The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
SYNEOS HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Changes in Significant Accounting Policies
Nature of Operations
Syneos Health, Inc. (the “Company”) is a global provider of end-to-end biopharmaceutical outsourcing solutions. The Company operates under two reportable segments, Clinical Solutions and Commercial Solutions, and derives its revenue through a suite of services designed to enhance its customers’ ability to successfully develop, launch, and market their products. The Company offers its solutions on both a standalone and integrated basis with biopharmaceutical development and commercialization services ranging from Phase I to IV clinical trial services to services associated with the commercialization of biopharmaceutical products. The Company’s customers include small, mid-sized, and large companies in the pharmaceutical, biotechnology, and medical device industries.
Unaudited Interim Financial Information
The Company prepared the accompanying unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. The significant accounting policies followed by the Company for interim financial reporting are consistent with the accounting policies followed for annual financial reporting.
The unaudited condensed consolidated financial statements, in management’s opinion, include all adjustments of a normal recurring nature necessary for a fair presentation. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission on February 18, 2021. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year ending December 31, 2021 or any other future period. The unaudited condensed consolidated balance sheet at December 31, 2020 is derived from the amounts in the audited consolidated balance sheet included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Reclassification
Certain previously reported amounts have been reclassified to conform to the current year presentation.
COVID-19 Pandemic
On March 11, 2020, the World Health Organization designated the outbreak of the novel strain of coronavirus that causes the disease known as COVID-19 as a global pandemic. Governments and businesses around the world have taken unprecedented actions to mitigate the spread of COVID-19, including, but not limited to, shelter-in-place orders, quarantines, significant restrictions on travel, social distancing practices as well as restrictions that prohibit many employees from going to work in person. As a result, the Company experienced significant impacts to its business and results of operations from COVID-19 during 2020 and for the three months ended March 31, 2021. While certain governments have eased restrictions, the pandemic continues to be disruptive to the Company’s business. The pandemic and associated economic impacts are expected to continue to significantly impact the Company’s future financial condition, results of operations, and cash flows.
8
Table of Contents
2. Financial Statement Details
Cash, Cash Equivalents, and Restricted Cash
Certain of the Company’s subsidiaries participate in a notional cash pooling arrangement to manage global liquidity requirements. As part of a master netting arrangement, the participants combine their cash balances in pooling accounts at the same financial institution with the ability to offset bank overdrafts of one participant against positive cash account balances held by another participant. Under the terms of the master netting arrangement, the financial institution has the right, ability, and intent to offset a positive balance in one account against an overdrawn amount in another account. Amounts in each of the accounts are unencumbered and unrestricted with respect to use. As such, the net cash balance related to this pooling arrangement is included in cash, cash equivalents, and restricted cash in the unaudited condensed consolidated balance sheets.
The Company’s net cash pool position consisted of the following (in thousands):
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Gross cash position
|
|
$
|
193,053
|
|
|
$
|
220,261
|
|
Less: cash borrowings
|
|
|
(178,715
|
)
|
|
|
(204,647
|
)
|
Net cash position
|
|
$
|
14,338
|
|
|
$
|
15,614
|
|
Accounts Receivable and Unbilled Services, net
Accounts receivable and unbilled services (including contract assets), net of allowance for doubtful accounts, consisted of the following (in thousands):
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Accounts receivable billed
|
|
$
|
705,783
|
|
|
$
|
774,605
|
|
Accounts receivable unbilled
|
|
|
228,798
|
|
|
|
211,285
|
|
Contract assets
|
|
|
372,266
|
|
|
|
366,506
|
|
Less: Allowance for doubtful accounts
|
|
|
(7,679
|
)
|
|
|
(7,615
|
)
|
Accounts receivable and unbilled services, net
|
|
$
|
1,299,168
|
|
|
$
|
1,344,781
|
|
Accounts Receivable Factoring Arrangement
The Company has an accounts receivable factoring agreement to sell certain eligible unsecured trade accounts receivable, without recourse, to an unrelated third-party financial institution for cash. For the three months ended March 31, 2021 and 2020, the Company factored $30.1 million and $36.2 million, respectively, of trade accounts receivable on a non-recourse basis and received $30.0 million and $36.0 million, respectively, in cash proceeds from the sale. The fees associated with these transactions were insignificant.
