What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-13 compared with 2023-02-14 · 47 added, 39 removed, 247 unchanged (26% of the section changed)

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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 to provide an understanding of our results of operations, financial condition and cash flows.

This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.

This section of this Form 10-K

generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022.

For a comparison of our results of operations for the fiscal years ended December 31, 2022 and December 31, 2021, see “Part II, Item 7.

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We believe this combination results in timely and cost-effective delivery of clinical development services for our customers.

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 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 Oncology, Metabolic Disease, Cardiology, Central Nervous System, or CNS, and Antiviral and Anti-infective, or AVAI.

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The majority of our customers can terminate our contracts without cause upon 30 days’ notice.

Similar to new business awards, the number and amount of cancellations can vary significantly period over period due to timing of customer correspondence and study-specific circumstances.

Similar to new business awards,

the number and amount of cancellations can vary significantly period over period due to timing of customer correspondence and study-specific circumstances.

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

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

unfavorable foreign currency adjustments of $19.1 million for the year ended December 31, 2022 and unfavorable foreign currency adjustments of $5.5 million for the year ended December 31, 2021.

favorable foreign currency adjustments of $14.6 million for the year ended December 31, 2023 and unfavorable foreign currency adjustments of $19.1 million for the year ended December 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.

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Income from operations 336,825 278,697 58,128

Miscellaneous income, net 7,068 3,342 3,726

Interest (expense) income, net (2,905) (105) (2,800)

Miscellaneous (expense) income, net (655) 7,068 (7,723)

Interest expense, net (488) (2,905) 2,417

Income before income taxes 335,682 282,860 52,822

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Total revenue increased by $425.8 million to $1,885.8 million for the year ended December 31, 2023, from $1,460.0 million for the year ended December 31, 2022.

The increase was broad based, but primarily driven by strong activity within the Oncology, Metabolic, Cardiology and Central Nervous System therapeutic areas.

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

Total direct costs

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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 $3.7 million to $7.1 million for the year ended December 31, 2022 from $3.3 million for the year ended December 31, 2021.

The increase was mainly attributable to third-party investment gains and 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.

Miscellaneous (expense) income, net

Miscellaneous (expense) income, net changed by $7.7 million of expense to $0.7 million of expense for the year ended December 31, 2023 from $7.1 million of income for the year ended December 31, 2022.

The change was 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 and third-party investment gains or losses.

Income tax provision

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The overall effective tax rates for the years ended December 31, 2023 and 2022 were 15.8% and 13.3%, respectively.

The increase in the income tax provision and overall effective rate was primarily attributable to the increase in pre-tax book income compared to the same periods in the prior year.

The increase in the income tax provision and overall effective rate was primarily attributable to the increase in pre-tax book income, an increase in uncertain tax positions, and a decrease in excess tax benefits recognized from share-based compensation, which was partially offset by an increase in tax benefits related to Foreign Derived Intangible Income ("FDII") 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 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 December 31, 2022, we had cash and cash equivalents of $28.3 million, which decreased from $461.3 million as of December 31, 2021 due primarily to share repurchases.

As of December 31, 2023, we had cash and cash equivalents of $245.4 million, which increased from $28.3 million as of December 31, 2022.

Approximately $29.5 million of our cash and cash equivalents, none of which was restricted, was held by our foreign subsidiaries as of December 31, 2023.

As of December 31, 2023, we had $150.0 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.

Our expected primary cash needs on both a short and long-term basis are for investment in operational growth, including additional lease commitments, capital expenditures, 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 December 31, 2022, cash commitments to support operating business needs include lease liabilities discussed in Note 8 of the Consolidated Financial Statements, short-term debt discussed in Note 7 of the Consolidated Financial Statements, purchase commitments discussed in Note 12 of the 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 6 basis points to 2.53% in the year ended

December 31, 2022.

As of December 31, 2023, cash commitments to support operating business needs include lease liabilities discussed in Note 8 of the Consolidated Financial Statements, purchase commitments discussed in Note 12 of the 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 59 basis points to 1.94% in the year ended December 31, 2023.

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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Effect of exchange rates on cash, cash equivalents, and restricted cash 1,081 (6,572)

(Decrease) increase in cash, cash equivalents, and restricted cash $ (433,039) $ 183,538

Increase (decrease) in cash, cash equivalents, and restricted cash $ 217,184 $ (433,039)

Cash Flows from Operating Activities

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.

Cash flows from operations are driven mainly by net income, deferred income tax benefit, depreciation, stock-based compensation expense, noncash lease expense 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.

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 were $433.4 million for the year ended December 31, 2023 consisting of net income of $282.8 million.

