differences include, but are not limited to, those discussed under the “Forward-Looking Statements” below and “Risk Factors” in “Item 1A Risk Factors” of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as amended by our Quarterly Reports on Form 10-Q.

Forward-Looking Statements

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Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

For a further discussion of the risks relating to our business, see “Item 1A Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as amended by our Quarterly Reports on Form 10-Q and “Part II – Other Information, Item 1A Risk Factors” herein .

For a further discussion of the risks relating to our business, see “Item 1A Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and “Part II – Other Information, Item 1A Risk Factors” herein.

Business Overview

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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 (“CNS”), Antiviral and Anti-infective (“AVAI”), as well as therapeutic expertise in Medical Devices.

Our global platform includes approximately 3,400 employees across 39 countries as of September 30, 2020, providing our customers with broad access to diverse markets and patient populations as well as local regulatory expertise and market knowledge.

We focus on conducting clinical trials across all major therapeutic areas, with particular strength in Oncology, Metabolic Disease, Cardiology, Antiviral and Anti-infective (“AVAI”), Central Nervous System (“CNS”), as well as therapeutic expertise in Medical Devices.

Our global platform includes approximately 3,900 employees across 40 countries as of March 31, 2021, providing our customers with broad access to diverse markets and patient populations as well as local regulatory expertise and market knowledge.

How We Generate Revenue

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Our contracts can range in duration from a few months to several years.

These contracts are individually priced and negotiated based on the anticipated project scope, including the

complexity of the project and the performance risks inherent in the project.

These contracts are individually priced and negotiated based on the anticipated project scope, including the complexity of the project and the performance risks inherent in the project.

The majority of our contracts are structured with an upfront fee that is collected at the time of contract signing, and the balance of the fee is collected over the duration of the contract either through an arranged billing schedule or upon completion of certain performance targets or defined milestones.

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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.

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 of 15 years.

Income Tax Provision

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

Net new business awards were $315.4 million and $816.4 million for the three and nine months ended September 30, 2020, respectively.

Net new business awards were $285.4 million and $813.3 million for the three and nine months ended September 30, 2019, respectively.

Net new business awards were $356.2 million and $246.9 million for the three months ended March 31, 2021 and 2020, respectively.

Backlog represents anticipated future net revenue from net new business awards that have not commenced or are currently in process but not complete.

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dollar denominated backlog.

As of September 30, 2020, our backlog increased by $205.7 million, or 16.7%, to $1,434.4 million compared to $1,228.7 million as of September 30, 2019.

Included within backlog as of September 30, 2020 was approximately $710 million to $730 million that we expect to convert to net revenue over the next twelve months, with the remainder expected to convert to net revenue thereafter.

As of March 31, 2021, our backlog increased by $337.6 million, or 26.1%, to $1,631.8 million compared to $1,294.2 million as of March 31, 2020.

Included within backlog as of March 31, 2021 was approximately $850 million to $870 million that we expect to convert to net revenue over the next twelve months, with the remainder expected to convert to net revenue thereafter.

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

favorable foreign currency adjustments of $7.4 million for the three months ended September 30, 2020;

favorable foreign currency adjustments of $3.3 million for nine months ended September 30, 2020;

unfavorable foreign currency adjustments of $9.8 million for the three months ended September 30, 2019;

and unfavorable foreign currency adjustments of $12.4 million for the nine months ended September 30, 2019.

unfavorable foreign currency adjustments of $3.7 million for the three months ended March 31, 2021 and unfavorable foreign currency adjustments of $3.9 million for the three months ended March 31, 2020.

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.

C oronavirus (COVID-19)

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.

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

While we continue to operate globally, the pandemic continues to impact our business and the level of activity at each of our locations varies depending on the local governmental requirements and guidelines which continue to evolve and change.

Our office staff are either effectively working remotely or in the office, 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 continues to impact the operations at most of the investigative sites where patients in our clinical trials are recruited and treated.