Goodwill
The changes in the carrying amount of goodwill by segment for the three months ended March 31, 2021 were as follows (in thousands):
|
|
Clinical
Solutions (a)
|
|
|
Commercial
Solutions (b)
|
|
|
Total
|
|
Balance as of December 31, 2020
|
|
$
|
3,216,335
|
|
|
$
|
1,559,843
|
|
|
$
|
4,776,178
|
|
Business combinations (c)
|
|
|
2,479
|
|
|
|
—
|
|
|
|
2,479
|
|
Impact of foreign currency translation and other (d)
|
|
|
49,079
|
|
|
|
(47,557
|
)
|
|
|
1,522
|
|
Balance as of March 31, 2021
|
|
$
|
3,267,893
|
|
|
$
|
1,512,286
|
|
|
$
|
4,780,179
|
|
9
Table of Contents
(a) Accumulated impairment losses of $8.1 million associated with the Clinical Solutions segment were recorded prior to 2016 and related to the former Phase I Services segment, now a component of the Clinical Solutions segment. No impairment of goodwill was recorded for the three months ended March 31, 2021.
(b) Accumulated impairment losses of $8.0 million associated with the Commercial Solutions segment were recorded prior to 2015 and related to the former Global Consulting segment, now a component of the Commercial Solutions segment. No impairment of goodwill was recorded for the three months ended March 31, 2021.
(c) Amount represents measurement period adjustments to goodwill recognized in connection with the 2020 acquisitions of SHCR Holdings Corporation (“Synteract”) and Illingworth Research Group™ (“Illingworth Research”) within the Clinical Solutions segment.
(d) Includes $44.2 million reallocation of goodwill from the Commercial Solutions segment to the Clinical Solutions segment to reflect the transfer of the Kinapse Regulatory and Operations Consulting service lines to align with management reporting in 2021.
Accumulated Other Comprehensive Loss, Net of Taxes
Accumulated other comprehensive loss, net of taxes, consisted of the following (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Beginning balance
|
|
$
|
(40,801
|
)
|
|
$
|
(71,593
|
)
|
|
|
|
|
|
|
|
|
|
Foreign currency translation:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
(22,040
|
)
|
|
|
(56,757
|
)
|
Other comprehensive loss before reclassifications
|
|
|
(4,310
|
)
|
|
|
(48,788
|
)
|
Ending balance
|
|
|
(26,350
|
)
|
|
|
(105,545
|
)
|
|
|
|
|
|
|
|
|
|
Derivative instruments:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
(18,761
|
)
|
|
|
(14,836
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
772
|
|
|
|
(12,510
|
)
|
Reclassification adjustments
|
|
|
5,165
|
|
|
|
1,780
|
|
Ending balance
|
|
|
(12,824
|
)
|
|
|
(25,566
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss, net of taxes
|
|
$
|
(39,174
|
)
|
|
$
|
(131,111
|
)
|
Changes in accumulated other comprehensive loss consisted of the following (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Foreign currency translation adjustments:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, before taxes
|
|
$
|
(5,018
|
)
|
|
$
|
(48,788
|
)
|
Income tax benefit
|
|
|
(708
|
)
|
|
|
—
|
|
Foreign currency translation adjustments, net of taxes
|
|
|
(4,310
|
)
|
|
|
(48,788
|
)
|
Unrealized loss on derivative instruments:
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) during period, before taxes
|
|
|
1,034
|
|
|
|
(19,783
|
)
|
Income tax expense (benefit)
|
|
|
262
|
|
|
|
(7,273
|
)
|
Unrealized gain (loss) during period, net of taxes
|
|
|
772
|
|
|
|
(12,510
|
)
|
Reclassification adjustment, before taxes
|
|
|
6,916
|
|
|
|
2,414
|
|
Income tax expense
|
|
|
1,751
|
|
|
|
634
|
|
Reclassification adjustment, net of taxes
|
|
|
5,165
|
|
|
|
1,780
|
|
