(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Forward Looking Statements You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. In addition to historical condensed consolidated financial information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect, among other things, our current expectations and anticipated results of operations, all of which are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, performance or achievements, market trends, or industry results to differ materially from those expressed or implied by such forward-looking statements. Therefore, any statements contained herein that are not statements of historical fact may be forward-looking statements and should be evaluated as such, including statements regarding our anticipated results of operations, our business strategy and planned capital expenditures, and our expectations regarding the resolution of our material weaknesses. Without limiting the foregoing, the words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "should," "targets," "will" and the negative thereof, and similar words and expressions are intended to identify forward-looking statements. Unless legally required, we assume no obligation to update any such forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information. We caution you that any such forward-looking statements are further qualified by important factors that could cause our actual operating results to differ materially from those in the forward-looking statements, including without limitation, regional, national, or global political, economic, business, competitive, market, and regulatory conditions and the following: the need to hire, develop, and retain key personnel; the impact of unfavorable economic conditions, including the uncertain international economic environment, changes in exchange rates, and effective income tax rate fluctuations; the impact of potentially underpricing our contracts, overrunning our cost estimates, or failing to receive approval for or experiencing delays with documentation of change orders; any adverse effects from customer or therapeutic area concentration; our potential failure to generate a large number of new business awards and the risk of delay, termination, reduction in scope, or failure to go to contract of our business awards; our potential failure to convert backlog to revenue; fluctuations in our operating results and effective income tax rate; the cyber-security and other risks associated with our information systems infrastructure; risks associated with the integration of our business with the business of Double Eagle Parent, Inc. ("inVentiv") and our operation of the combined business following the closing of the merger with inVentiv (the "Merger"); the risks associated with doing business internationally; risks related to the U.K.'s planned withdrawal from the European Union; impact of the Tax Cuts and Jobs Act; challenges by tax authorities of our intercompany transfer pricing policies; our potential failure to successfully increase our market share, grow our business, and execute our growth strategies; our ability to effectively upgrade our information systems; our failure to perform our services in accordance with contractual requirements, regulatory standards, and ethical considerations; the risk of litigation and personal injury claims; risks related to the management of clinical trials; failure of our insurance to cover our indemnification obligations and other liabilities; risks related to marketing drugs for biopharmaceutical companies; our ability to protect our intellectual property; the risks associated with potential future acquisitions or investments in our customers' businesses or drugs; our relationships with customers who are in competition with each other; any failure to realize the full value of our goodwill and intangible assets; risks related to restructuring; our compliance with anti-corruption and anti-bribery laws; our dependence on third parties; potential employment liability; downgrades of our credit ratings; outsourcing trends and changes in aggregate spending and research and development budgets; the impact of, including changes in, government regulations and healthcare reform; our ability to keep pace with rapid technological change; the cost of and our ability to service our substantial indebtedness; and other risks related to ownership of our common stock. For a further discussion of the risks relating to our business, refer to
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"Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
the project or projects are not contingent upon completion of another clinical trial or event that would place the project or projects at material risk of not commencing in accordance with the expected timeline;
the project or projects are expected to commence within a certain period of time from the end of the quarter in which the award was granted;
the customer has entered or intends to enter into a comprehensive contract as soon as practicable; and
for awards related to our deployment solutions and Functional Service Provider ("FSP") offerings, a maximum of twelve months of services are included in the award value.
In addition, we continually evaluate our backlog to determine if any of the previously awarded work is no longer expected to be performed, regardless of whether we have received formal cancellation notice from the customer. If we determine that any previously awarded work is no longer probable of being performed, we remove the value from our backlog based on the risk of cancellation. We recognize revenue from these awards as services are performed, provided we have entered into a contractual commitment with the customer. Beginning in 2019, we now report new business awards for our Clinical Solutions and Commercial Solutions segments on a trailing twelve months ("TTM") basis. Our total backlog represents backlog for our Clinical Solutions segment and the deployment solutions service offering within our Commercial Solutions segment (formerly selling solutions). We do not report backlog for the remaining service offerings in the Commercial Solutions segment. New business awards and backlog include reimbursable out-of-pocket expenses for all periods presented.
