What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-04-25 compared with 2022-10-25 · 49 added, 99 removed, 155 unchanged (49% of the section changed)

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financial position and performance;

the anticipated impact of the coronavirus COVID-19 pandemic on our business;

international risks including the conflict involving Russia, Ukraine and surrounding countries, respectively, on our business;

liquidity and our ability to fund our business operations and initiatives;

capital expenditure and debt service obligations;

business strategies, plans and goals, including those related to operations, marketing, acquisitions and expansion of our business;

business strategies, plans and goals, including those related to marketing, acquisitions and expansion of our business;

product approvals and plans;

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

Our global platform

includes approximately 5,000 employees across 40 countries as of September 30, 2022, providing our customers with broad access to diverse markets and patient populations as well as local regulatory expertise and market knowledge.

Our global platform includes approximately 5,400 employees across 40 countries as of March 31, 2023, 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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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 $470.9 million and $1,344.4 million for the three and nine months ended September 30, 2022, respectively.

Net new business awards were $408.0 million and $1,151.7 million for the three and nine months ended September 30, 2021, respectively.

Net new business awards were $555.8 million and $423.0 million for the three months ended March 31, 2023 and 2022, 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, 2022, our backlog increased by $386.4 million, or 20.9%, to $2,236.2 million compared to $1,849.8 million as of September 30, 2021.

Included within backlog as of September 30, 2022 was approximately $1,165.0 million to $1,175.0 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, 2023, our backlog increased by $372.1 million, or 17.8%, to $2,460.1 million compared to $2,088.0 million as of March 31, 2022.

Included within backlog as of March 31, 2023 was approximately $1,320.0 million to $1,340.0 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:

unfavorable foreign currency adjustments of $17.4 million for the three months ended September 30, 2022;

unfavorable foreign currency adjustments of $33.2 million for the nine months ended September 30, 2022;

unfavorable foreign currency adjustments of $3.5 million for the three months ended September 30, 2021;

and unfavorable foreign currency adjustments of $3.9 million for the nine months ended September 30, 2021.

favorable foreign currency adjustments of $3.0 million for the three months ended March 31, 2023 and favorable foreign currency adjustments of $1.2 million for the three months ended March 31, 2022.

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)

The COVID-19 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 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 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.

We are continuing along with the rest of the industry with a blend of on-site monitoring and remote based monitoring and we are using technology tools like e-PRO for patient reported outcomes, e-COA, for clinical outcome assessment, remote data capture and remote data review.

We are also leveraging internal service capabilities like patient concierge service to help facilitate patient travel to sites and master service agreements in place with strategic vendors for other patient services like home health.

While certain governments eased restrictions during 2021 and into the three and nine months ended September 30, 2022, 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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The Euro represents the largest foreign currency denomination of our contractual and operational exposure.

As a result, a portion of our revenue and expenses are subject to exchange rate fluctuations.

As a result, a portion of our revenue and

expenses are subject to exchange rate fluctuations.

We have translated the Euro into U.S.

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,

2022 2021 2022 2021

Three Months Ended March 31,

Dollars per Euro:

1.01 1.18 1.07 1.20

Results of Operations

Three Months Ended September 30, 2022 compared to Three Months Ended September 30, 2021

Three Months Ended September 30,

(Amounts in thousands, except percentages) 2022 2021 Change

Revenue, net $ 383,744 $ 295,567 $ 88,177 29.8 %

Direct service costs, excluding depreciation and amortization 136,648 112,540 24,108 21.4 %

Reimbursed out-of-pocket expenses 128,062 95,934 32,128 33.5 %

Total direct costs 264,710 208,474 56,236 27.0 %

Selling, general and administrative 35,418 28,046 7,372 26.3 %

Depreciation 4,951 4,056 895 22.1 %

Amortization 838 1,278 (440) (34.4) %

Total operating expenses 305,917 241,854 64,063 26.5 %

Income from operations 77,827 53,713 24,114

Miscellaneous income, net 5,649 1,064 4,585

Interest expense, net (1,584) (41) (1,543)

Income before income taxes 81,892 54,736 27,156

Income tax provision 15,865 6,162 9,703

Net income $ 66,027 $ 48,574 $ 17,453

Nine Months Ended September 30, 2022 compared to Nine Months Ended September 30, 2021

Nine Months Ended September 30,

Three Months Ended March 31, 2023 compared to Three Months Ended March 31, 2022

Three Months Ended March 31,

(Amounts in thousands, except percentages) 2023 2022 Change

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Miscellaneous income, net 687 1,067 (380)

Interest expense, net (2,078) (82) (1,996)

Interest (expense) income, net (861) 54 (915)

Income before income taxes 86,030 65,324 20,706

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Total revenue

Total revenue increased by $88.2 million to $383.7 million for the three months ended September 30, 2022, from $295.6 million for the three months ended September 30, 2021.