Adjustments to reconcile net income to net cash provided by operating activities were $36.6 million, primarily related to stock-based compensation expense of $21.4 million, depreciation of $19.0 million and noncash lease expense of $18.0 million, partially offset by a deferred income tax benefit of $23.0 million.

Changes in operating assets and liabilities provided $106.1 million in operating cash flows and were primarily driven by by increased advanced billings of $118.1 million and increased accrued expenses of $52.5 million, offset by increased accounts receivable and unbilled, net of $66.9 million..

Adjustments to reconcile net income to net cash provided by operating activities were $44.1 million, primarily related to depreciation of $24.1 million, stock-based compensation expense of $20.5 million, and noncash lease expense of $19.6 million, partially offset by a deferred income tax benefit of $25.1 million.

Changes in operating assets and liabilities provided $106.5 million in operating cash flows and were primarily driven by by increased advanced billings of $97.1 million and increased accrued expenses of $82.1 million, partially offset by increased accounts receivable and unbilled, net of $48.3 million.

Net cash flows provided by operating activities were $388.1 million for the year ended December 31, 2022 consisting of net income of $245.4 million.

Adjustments to reconcile net income to net cash provided by operating activities were $14.8 million, primarily related to noncash lease expense of $16.3 million, depreciation of $16.0 million, stock-based compensation expense of $14.5 million and amortization of intangibles of $5.1 million, partially offset by a deferred income tax benefit of $37.1 million.

Changes in operating assets and liabilities provided $66.7 million in operating cash flows and were primarily driven by increased advanced billings of $89.0 million and increased accrued expenses of $26.2 million, offset by increased accounts receivable and unbilled, net of $25.0 million, decreased lease liabilities of $15.6 million and increased prepaid expenses and other current assets of $9.1 million.

Changes in operating assets and liabilities provided $106.1 million in operating cash flows and were primarily driven by increased advanced billings of $118.1 million and increased accrued expenses of $52.5 million, offset by increased accounts receivable and unbilled, net of $66.9 million.

Cash Flow from Investing Activities

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Cash Flow from Financing Activities

Net cash used in financing activities was $775.8 million for the year ended December 31, 2022, primarily related to $847.8 million in repurchases of common stock and $274.2 million in repayments of the Credit Facility, partially offset by $324.2 million in proceeds related to the Credit Facility and proceeds from stock options exercises of $22.1 million.

Net cash used in financing activities was $44.5 million for the year ended December 31, 2021, primarily related to $62.1 million in repurchases of common stock, offset by proceeds from stock options exercises of $17.6 million.

Net cash used in financing activities was $182.6 million for the year ended December 31, 2023, primarily related to $155.0 million in repayments of the Credit Facility and $144.0 million in repurchases of common stock, partially offset by $105.0 million in proceeds from the Credit Facility and proceeds from stock options exercises of $11.4 million.

Net cash used in financing activities was $775.8 million for the year ended December 31, 2022, primarily related to $847.8 million in repurchases of common stock and $274.2 million in repayments of the Credit Facility, partially offset by $324.2 million in proceeds from the Credit Facility and proceeds from stock options exercises of $22.1 million.

Share Repurchases

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For the year ended December 31, 2021, the Company repurchased 377,783 shares for $62.1 million.

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

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

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For the year ended December 31, 2023, the Company repurchased 781,068 shares for $144.0 million under the new repurchase program.

For the year ended December 31, 2022, the Company repurchased 228,247 shares for $47.2 million under the new repurchase program.

As of December 31, 2023, we have remaining authorization of $308.8 million under the new repurchase program.

Repurchases under the share repurchase programs 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, except for a small portion which were retained as Treasury Shares on the consolidated statements of shareholders' equity.

The Company constructively retires the repurchased shares associated with these approved share repurchase programs, except for a small portion which were retained as Treasury Shares on the consolidated statements of shareholders' equity.

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

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On the Closing Date, the Borrower and lender entered into a Loan Agreement (as it may be amended from time to time, the “Loan Agreement”) providing for the Credit Facility, and the Guarantor executed a Guaranty Agreement providing for its guarantee of the payment and performance of the obligations under the Loan Agreement.

On December 27, 2021, the Company entered into Amendment No.

3 to the Credit Facility which extends the expiration date of the revolving credit note to March 31, 2023 and adds provisions for alternative rates of interest as a result of global reference rate initiatives and removes the ability to obtain advances in any currency other than U.S.

After the LIBOR cessation date of December 31, 2021, the Credit Facility bears interest at a rate of the sum of The Secured Overnight Financing Rate (SOFR) and the benchmark replacement adjustment plus 100 basis points (1.00%).

On March 15, 2022, the Company entered into Amendment No.