Total unrealized gain (loss) on derivative instruments, net of taxes
|
|
|
5,937
|
|
|
|
(10,730
|
)
|
Total other comprehensive income (loss), net of taxes
|
|
$
|
1,627
|
|
|
$
|
(59,518
|
)
|
10
Table of Contents
Other Income, Net
Other income, net consisted of the following (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Net realized foreign currency loss (gain)
|
|
$
|
1,192
|
|
|
$
|
(5,096
|
)
|
Net unrealized foreign currency gain
|
|
|
(9,522
|
)
|
|
|
(15,019
|
)
|
Other, net
|
|
|
(1,526
|
)
|
|
|
1,185
|
|
Total other income, net
|
|
$
|
(9,856
|
)
|
|
$
|
(18,930
|
)
|
3. Business Combinations
Synteract Acquisition
On December 9, 2020, the Company completed the acquisition of Synteract, effected through the purchase of 100% of the outstanding shares of Synteract for approximately $385.5 million in cash (net of approximately $28.0 million of cash acquired), which includes payment of $1.0 million during the three months ended March 31, 2021. Synteract is a contract research organization focused on the emerging biopharmaceutical industry, strengthening the Company’s position in the small to mid-sized category. The Company recognized $357.1 million of goodwill and $56.4 million of intangible assets, including acquired backlog and trade name, as a result of the acquisition. The purchase price has been allocated to the tangible assets and identifiable intangible assets acquired and liabilities assumed based upon their fair values. The excess of the purchase price over the tangible and intangible assets acquired and liabilities assumed has been recorded as goodwill. Goodwill is attributable to the acquired workforce as well as future synergies and is not deductible for income tax purposes. The operating results from the acquisition of Synteract have been included in the Company’s Clinical Solutions segment from the date of acquisition.
Illingworth Research Group Acquisition
On December 17, 2020, the Company completed the acquisition of Illingworth Research, a leading provider of clinical research home health services, adding new scale and capabilities to the Company’s clinical trial solutions. The total purchase consideration was $80.9 million (net of cash acquired of $1.1 million), which includes payments of $9.0 million during the three months ended March 31, 2021. The Company recognized $64.0 million of goodwill and $21.5 million of intangible assets, principally customer relationships, as a result of the acquisition. The purchase price has been allocated to the tangible assets and identifiable intangible assets acquired and liabilities assumed based upon their fair values. The excess of the purchase price over the tangible and intangible assets acquired and liabilities assumed has been recorded as goodwill. Goodwill is attributable to the acquired workforce as well as future synergies and is not deductible for income tax purposes. The operating results from the acquisition of Illingworth Research have been included in the Company’s Clinical Solutions segment from the date of acquisition.
The Company’s assessment of fair value and the purchase price allocation related to these 2020 acquisitions is preliminary and further adjustments may be necessary as additional information related to the fair values of assets acquired and liabilities assumed is assessed during the measurement period (up to one year from the respective acquisition dates).
Pro forma information for these acquisitions is not presented as the operations of the acquired businesses, individually and in the aggregate, are not significant to the overall operations of the Company.