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 has already had a significant adverse effect on the first three quarters of fiscal 2020 and we believe that the outbreak will have a continued adverse impact on our results of operations in the future.

In connection with this expected adverse impact, we have also 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, but the impact will likely be material.

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

Travel restrictions and business closures continue to impact study participants and clinical sites which affects our ability to efficiently provide clinical trial services.

We continue to work 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, including alternative assessment methods such as virtual monitoring visits.

While certain governments eased restrictions during the balance of 2020 and into 2021, the pandemic remains disruptive to our business operations.

As we look ahead, we continue to expect impacts to our business to be temporary and primarily relate to limitations on our ability to physically access investigative sites, delays in patient enrollment and trial start-up activities.

The COVID-19 outbreak had a significant adverse effect on our results of operations and we believe that the outbreak may have a continued adverse impact on our results of operations in the future.

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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dollars using the following average exchange rates based on data obtained from www.xe.com:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Dollars per Euro:

Results of Operations

Three Months Ended September 30, 2020 compared to Three Months Ended September 30, 2019

Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020

Three Months Ended

September 30,

(Amounts in thousands, except percentages)

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Income from operations

Miscellaneous income (expense), net

Interest expense, net

Income before income taxes

Income tax provision

Nine Months Ended September 30, 2020 compared to Nine Months Ended September 30, 2019

Nine Months Ended

September 30,

(Amounts in thousands, except percentages)

Direct service costs, excluding depreciation and amortization

Reimbursed out-of-pocket expenses

Total direct costs

Selling, general and administrative

Total operating expenses

Income from operations

Miscellaneous income (expense), net

Interest income (expense), net

Miscellaneous income, net

Interest (expense) income, net

Income before income taxes

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Total revenue

Total revenue increased by $14.1 million to $230.4 million for the three months ended September 30, 2020, from $216.2 million for the three months ended September 30, 2019.

Total revenue increased by $35.2 million to $666.2 million for the nine months ended September 30, 2020, from $631.1 million for the nine months ended September 30, 2019.

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

Total revenue increased by $29.1 million to $260.0 million for the three months ended March 31, 2021, from $230.9 million for the three months ended March 31, 2020.

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

Total direct costs

Total direct costs increased by $4.1 million to $156.2 million for the three months ended September 30, 2020 from $152.1 million for the three months ended September 30, 2019.

Total direct costs increased by $22.3 million to $470.4 million for the nine months ended September 30, 2020 from $448.1 million for the nine months ended September 30, 2019.

The increase was primarily attributed to higher personnel costs to support the growth in service activities, partially offset by lower reimbursed out-of-pocket expenses.

The higher personnel costs portion, including severance, increased by $6.4 million and $25.6 million for the three and nine months ended September 30, 2020, compared to the same period in the prior year.

Reimbursed out-of-pocket expenses, which can fluctuate significantly from period to period based on the timing of program initiation and closeout, decreased $2.3 million and $5.2 million for the three and nine months ended September 30, 2020, compared to the same period in the prior year.

Total direct costs increased by $15.7 million, to $181.5 million for the three months ended March 31, 2021 from $165.8 million for the three months ended March 31, 2020.

The increase was primarily attributed to higher reimbursed out-of-pocket expenses and higher personnel 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 program initiation and closeout, increased $3.1 million for the three months ended March 31, 2021, compared to the same period in the prior year.

The higher personnel costs portion increased by $8.7 million for the three months ended March 31, 2021, compared to the same period in the prior year.

Selling, general and administrative

Selling, general and administrative expenses decreased by $6.3 million to $22.8 million for the three months ended September 30, 2020 from $29.1 million for the three months ended September 30, 2019.

Selling, general and administrative expenses decreased by $4.2 million to $69.8 million for the nine months ended September 30, 2020 from $74.0 million for the nine months ended September 30, 2019.

Personnel costs, net of severance, decreased by $5.1 million and $2.4 million for the three and nine months ended September 30, 2020, compared to the same period in the prior year.