4 to the Loan Agreement, which increased the aggregate principal amount that may be borrowed under the facility’s line of credit to up to $250.0 million.

The Company is expected to amend the Credit Facility or obtain a new credit facility prior to the March 31, 2023 expiration.

On March 31, 2023, the Company entered into Amendment No.

5 to the Loan Agreement, which changed the aggregate principal amount that may be borrowed under the facility's line of credit to up to $150.0 million, adjusted the interest rate and fee charged on the credit facility and extended the expiration date of resolving credit note to March 29, 2024.

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.

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The Credit Facility contains certain events of default, including, among others, non-payment of principal or interest, breach of the covenants, cross default and cross acceleration to certain other indebtedness, defaults on monetary judgment orders, certain ERISA events, certain bankruptcy and insolvency events, actual or asserted invalidity of any guarantee or security document and change in control.

As of December 31, 2022, we had $50.0 million in indebtedness under the Credit Facility.

As of December 31, 2022, we had $0.2 million in letters of credit outstanding related to certain operating lease obligations, which are secured by the Credit Facility.

As of December 31, 2023, we have no indebtedness and less than $0.1 million in letters of credit outstanding related to certain operating lease obligations, which are secured by the Credit Facility.

Critical Accounting Policies and Estimates

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Cost estimates are based on a detailed project budget and are developed based on many variables, including, but not limited to, the scope of the work, labor productivity, the complexity of the study, the participating geographic locations and the Company’s historical experience.

To assist with the estimation of costs expected at completion over the life of a project, regular contract reviews are performed in which performance to date is compared to the most current estimate to complete assumptions.

The reviews include an assessment of costs incurred to date compared to expectations based on budget assumptions and other circumstances specific to the project.

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We record deferred tax assets and liabilities based on temporary differences between the financial statement bases and tax bases of assets and liabilities.

Deferred tax assets are recorded for tax benefit carryforwards using tax rates anticipated to be in effect in the year in which temporary differences are expected to reverse.

Deferred tax assets are recorded for tax benefit carryforwards using tax rates anticipated to be

in effect in the year in which temporary differences are expected to reverse.

If it does not appear more likely than not that the full value of a deferred tax asset will be realized, the Company records a valuation allowance against the deferred tax asset, with an offsetting charge to the Company’s income tax provision or benefit.

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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, 2022 and 2021 a valuation allowance in the amount of $0.4 million relating to certain foreign deferred tax assets and $0.9 million relating to certain foreign operating loss carryforwards and other deferred tax assets, respectively, that are currently not expected to be realized.

Based on the analysis of the above factors, we determined that a valuation allowance in the amount of $1.8 million relating to certain tax credits and other deferred tax assets should be recorded as of December 31, 2023 and $0.4 million should be recorded as of December 31, 2022 relating to certain foreign 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.

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See Note 11 of the Notes to Consolidated Financial Statements for further information regarding this assertion.

The Organization for Economic Co-operation and Development (OECD) has a framework to implement a global minimum corporate tax of 15% for companies with global revenues and profits above certain thresholds (referred to as Pillar Two), with certain aspects of Pillar Two effective January 1, 2024 and other aspects effective January 1, 2025.

While it is uncertain whether the U.S.

will enact legislation to adopt Pillar Two, certain countries in which we operate have adopted legislation, and other countries are in the process of introducing legislation to implement Pillar Two.

As currently designed, Pillar Two will ultimately apply to our worldwide operations.

There remains uncertainty as to the final Pillar Two model rules.

We will continue to monitor US and global legislative action related to Pillar Two for potential impacts.

At this time, we do not expect Pillar Two to have a material impact on our effective tax rate or our consolidated results of operation, financial position, and cash flows.

Stock Based Compensation

In connection with the Company's initial public offering (IPO), the Board approved the formation of the 2016 Incentive Award Plan (the “2016 Plan”), which replaced our 2014 Equity Incentive Plan (the “2014 Plan”).

In connection with the Company's initial public offering (IPO), the Board approved the 2016 Incentive Award Plan (the “2016 Plan”).

The 2016 Plan provides for long-term equity incentive compensation for key employees, officers and non-employee directors.

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the expected stock price volatility, the calculation of the expected holding period of the award, the risk free interest rate and expected dividends on the underlying common stock.

Due to the lack of Company specific historical and implied volatility data, our estimate of expected volatility is based upon a blended approach that utilizes the historical volatility of the Company's common stock for periods in which the Company has sufficient information and the historical volatility of a group of peer companies that are most representative of our company.

sufficient information and the historical volatility of a group of peer companies that are most representative of our company.

The historical volatility is calculated based on a period of time commensurate with the expected holding period assumption.

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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-K

Item 7. Management’s Discussion and Analysis