11
Table of Contents
4. Long-Term Debt Obligations
The Company’s debt obligations consisted of the following (in thousands):
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Secured Debt
|
|
|
|
|
|
|
|
|
Term Loan A - tranche one due March 2024
|
|
$
|
173,852
|
|
|
$
|
183,715
|
|
Term Loan A - tranche two due August 2024
|
|
|
1,242,140
|
|
|
|
1,273,991
|
|
Term Loan B due August 2024
|
|
|
496,421
|
|
|
|
560,564
|
|
Accounts receivable financing agreement due October 2022
|
|
|
365,000
|
|
|
|
300,000
|
|
Total secured debt
|
|
|
2,277,413
|
|
|
|
2,318,270
|
|
Unsecured Debt
|
|
|
|
|
|
|
|
|
3.625% Senior Unsecured Notes due 2029 (the “Notes”)
|
|
|
600,000
|
|
|
|
600,000
|
|
Total debt obligations
|
|
|
2,877,413
|
|
|
|
2,918,270
|
|
Less: Term loan original issuance discount
|
|
|
(3,108
|
)
|
|
|
(3,500
|
)
|
Less: Unamortized deferred issuance costs
|
|
|
(11,731
|
)
|
|
|
(12,716
|
)
|
Total debt obligations, non-current portion
|
|
$
|
2,862,574
|
|
|
$
|
2,902,054
|
|
Credit Agreement
The Company is party to a credit agreement (as amended, the “Credit Agreement”) that includes a $1.55 billion Term Loan A facility (“Term Loan A”) that has two tranches, tranche one that matures on March 26, 2024 and tranche two that matures on August 1, 2024, a $1.60 billion Term Loan B facility that matures on August 1, 2024 (“Term Loan B”), and a $600.0 million revolving credit facility that matures on August 1, 2024 (the “Revolver”).
In February 2021, as a result of the Company’s First Lien Leverage Ratio (as defined in the Credit Agreement) being less than or equal to 2.5x, the Adjusted Eurocurrency Rate Spread (as defined in the Credit Agreement) on Term Loan A and the Revolver decreased from 1.50% to 1.25%.
During the three months ended March 31, 2021, the Company made $41.8 million and $64.1 million of voluntary prepayments against Term Loan A and Term Loan B, respectively, which were applied to future principal payments. As a result of these and previous voluntary prepayments, the Company is not required to make a mandatory payment against the principal balance of Term Loan A until October 2022 and Term Loan B until maturity in August 2024.
Revolver and Letters of Credit
The Revolver includes letters of credit (“LOCs”) with a sublimit of $150.0 million. As of March 31, 2021, there were no outstanding Revolver borrowings and $16.1 million of LOCs outstanding, leaving $583.9 million of available borrowings under the Revolver, including $133.9 million available for LOCs.
The lease for the Company’s corporate headquarters in Morrisville, North Carolina includes a provision that may require the Company to issue a LOC in certain amounts to the landlord based on the debt rating of the Company issued by Moody’s Investors Service (or other nationally-recognized debt rating agency, such as S&P Global Ratings). As of March 31, 2021 (and through the date of this filing), the Company’s debt rating was such that no LOC is currently required. Any LOC issued in accordance with the aforementioned requirements could be issued under the Company’s Revolver, and, if issued under the Revolver, would reduce its available borrowing capacity by the same amount accordingly.
12
Table of Contents
Accounts Receivable Financing Agreement
The Company has an accounts receivable financing agreement (as amended) with a termination date of October 3, 2022, unless terminated earlier pursuant to its terms. On January 28, 2021, the Company amended this agreement to increase the amount it can borrow from $300.0 million to $365.0 million, and drew down the additional $65.0 million to partially fund the Term Loan A and Term Loan B voluntary prepayments. Accordingly, there was no incremental impact on the Company’s total debt.
Under the accounts receivable financing agreement, certain of the Company’s consolidated subsidiaries sell accounts receivable and unbilled services (including contract assets) balances to a wholly-owned, bankruptcy-remote special purpose entity. The Company has guaranteed the performance of the obligations of existing and future subsidiaries that sell and service the accounts receivable under this agreement. The available borrowing capacity varies monthly according to the levels of the Company’s eligible accounts receivable and unbilled services (including contract assets). Loans under this agreement will accrue interest at a reserve-adjusted LIBOR rate or a base rate equal to the higher of the applicable lender’s prime rate and the federal funds rate plus 0.50%.