Selling, general and administrative expenses increased by $0.6 million, to $25.7 million for the three months ended March 31, 2021 from $25.1 million for the three months ended March 31, 2020.

This increase was primarily driven by higher personnel costs.

The higher personnel costs portion increased by $0.8 million for the three months ended March 31, 2021, compared to the same period in the prior year.

Depreciation and Amortization

Depreciation and amortization expense decreased by $0.1 million to $4.9 million for the three months ended September 30, 2020 from $5.1 million for the three months ended September 30, 2019.

Depreciation and amortization expense decreased by $3.8 million to $14.0 million for the nine months ended September 30, 2020 from $17.9 million for the nine months ended September 30, 2019.

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

Miscellaneous income ( expense ) , net

Miscellaneous income (expense), net increased by $0.9 million to $0.6 million of income for the three months ended September 30, 2020 from $0.3 million of expense for the three months ended September 30, 2019.

Miscellaneous income (expense), net increased by $2.0 million to $1.4 million of income for the nine months ended September 30, 2020 from $0.6 million of expense for the nine months ended September 30, 2019.

Depreciation and amortization expense increased by $0.6 million, to $5.1 million for the three months ended March 31, 2021 from $4.5 million for the three months ended March 31, 2020.

The increase in depreciation and amortization was primarily related to increased depreciation related to Property and equipment, net.

Miscellaneous income, net

Miscellaneous income, net increased by $0.3 million to $0.9 million of income for the three months ended March 31, 2021 from $0.6 million of income for the three months ended March 31, 2020.

These changes were mainly attributable to foreign exchange gains or losses that arise in connection with the revaluation of short-term intercompany 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 income (expense), net

Interest income (expense), net increased by $0.2 million of income to $0.0 million of expense for the three months ended September 30, 2020 from $0.3 million of expense for the three months ended September 30, 2019.

Interest income (expense), net increased by $2.3 million of income to $0.3 million of income for the nine months ended September 30, 2020 from $2.0 million of expense for the nine months ended September 30, 2019.

The increase in interest income (expense), net was related to a lower average outstanding balance under our credit facility.

Interest (expense) income, net

Interest (expense) income, net decreased by $0.3 million to $0.0 million of expense for the three months ended March 31, 2021 from $0.4 million of income for the three months ended March 31, 2020.

Income tax provision

Income tax provision was unchanged at $5.5 million for the three months ended September 30, 2020 and 2019, respectively.

The overall effective tax rate for the three months ended September 30, 2020 was 11.8%, compared to an overall effective tax rate of 18.6% for the three months ended September 30, 2019.

The decrease in the effective tax rate was primarily attributable to an increase in excess tax benefits recognized from share-based compensation compared to the same period in the prior year and an increase in tax benefits related to Foreign Derived Intangible Income (FDII).

Income tax provision increased by $1.3 million to $19.3 million for the nine months ended September 30, 2020 from $18.0 million for the nine months ended September 30, 2019.

The overall effective tax rate for the nine months ended September 30, 2020 was 17.0%, compared to an overall effective tax rate of 20.3% for the nine months ended September 30, 2019.

The increase in the income tax provision was primarily attributable to an increase in pre-tax book income, which was partially offset by an increase in excess tax benefits recognized from share-based compensation and an increase in tax benefits related to FDII.

The decrease in the overall effective tax rate primarily relates to an increase in excess tax benefits recognized from share-based compensation and an increase in tax benefits related to FDII compared to the same period in the prior year.

Income tax provision decreased by $2.3 million, to $5.2 million for the three months ended March 31, 2021 from $7.5 million for the three months ended March 31, 2020.

The overall effective tax rate for the three months ended March 31, 2021 was 10.7%, compared to an overall effective tax rate of 20.6% for the three months ended March 31, 2020.