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Backlog Our backlog consists of anticipated future revenue from business awards that either have not started, or that are in process and have not been completed. Our backlog also reflects any cancellation or adjustment activity related to these awards. The average duration of our contracts will fluctuate from period to period based on the contracts comprising our backlog at any given time. The majority of our contracts can be terminated by the customer with a 30-day notice. Our backlog was as follows as of June 30 (in millions): 2019 2018 Change Clinical Solutions $ 7,834.0 $ 7,183.8 $ 650.2 9.1 % Commercial Solutions - deployment solutions 621.3 550.2 71.1 12.9 % Total backlog $ 8,455.3 $ 7,734.0 $ 721.3 9.3 %
We expect that approximately $2.07 billion of our backlog as of June 30, 2019 will be recognized as revenue during the remainder of 2019. We adjust the amount of our backlog each quarter for the effects of fluctuations in foreign currency exchange rates.
2019 Clinical Solutions $ 3,967.0 Commercial Solutions - deployment solutions 1,298.2 Total net new business awards $ 5,265.2
New business awards have varied and may continue to vary significantly from quarter to quarter. Fluctuations in our net new business award levels often result from the fact that we may receive a small number of relatively large orders in any given reporting period. Because of these large orders, our backlog and net new business awards in a reporting period may reach levels that are not sustainable in subsequent reporting periods.
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Results of Operations The following table sets forth amounts from our unaudited condensed consolidated statements of operations along with dollar and percentage changes (in thousands, except percentages): Three Months Ended June 30, 2019 2018 Change Revenue $ 1,166,827 $ 1,072,530 $ 94,297 8.8 % Costs and operating expenses: Direct costs (exclusive of depreciation and amortization) 917,529 847,465 70,064 8.3 % Selling, general, and administrative expenses 110,879 100,218 10,661 10.6 % Restructuring and other costs 11,882 8,591 3,291 38.3 % Transaction and integration-related expenses 7,654 18,032 (10,378 ) (57.6 )% Depreciation and amortization 60,749 67,502 (6,753 ) (10.0 )% Total operating expenses 1,108,693 1,041,808 66,885 6.4 % Income from operations 58,134 30,722 27,412 89.2 % Total other expense, net (24,557 ) (1,115 ) (23,442 ) n/m Income (loss) before provision for income taxes 33,577 29,607 3,970 13.4 % Income tax expense (22,285 ) (16,047 ) (6,238 ) (38.9 )% Net income (loss) $ 11,292 $ 13,560 $ (2,268 ) (16.7 )% Six Months Ended June 30, 2019 2018 Change Revenue $ 2,285,833 $ 2,129,726 $ 156,107 7.3 % Costs and operating expenses: Direct costs (exclusive of depreciation and amortization) 1,804,331 1,688,288 116,043 6.9 % Selling, general, and administrative expenses 223,996 199,477 24,519 12.3 % Restructuring and other costs 26,295 22,298 3,997 17.9 % Transaction and integration-related expenses 24,312 43,243 (18,931 ) (43.8 )% Depreciation and amortization 121,949 135,523 (13,574 ) (10.0 )% Total operating expenses 2,200,883 2,088,829 112,054 5.4 % Income from operations 84,950 40,897 44,053 107.7 % Total other expense, net (70,961 ) (44,814 ) (26,147 ) (58.3 )% Income (loss) before provision for income taxes 13,989 (3,917 ) 17,906 n/m Income tax expense (32,701 ) (7,075 ) (25,626 ) n/m Net income (loss) $ (18,712 ) $ (10,992 ) $ (7,720 ) (70.2 )%
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During both the three and six months ended June 30, 2019, one customer accounted for approximately 10% of our revenue. During both the three and six months ended June 30, 2018, one customer accounted for 11% of our revenue. Revenue from our top five customers accounted for approximately 24% and 26% of revenue for the three months ended June 30, 2019 and 2018, respectively, and 23% and 25% of revenue for the six months ended June 30, 2019 and 2018, respectively. Revenue for each of our segments was as follows (dollars in thousands):
Three Months Ended June 30, 2019 % of total 2018 % of total Change Clinical Solutions $ 849,922 72.8 % $ 783,913 73.1 % $ 66,009 8.4 % Commercial Solutions 316,905 27.2 % 288,617 26.9 % 28,288 9.8 % Total revenue $ 1,166,827 $ 1,072,530 $ 94,297 8.8 % Six Months Ended June 30, 2019 % of total 2018 % of total Change Clinical Solutions $ 1,654,880 72.4 % $ 1,570,752 73.8 % $ 84,128 5.4 % Commercial Solutions 630,953 27.6 % 558,974 26.2 % 71,979 12.9 % Total revenue $ 2,285,833 $ 2,129,726 $ 156,107 7.3 %