As of March 31, 2021, the Company had $365.0 million of outstanding borrowings under the accounts receivable financing agreement, which are recorded in long-term debt on the accompanying unaudited condensed consolidated balance sheet. There was no remaining borrowing capacity available under this agreement as of March 31, 2021.
Maturities of Debt Obligations
As of March 31, 2021, the contractual maturities of the Company’s debt obligations (excluding finance leases) were as follows (in thousands):
|
|
Principal
|
|
Remainder of 2021
|
|
$
|
—
|
|
2022
|
|
|
385,856
|
|
2023
|
|
|
107,313
|
|
2024
|
|
|
1,784,244
|
|
2025
|
|
|
—
|
|
2026 and thereafter
|
|
|
600,000
|
|
Less: Deferred issuance costs
|
|
|
(11,731
|
)
|
Less: Term loan original issuance discount
|
|
|
(3,108
|
)
|
Total
|
|
$
|
2,862,574
|
|
5. Derivatives
Interest Rate Swaps
The Company has entered into various interest rate swaps to mitigate its exposure to changes in interest rates on its term loans.
In June 2018, the Company entered into an interest rate swap with multiple counterparties that had an initial aggregate notional value of $1.01 billion, an effective date of December 31, 2018, and will expire on June 30, 2021. As of March 31, 2021, the notional value of this interest rate swap was $894.0 million.
In March 2020, the Company entered into interest rate swaps with multiple counterparties. The interest rate swaps had an initial aggregate notional value of $549.2 million that will increase to $1.42 billion on June 30, 2021, an effective date of March 31, 2020, and will expire on March 31, 2023. As of March 31, 2021, the notional value of these interest rate swaps was $572.7 million.
13
Table of Contents
Foreign Exchange Forward
On October 30, 2020, the Company entered into a foreign exchange forward in order to minimize monthly foreign currency remeasurement gains or losses on non-functional currency monetary balances. The foreign exchange forward notional value may be adjusted each month as the exposure balance changes. The Company did not designate the derivative as a hedge. All changes in the fair value of the foreign exchange forward are recorded in earnings every month to other (income) expense, net in the accompanying consolidated statements of income. The Company recognized $1.1 million of realized gains during the three months ended March 31, 2021 related to this foreign exchange forward. As of March 31, 2021, the notional value of this foreign exchange forward was $50.0 million.
Fair Values
The fair values of the Company’s derivative financial instruments and the line items on the accompanying condensed consolidated balance sheets to which they were recorded were as follows (in thousands):
|
|
Balance Sheet Classification
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Interest rate swaps - current
|
|
Accrued expenses
|
|
$
|
11,507
|
|
|
$
|
17,045
|
|
Interest rate swaps - non-current
|
|
Other long-term liabilities
|
|
|
3,161
|
|
|
|
5,572
|
|
Fair value of derivative liabilities
|
|
$
|
14,668
|
|
|
$
|
22,617
|
|
6. Fair Value Measurements
Assets and Liabilities Carried at Fair Value
As of March 31, 2021 and December 31, 2020, the Company’s financial assets and liabilities carried at fair value included cash and cash equivalents, restricted cash, trading securities, accounts receivable, unbilled services (including contract assets), accounts payable, accrued expenses, deferred revenue, contingent obligations, liabilities under the accounts receivable financing agreement, and derivative instruments.
The fair values of cash and cash equivalents, restricted cash, accounts receivable, unbilled services (including contract assets), accounts payable, accrued expenses, deferred revenue, and the liabilities under the accounts receivable financing agreement approximate their respective carrying amounts because of the liquidity and short-term nature of these financial instruments.