The decrease in the income tax provision and overall effective tax rate was primarily attributable to an increase in tax benefits related to Foreign Derived Intangible Income (FDII) and an increase in excess tax benefits recognized from share-based compensation compared to the same period in the prior year.

Liquidity and Capital Resources

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Our principal sources of liquidity are operating cash flows and funds available for borrowing under our unsecured credit facility consisting of up to a $50.0 million revolving line of credit which we entered into on September 30, 2019 (the “Credit Facility”).

As of September 30, 2020, we had cash and cash equivalents of $219.2 million.

Approximately $26.9 million of cash and cash equivalents, none of which was restricted, was held by our foreign subsidiaries as of September 30, 2020.

On March 30, 2020, we extended the expiration date of the Credit Facility to March 31, 2021 and added provisions for alternative interest rates when certain interbank market offered rates are not available.

As of September 30, 2020, we had $49.8 million available for borrowing under the Credit Facility.

As of March 31, 2021, we had cash and cash equivalents of $332.9 million.

Approximately $26.6 million of cash and cash equivalents, none of which was restricted, was held by our foreign subsidiaries as of March 31, 2021.

On March 29, 2021, we extended the expiration date of the Credit Facility to March 31, 2022.

As of March 31, 2021, we had $49.8 million available for borrowing under the Credit Facility.

Our expected primary cash needs on both a short and long-term basis are for investment in operational growth, capital expenditures, share repurchases, selective strategic bolt-on acquisitions, other investments, and other general corporate needs.

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

Nine Months Ended

September 30,

Three Months Ended

Cash Flows (Amounts in thousands)

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Net cash used in investing activities

Net cash used in financing activities

Net cash provided by (used in) financing activities

Effect of exchange rates on cash, cash equivalents and restricted cash

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Cash Flow from Operating Activities

Cash flows from operations are driven mainly by net income, net movement in accounts receivable and unbilled, net, and accounts payable.

Cash flows from operations are driven mainly by net income, stock based compensation expense, amortization of intangibles and net movement in advanced billings, accrued expenses, prepaid expenses and other current assets, and accounts receivable and unbilled, net.

Accounts receivable and unbilled, net and advanced billings fluctuate on a regular basis as we perform our services, bill our customers and ultimately collect on those receivables.

We attempt to negotiate payment terms in order to provide for payments prior to or soon after the provision of services, but this timing of collection can vary significantly on a period by period comparative basis.

Net cash flows provided by operating activities was $153.2 million for the nine months ended September 30, 2020 beginning with net income of $94.5 million.

Adjustments to reconcile net income to net cash provided by operating activities were $41.1 million, primarily related to amortization of intangibles of $5.9 million, depreciation of $8.1 million, stock based compensation expense of $10.8 million, noncash lease expense of $10.0 million and deferred income tax provision of $6.9 million.

Changes in operating assets and liabilities provided $17.6 million in operating cash flows and was primarily driven by decreased accounts receivable and unbilled, net of $21.4 million and increased advanced billings of $10.4 million, offset by increased prepaid expenses and other current assets of $9.8 million.

Net cash flows provided by operating activities was $144.9 million for the nine months ended September 30, 2019 beginning with net income of $70.6 million.

Adjustments to reconcile net income to net cash provided by operating activities were $48.1 million, primarily related to amortization of intangibles of $11.8 million, depreciation of $6.0 million, stock based compensation expense of $18.0 million and noncash lease expense of $7.2 million.

Changes in operating assets and liabilities provided $26.2 million in operating cash flows and was primarily driven by increased advanced billings of $21.9 million and increased accrued expenses of $15.4 million, offset by increased prepaid expenses and other current assets of $9.0 million .

Net cash flows provided by operating activities was $57.3 million for the three months ended March 31, 2021 beginning with net income of $43.3 million.

Adjustments to reconcile net income to net cash provided by operating activities were $13.1 million, primarily related to noncash lease expense of $3.9 million, depreciation of $3.8 million, stock based compensation expense of $2.9 million and amortization of intangibles of $1.3 million.