Total revenue increased by $232.1 million to $1,065.9 million for the nine months ended September 30, 2022, from $833.8 million for the nine months ended September 30, 2021.

The increase for the three and nine months ended September 30, 2022 was primarily driven by growth within the Oncology, Metabolic, Cardiology and Central Nervous System therapeutic areas, compared to the same period in the prior year.

Total revenue increased by $103.1 million to $434.1 million for the three months ended March 31, 2023, from $330.9 million for the three months ended March 31, 2022.

The increase for the three months ended March 31, 2023 was primarily driven by growth within the Oncology, Metabolic, Cardiology and other therapeutic areas, compared to the same period in the prior year.

Total direct costs

Total direct costs increased by $56.2 million, to $264.7 million for the three months ended September 30, 2022 from $208.5 million for the three months ended September 30, 2021.

Total direct costs increased by $155.5 million, to $749.2 million for the nine months ended September 30, 2022 from $593.7 million for the nine months ended September 30, 2021.

Total direct costs increased by $71.6 million, to $303.9 million for the three months ended March 31, 2023 from $232.3 million for the three months ended March 31, 2022.

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 $32.1 million and $83.5 million for the three and nine months ended September 30, 2022, compared to the same period in the prior year.

The higher personnel costs portion increased by $18.1 million and $59.4 million for the three and nine months ended September 30, 2022, compared to the same periods 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, increased $46.0 million for the three months ended March 31, 2023, compared to the same period in the prior year.

The higher personnel costs portion increased by $19.5 million for the three months ended March 31, 2023, compared to the same periods in the prior year.

Selling, general and administrative

Selling, general and administrative expenses increased by $7.4 million, to $35.4 million for the three months ended September 30, 2022 from $28.0 million for the three months ended September 30, 2021.

Selling, general and administrative expenses increased by $17.2 million, to $98.0 million for the nine months ended September 30, 2022 from $80.8 million for the nine months ended September 30, 2021.

Selling, general and administrative expenses increased by $8.7 million, to $38.0 million for the three months ended March 31, 2023 from $29.4 million for the three months ended March 31, 2022.

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

The higher personnel costs portion increased by $4.8 million and $13.5 million for the three and nine months ended September 30, 2022, compared to the same periods in the prior year.

The higher personnel costs portion increased by $4.9 million for the three months ended March 31, 2023, compared to the same periods in the prior year.

Depreciation and Amortization

Depreciation and amortization expense of $5.8 million and $16.4 million for the three and nine months ended September 30, 2022 remained relatively consistent with $5.3 million and $15.7 million for the three and nine months ended September 30, 2021.

Depreciation and amortization expense of $6.0 million for the three months ended March 31, 2023 remained relatively consistent with $5.1 million for the three months ended March 31, 2022.

Miscellaneous income, net

Miscellaneous income, net increased by $4.6 million to $5.6 million for the three months ended September 30, 2022 from $1.1 million for the three months ended September 30, 2021.

Miscellaneous income, net increased by $6.8 million to $9.0 for the nine months ended September 30, 2022 from $2.3 million for the nine months ended September 30, 2021.

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 and 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.

Miscellaneous income, net decreased by $0.4 million to $0.7 million for the three months ended March 31, 2023 from $1.1 million for the three months ended March 31, 2022.

These changes were mainly attributable to foreign exchange gains and losses that arise in connection with the revaluation of short-term intercompany balances between our domestic and international subsidiaries and 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.

Income tax provision

Income tax provision increased by $9.7 million, to $15.9 million for the three months ended September 30, 2022 from $6.2 million for the three months ended September 30, 2021.

Income tax provision increased by $18.4 million, to $32.5 million for the nine months ended September 30, 2022 from $14.1 million for the nine months ended September 30, 2021.

The overall effective tax rate for the three months ended September 30, 2022 was 19.4%, compared to an overall effective tax rate of 11.3% for the three months ended September 30, 2021.

The overall effective tax rate for the nine months ended September 30, 2022 was 15.5% compared to an overall effective tax rate of 9.7% for the nine months ended September 30, 2021.