Financial Instruments Subject to Recurring Fair Value Measurements
As of March 31, 2021, the fair values of the major classes of the Company’s assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Investments
Measured
at Net
Asset Value
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities (a)
|
|
$
|
23,663
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,663
|
|
Partnership interest (b)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,391
|
|
|
|
8,391
|
|
Total assets
|
|
$
|
23,663
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,391
|
|
|
$
|
32,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (c)
|
|
$
|
—
|
|
|
$
|
14,668
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,668
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
14,668
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,668
|
|
14
Table of Contents
As of December 31, 2020, the fair values of the major classes of the Company’s assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Investments
Measured
at Net
Asset Value
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities (a)
|
|
$
|
22,950
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,950
|
|
Partnership interest (b)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,665
|
|
|
|
8,665
|
|
Total assets
|
|
$
|
22,950
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,665
|
|
|
$
|
31,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (c)
|
|
$
|
—
|
|
|
$
|
22,617
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,617
|
|
Contingent obligations related to business combinations (d)
|
|
|
—
|
|
|
|
—
|
|
|
|
6,793
|
|
|
|
—
|
|
|
|
6,793
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
22,617
|
|
|
$
|
6,793
|
|
|
$
|
—
|
|
|
$
|
29,410
|
|
(a) Represents the fair value of investments in mutual funds based on quoted market prices that are used to fund the liability associated with the Company’s deferred compensation plan.
(b) The Company has committed to invest $21.5 million as a limited partner in two private equity funds. The private equity funds invest in opportunities in the healthcare and life sciences industry. As of March 31, 2021, the Company’s remaining unfunded commitment in the private equity funds was $13.9 million. The Company holds minor ownership interests (less than 3%) in each of the private equity funds and has determined that it does not exercise significant influence over the private equity funds’ operating and finance activities. As the private equity funds do not have readily determinable fair values, the Company has estimated the fair values using each fund’s Net Asset Value, the amount by which the value of all assets exceeds all debt and liabilities, in accordance with ASC Topic 946, Financial Services – Investment Companies.
(c) Represents the fair value of interest rate swap arrangements (see “Note 5 – Derivatives” for further information).
(d) Represents the fair value of contingent consideration obligations related to business combinations. The fair values of these liabilities are determined based on the Company’s best estimate of the probable timing and amount of settlement.
The following table presents a reconciliation of changes in the carrying amount of contingent obligations classified as Level 3 for the three months ended March 31, 2021 (in thousands):
Balance as of December 31, 2020
|
|
$
|
6,793
|
|
Additions
|
|
|
—
|
|
Changes in fair value recognized in earnings
|
|
|
(597
|
)
|
Payments (a)
|
|
|
(6,196
|
)
|
Balance as of March 31, 2021
|
|
$
|
—
|
|
(a) The Company made payments during the three months ended March 31, 2021 to fully settle the contingent tax-sharing obligation arising from inVentiv Health, Inc.’s 2016 merger with Double Eagle Parent, Inc. (see “Note 16 – Commitments and Contingencies” for further information).
As of March 31, 2021, there were no contingent obligations outstanding. During the three months ended March 31, 2021, there were no transfers of assets or liabilities between Level 1, Level 2, or Level 3 fair value measurements.
15
Table of Contents
Financial Instruments Subject to Non-Recurring Fair Value Measurements
Certain assets, including goodwill and identifiable intangible assets, are carried on the accompanying condensed consolidated balance sheets at cost and, subsequent to initial recognition, are measured at fair value on a non-recurring basis when certain identified events or changes in circumstances that may have a significant adverse effect on the carrying values of these assets occur. These assets are classified as Level 3 fair value measurements within the fair value hierarchy. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate a triggering event has occurred. Intangible assets are tested for impairment upon the occurrence of certain triggering events. As of March 31, 2021 and December 31, 2020, assets carried on the condensed consolidated balance sheets and not remeasured to fair value on a recurring basis totaled $5.68 billion and $5.71 billion, respectively.