Changes in operating assets and liabilities provided $0.9 million in operating cash flows and was primarily driven by increased advanced billings of $22.1 million, offset by decreased accrued expenses $10.0 million, increased prepaid expenses and other current assets of $6.1 and decreased lease liabilities of $3.2 million.

Net cash flows provided by operating activities was $49.1 million for the three months ended March 31, 2020 beginning with net income of $29.0 million.

Adjustments to reconcile net income to net cash provided by operating activities were $13.6 million, primarily related to stock based compensation expense of $5.4 million, noncash lease expense of $2.9 million, depreciation of $2.5 million and amortization of intangibles of $2.0 million.

Changes in operating assets and liabilities provided $6.5 million in operating cash flows and was primarily driven by decreased accounts receivable and unbilled, net of $19.3 million and a change in other assets and liabilities, net of $3.4 million, offset by decreased accounts payable of $6.8 million.

Cash Flow from Investing Activities

Net cash used in investing activities was $23.5 million for the nine months ended September 30, 2020 primarily consisting of property and equipment expenditures.

Net cash used in investing activities was $13.4 million for the nine months ended September 30, 2019 primarily consisting of property and equipment expenditures.

Net cash used in investing activities was $9.7 million for the three months ended March 31, 2021 primarily consisting of $6.5 million in property and equipment expenditures.

Net cash used in investing activities was $5.5 million for the three months ended March 31, 2020 primarily consisting of property and equipment expenditures.

Cash Flow from Financing Activities

Net cash used in financing activities was $42.1 million for the nine months ended September 30, 2020 primarily related to $50.8 million in repurchases of common stock, offset by proceeds from stock options exercises of $8.8 million.

Net cash used in financing activities was $74.8 million for the nine months ended September 30, 2019 primarily related to $80.4 million in principal payments on our Senior Secured Term Loan Facility, offset by proceeds from stock options exercises of $5.7 million.

Net cash provided by financing activities was $9.1 million for the three months ended March 31, 2021 primarily related to proceeds from stock option exercises.

Net cash used in financing activities was $40.4 million for the three months ended March 31, 2020 primarily related to $41.8 million in repurchases of common stock.

Share Repurchases

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 additional $50.0 million in share repurchases, bringing the total to $100.0 million authorized under the share repurchase program.

There were no share repurchases during the three months ended September 30, 2020.

During the nine months ended September 30, 2020, the Company repurchased 772,125 shares for $50.8 million.

As of September 30, 2020, $49.2 million remained available under the repurchase program authorization.

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 retires all repurchased shares with all amounts paid in excess of par value reflected within Retained earnings in the Company’s condensed consolidated balance sheets.

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.

During the quarter ended March 31, 2020, the Company repurchased 661,637 shares for $43.2 million.

As of March 31, 2021, we have remaining authorization of $102.6 million remaining under the repurchase program.

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

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

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

As of September 30, 2020, we had no indebtedness and $0.2 million in letters of credit outstanding related to certain operating lease obligations, which are secured by the Credit Facility.

As of March 31, 2021, we had no indebtedness and $0.2 million in letters of credit outstanding related to certain operating lease obligations, which are secured by the Credit Facility.

Refer to Note 7 of the Notes to Condensed Consolidated Financial Statements for details regarding our Credit Facility.

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Refer to Note 1 of the Condensed Consolidated Financial Statements for management’s discussion of the effect of recent accounting pronouncements.

Quantitative and Qualitat ive Disclosures About Market Risk

Other than the negative impact the recent outbreak of the coronavirus (COVID-19) has had and will continue to have on our business and results of operations as discussed elsewhere in this report, there have been no material changes to our quantitative and qualitative disclosures about market risk as compared to the quantitative and qualitative disclosures about market risk described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our quantitative and qualitative disclosures about market risk as compared to the quantitative and qualitative disclosures about market risk described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

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-Q

Item 2. Management’s Discussion and Analysis