The increase in the income tax provision and overall effective tax rate was primarily attributable to the increase in pre-tax book income and a decrease in excess tax benefits recognized from share based compensation which was partially offset by an increase in benefits from uncertain tax positions compared to the same periods in the prior year.

Income tax provision increased by $9.1 million, to $13.1 million for the three months ended March 31, 2023 from $4.0 million for the three months ended March 31, 2022.

The overall effective tax rate for the three months ended March 31, 2023 was 15.3%, compared to an overall effective tax rate of 6.1% for the three months ended March 31, 2022.

The increase in the income tax provision and overall effective tax rate was primarily attributable to the increase in pre-tax book income and a decrease in excess tax benefits recognized from share based compensation and benefits from uncertain tax positions compared to the same periods in the prior year.

Liquidity and Capital Resources

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Our principal sources of liquidity are operating cash flows and from borrowings under our unsecured credit facility consisting of up to a $150.0 million revolving line of credit which we entered into on September 30, 2019 (the “Credit Facility”), and has subsequently been amended.

As of September 30, 2022, we had cash and cash equivalents of $31.0 million which decreased from $461.3 million as of December 31, 2021 primarily due to share repurchases during the nine months ended September 30, 2022.

Approximately $5.3 million of cash and cash equivalents, none of which was restricted, was held by our foreign subsidiaries as of September 30, 2022.

As of September 30, 2022, we had $110.1 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, credit facility

repayments, share repurchases, selective strategic bolt-on acquisitions, other investments, and other general corporate needs.

As of March 31, 2023, we had cash and cash equivalents of $46.9 million which increased from $28.3 million as of December 31, 2022.

Approximately $15.6 million of cash and cash equivalents, none of which was restricted, was held by our foreign subsidiaries as of March 31, 2023.

As of March 31, 2023, we had $34.8 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, credit facility repayments, share repurchases, selective strategic bolt-on acquisitions, other investments, and other general corporate needs.

We have historically funded our operations and growth with cash flow from operations and borrowings under our credit facilities.

We expect to continue expanding our operations through organic growth and potentially highly selective bolt-on acquisitions and investments.

As of September 30, 2022, cash commitments to support operating business needs include lease liabilities discussed in Note 8 of the Condensed Consolidated Financial Statements, purchase commitments discussed in Note 11 of the Condensed Consolidated Financial Statements and capital expenditures primarily related to infrastructure investments in our facilities, equipment and technology.

Capital spending as a percentage of revenue increased by 30 basis points to 2.59% in the nine months ended September 30, 2022, compared to the same period in the prior year.

As of March 31, 2023, cash commitments to support operating business needs include lease liabilities discussed in Note 8 of the Condensed Consolidated Financial Statements, short-term debt discussed in Note 7 of the Condensed Consolidated Financial Statements, purchase commitments discussed in Note 11 of the Condensed Consolidated Financial Statements and capital expenditures primarily related to infrastructure investments in our facilities, equipment and technology.

Capital spending as a percentage of revenue decreased by 61 basis points to 2.19% in the three months ended March 31, 2023, compared to the same period in the prior year.

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.

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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 borrowings 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 March 31,

Cash Flows (Amounts in thousands) 2023 2022

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Effect of exchange rates on cash, cash equivalents and restricted cash 767 (1,426)

(Decrease) increase in cash, cash equivalents and restricted cash $ (430,297) $ 120,621

Increase (decrease) in cash, cash equivalents and restricted cash $ 18,657 $ (378,461)

Cash Flow from Operating Activities

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

Cash flows from operations are driven mainly by net income, stock-based compensation expense, noncash lease expense, depreciation, and net movement in advanced billings, accrued expenses 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 $251.4 million for the nine months ended September 30, 2022 beginning with net income of $176.7 million.

Net cash flows provided by operating activities was $80.1 million for the three months ended March 31, 2023 beginning with net income of $72.9 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, depreciation of $5.4 million and noncash lease expense of $4.8 million.

Changes in operating assets and liabilities provided $31.4 million in operating cash flows and was primarily driven by increased advanced billings of 73.3 million and increased accrued expenses of 47.8 million, offset by increased accounts receivable and unbilled, net of 62.4 million and increased prepaid expenses and other current assets of 17.4 million.

Net cash flows provided by operating activities was $192.4 million for the nine months ended September 30, 2021 beginning with net income of $131.8 million.

Adjustments to reconcile net income to net cash provided by operating activities were $41.0 million, primarily related to noncash lease expense of $11.9 million, depreciation of $11.8 million, stock based compensation expense of $10.5 million and amortization of intangibles of $3.8 million.