Fair Value Disclosures for Financial Instruments Not Carried at Fair Value
The estimated fair values of the term loans and the Senior Notes are determined based on the price that the Company would have had to pay to settle the liabilities. As these liabilities are not actively traded, they are classified as Level 2 fair value measurements. The estimated fair values of the Company’s term loans and the Notes were as follows (in thousands):
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
|
Carrying
Value (a)
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Value (a)
|
|
|
Estimated
Fair Value
|
|
Term Loan A - tranche one due March 2024
|
|
$
|
173,508
|
|
|
$
|
173,962
|
|
|
$
|
183,320
|
|
|
$
|
183,026
|
|
Term Loan A - tranche two due August 2024
|
|
|
1,239,681
|
|
|
|
1,243,693
|
|
|
|
1,271,255
|
|
|
|
1,269,213
|
|
Term Loan B
|
|
|
496,117
|
|
|
|
497,041
|
|
|
|
560,194
|
|
|
|
560,144
|
|
3.625% Senior Unsecured Notes due 2029
|
|
|
600,000
|
|
|
|
586,500
|
|
|
|
600,000
|
|
|
|
602,412
|
|
(a) The carrying value of the term loan debt is shown net of original issue discounts.
7. Restructuring and Other Costs
During the three months ended March 31, 2021, the Company incurred employee severance and benefit costs, facility and lease termination costs, and other costs related to the Company’s restructuring activities. These costs were primarily related to the Company’s ForwardBound margin enhancement initiative.
Restructuring and other costs consisted of the following (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Employee severance and benefit costs
|
|
$
|
6,293
|
|
|
$
|
7,621
|
|
Facility and lease termination costs
|
|
|
888
|
|
|
|
733
|
|
Other costs
|
|
|
47
|
|
|
|
366
|
|
Total restructuring and other costs
|
|
$
|
7,228
|
|
|
$
|
8,720
|
|
The Company expects to continue to incur costs related to restructuring of its operations in order to achieve cost savings and the targeted synergies related to its business combinations. However, the timing and the amount of these costs depends on various factors, including, but not limited to, identifying and realizing synergy opportunities and executing the integration of its combined operations. The Company may also continue to incur additional restructuring and other costs during 2021 related to its ForwardBound margin enhancement initiative.
16
Table of Contents
Accrued Restructuring Liabilities
The following table summarizes activity related to the liabilities associated with restructuring and other costs (in thousands):
|
|
Employee
Severance
Costs
|
|
|
Other
Costs
|
|
|
Total
|
|
Balance as of December 31, 2020
|
|
$
|
5,830
|
|
|
$
|
—
|
|
|
$
|
5,830
|
|
Expenses incurred (a)
|
|
|
6,293
|
|
|
|
47
|
|
|
|
6,340
|
|
Payments
|
|
|
(8,716
|
)
|
|
|
(47
|
)
|
|
|
(8,763
|
)
|
Balance as of March 31, 2021
|
|
$
|
3,407
|
|
|
$
|
—
|
|
|
$
|
3,407
|
|
(a) The amount of expenses incurred for the three months ended March 31, 2021 excludes $0.9 million of facility lease closure and lease termination costs that are reflected as a reduction of operating lease right-of-use assets on the unaudited condensed consolidated balance sheet under ASC 842.
The Company expects the employee severance costs accrued as of March 31, 2021 will be paid within the next twelve months. Liabilities associated with restructuring and other costs are included in accrued expenses and other long-term liabilities on the accompanying condensed consolidated balance sheets.
8. Shareholders’ Equity
Shares Outstanding
Shares of common stock outstanding were as follows (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Common stock shares, beginning balance
|
|
|
103,935
|
|
|
|
103,866
|
|
Repurchases of common stock
|
|
|
(600
|
)
|
|
|
(600
|
)
|
Issuances of common stock
|
|
|
891
|
|
|
|
895
|
|
Common stock shares, ending balance
|
|
|
104,226
|
|
|
|
104,161
|
|
Stock Repurchase Program
On November 17, 2020, the Company’s Board of Directors (the “Board”) authorized the repurchase of up to an aggregate of $300.0 million of the Company’s Class A common stock, par value $0.01 per share, to be executed from time to time in open market transactions effected through a broker at prevailing market prices, in block trades, or through privately negotiated transactions through December 31, 2022 (the “Stock Repurchase Program”). The Stock Repurchase Program took effect on January 1, 2021.