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Direct costs consisted of the following (dollars in thousands):
Three Months Ended June 30, 2019 2018 Change Direct costs (exclusive of depreciation and amortization) $ 917,529 $ 847,465 $ 70,064 8.3 % % of revenue 78.6 % 79.0 % Gross margin % 21.4 % 21.0 % Six Months Ended June 30, 2019 2018 Change Direct costs (exclusive of depreciation and amortization) $ 1,804,331 $ 1,688,288 $ 116,043 6.9 % % of revenue 78.9 % 79.3 % Gross margin % 21.1 % 20.7 %
For the three and six months ended June 30, 2019, our direct costs increased by $70.1 million and $116.0 million, or 8.3% and 6.9%, as compared to the three and six months ended June 30, 2018, respectively. The increases were primarily driven by an increase in compensation and related costs (including share-based compensation), reimbursable out-of-pocket expenses, as well as direct costs from Kinapse, which was acquired in the third quarter of 2018. Clinical Solutions
Three Months Ended June 30, 2019 2018 Change Direct costs $ 654,403 $ 608,994 $ 45,409 7.5 % % of segment revenue 77.0 % 77.7 % Segment gross margin % 23.0 % 22.3 % Six Months Ended June 30, 2019 2018 Change Direct costs $ 1,280,170 $ 1,224,365 $ 55,805 4.6 % % of segment revenue 77.4 % 77.9 % Segment gross margin % 22.6 % 22.1 %
For the three and six months ended June 30, 2019, our Clinical Solutions segment direct costs increased by $45.4 million and $55.8 million, or 7.5% and 4.6%, as compared to the three and six months ended June 30, 2018, respectively. These increases were primarily due to higher reimbursable out-of-pocket expenses and an increase in compensation and related costs due to higher billable headcount to support revenue growth.
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Commercial Solutions Direct costs for our Commercial Solutions segment, excluding share-based compensation expense, were as follows (dollars in thousands): Three Months Ended June 30, 2019 2018 Change Direct costs $ 255,814 $ 232,899 $ 22,915 9.8 % % of segment revenue 80.7 % 80.7 % Segment gross margin % 19.3 % 19.3 % Six Months Ended June 30, 2019 2018 Change Direct costs $ 508,687 $ 454,599 $ 54,088 11.9 % % of segment revenue 80.6 % 81.3 % Segment gross margin % 19.4 % 18.7 %
For the three and six months ended June 30, 2019, our Commercial Solutions segment direct costs increased by $22.9 million and $54.1 million, or 9.8% and 11.9%, as compared to the three and six months ended June 30, 2018, respectively. These increases were primarily related to an increase in compensation and related costs due to higher billable headcount to support revenue growth, as well as direct costs from Kinapse, which was acquired in the third quarter of 2018. Direct costs were also negatively impacted by higher reimbursable out-of-pocket expenses for the six months ended June 30, 2019. Gross margins for our Commercial Solutions segment were 19.3% and 19.4% for the three and six months ended June 30, 2019, respectively, compared to 19.3% and 18.7% for the three and six months ended June 30, 2018, respectively. Gross margin was higher during the six months ended June 30, 2019 compared to the same period in 2018 primarily due to a favorable revenue mix. Selling, General, and Administrative Expenses Selling, general, and administrative expenses were as follows (dollars in thousands):
Three Months Ended June 30, 2019 2018 Change Selling, general, and administrative expenses $ 110,879 $ 100,218 $ 10,661 10.6 % % of total revenue 9.5 % 9.3 % Six Months Ended June 30, 2019 2018 Change Selling, general, and administrative expenses $ 223,996 $ 199,477 $ 24,519 12.3 % % of total revenue 9.8 % 9.4 %
The increases in selling, general, and administrative expenses for the three and six months ended June 30, 2019 as compared to the same periods in 2018 were primarily caused by higher compensation-related expenses (including share-based compensation), incremental costs from Kinapse, which was acquired during the third quarter of 2018 and incremental costs from a strategic partnership agreement entered into during the fourth quarter of 2018.
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Restructuring and Other Costs
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Aug 06, 2019
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