Changes in operating assets and liabilities provided $19.6 million in operating cash flows and was primarily driven by increased advanced billings of $48.2 million and increased accrued expenses of $24.7 million, offset by increased accounts receivable and unbilled, net of $25.0 million and increased prepaid expenses and other current assets of $22.0 million.

Changes in operating assets and liabilities used $6.5 million in operating cash flows and was primarily driven by increased prepaid expenses and other current assets of 10.2 million, decreased accrued expenses of 9.4 million and decreased lease liabilities of $5.3 million, offset by increased other assets and liabilities, net of $15.0 million and increased accounts payable of $4.5 million.

Net cash flows provided by operating activities was $46.3 million for the three months ended March 31, 2022 beginning with net income of $61.3 million.

Adjustments to reconcile net income to net cash provided by operating activities were $12.9 million, primarily related to noncash lease expense of $4.5 million, stock based compensation expense of $4.4 million and depreciation of $4.3 million.

Changes in operating assets and liabilities used $27.9 million in operating cash flows and was primarily driven by increased by increased accounts receivable and unbilled, net of $38.2 million and increased prepaid expenses and other current assets of $5.5 million, offset by increased advanced billings of $22.6 million.

Cash Flow from Investing Activities

Net cash used in investing activities was $29.5 million for the nine months ended September 30, 2022 primarily consisting of $27.6 million in property and equipment expenditures.

Net cash used in investing activities was $22.2 million for the nine months ended September 30, 2021 primarily consisting of $19.2 million in property and equipment expenditures.

Net cash used in investing activities was $9.5 million for the three months ended March 31, 2023 primarily consisting of property and equipment expenditures.

Net cash used in investing activities was $11.2 million for the three months ended March 31, 2022 primarily consisting of 9.3 million in property and equipment expenditures.

Cash Flow from Financing Activities

Net cash used in financing activities was $644.7 million for the nine months ended September 30, 2022 primarily related to $800.7 million in repurchases of common stock and $159.5 million in repayments of the Credit Facility, partially offset by 299.2 million in proceeds related to the Credit Facility and $16.3 million in proceeds from stock option exercises.

Net cash used in financing activities was $46.9 million for the nine months ended September 30, 2021 primarily related to $62.1 million in repurchases of common stock, partially offset by $15.2 million in proceeds from stock option exercises.

Net cash used in financing activities was $52.7 million for the three months ended March 31, 2023 primarily related to $120.1 million in repurchases of common stock and $25.0 million in repayments of the Credit Facility, partially offset by 90.0 million in proceeds related to the Credit Facility and $2.5 million in proceeds from stock option exercises.

Net cash used in financing activities was $412.1 million for the three months ended March 31, 2022, primarily related to $426.0 million in repurchases of common stock, partially offset by $13.9 million in proceeds from stock option exercises.

Share Repurchases

In the second quarter of 2021, the Board approved an increase of $150.0 million to the Company's stock repurchase program bringing the total repurchase authorization up to $300.0 million.

In the first quarter of 2022, the Board approved additional increases totaling $500.0 million to the Company's stock repurchase program.

In the second quarter of 2022, the Board approved further increases of $110.0 million to the Company's stock repurchase program.

During the nine months ended September 30, 2022, the Company repurchased 5,463,244 shares for $800.5 million.

During the three and nine months ended September 30, 2021, the Company repurchased 34,624 and 377,783 shares for $5.9 million and $62.1 million, respectively.

As of September 30, 2022, the Company has completed all authorized share repurchases under the repurchase program.

In 2018, the Board of Directors approved a stock repurchase program which has been amended several times to increase the aggregate amount of the stock repurchase authorization.

During the three months ended March 31, 2022, the Company repurchased 2,745,865 shares for $425.9 million.

In the fourth quarter of 2022, the Board approved a new stock repurchase program of up to $500.0 million.

During the three months ended March 31, 2023, the Company repurchased 654,787 shares for $120.1 million.

As of March 31, 2023, we have remaining authorization of $332.7 million under the new 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.

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Retired share repurchase amounts paid in excess of par value are reflected within Accumulated deficit/Retained earnings in the Company’s condensed consolidated balance sheets.

As of September 30, 2022, we had total indebtedness of 139.7 million 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, 2023, we had total indebtedness of 115.0 million 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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There have been no significant changes in the critical accounting policies and estimates as previously described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Effect of Recent Accounting Pronouncements

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

Quantitative and Qualitative Disclosures About Market Risk

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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