The Stock Repurchase Program does not obligate the Company to repurchase any particular amount of the Company’s common stock and may be modified, extended, suspended, or discontinued at any time. The timing and amount of repurchases will be determined by the Company’s management based on a variety of factors such as the market price of the Company’s common stock, the Company’s corporate cash requirements, and overall market conditions. The Stock Repurchase Program is subject to applicable legal requirements, including federal and state securities laws and applicable Nasdaq rules. The Company may also repurchase shares of its common stock pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, which permits shares of the Company’s common stock to be repurchased when the Company might otherwise be precluded from doing so by law.
17
Table of Contents
During the three months ended March 31, 2021, the Company repurchased 600,000 shares of its common stock in a private transaction under the Stock Repurchase Program, for a total purchase price of approximately $44.5 million.
The following table sets forth repurchase activity under the Stock Repurchase Program from inception through March 31, 2021:
|
|
Total number of
shares purchased
|
|
|
Average price
paid per share
|
|
|
Approximate
dollar value of
shares purchased
(in thousands)
|
|
March 2021
|
|
|
600,000
|
|
|
$
|
74.18
|
|
|
$
|
44,505
|
|
Total
|
|
|
600,000
|
|
|
|
|
|
|
$
|
44,505
|
|
The Company immediately retired all of the repurchased common stock and charged the par value of the shares to common stock. The excess of the repurchase price over the par value was applied on a pro rata basis against additional paid-in capital, with the remainder applied to accumulated deficit.
As of March 31, 2021, the Company had remaining authorization to repurchase up to approximately $255.5 million of shares of its common stock under the Stock Repurchase Program.
9. Earnings Per Share
The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations (in thousands, except per share data):
|
|
Three Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
38,724
|
|
|
$
|
33,574
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
104,274
|
|
|
|
104,265
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options and other awards under deferred share-based compensation programs
|
|
|
1,183
|
|
|
|
1,377
|
|
Diluted weighted average common shares outstanding
|
|
|
105,457
|
|
|
|
105,642
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.37
|
|
|
$
|
0.32
|
|
Diluted
|
|
$
|
0.37
|
|
|
$
|
0.32
|
|
Potential common shares outstanding that are considered anti-dilutive are excluded from the computation of diluted earnings per share. Potential common shares related to stock options and other awards under share-based compensation programs may be determined to be anti-dilutive based on the application of the treasury stock method. Potential common shares are also considered anti-dilutive in periods when the Company incurs a net loss.
The number of potential shares outstanding that were anti-dilutive and therefore excluded from the computation of diluted earnings per share, weighted for the portion of the period they were outstanding, were 166,166 and 910,918 for the three months ended March 31, 2021 and 2020, respectively.
18
Table of Contents
10. Income Taxes
Income Tax Expense
For the three months ended March 31, 2021, the Company recorded income tax expense of $8.3 million, compared to pre-tax income of $47.0 million. Income tax expense for the three months ended March 31, 2021 included a discrete tax benefit of $3.6 million, primarily related to excess tax benefits from share-based compensation. The effective tax rate for the three months ended March 31, 2021, excluding discrete items, varied from the U.S. federal statutory income tax rate of 21.0% primarily due to foreign income inclusions such as the Global Intangible Low-Taxed Income (“GILTI”) provisions, foreign tax credits, and state and local taxes on U.S. income.
For the three months ended March 31, 2020, the Company recorded income tax expense of $8.2 million, compared to pre-tax income of $41.8 million. Income tax expense for the three months ended March 31, 2020 included $7.1 million of discrete tax benefits primarily related to excess tax benefits from share-based compensation and the benefit from foreign tax credits related to prior years that were quantified or claimed on amended returns during the period. The effective tax rate for the three months ended March 31, 2020, excluding discrete items, varied from the U.S. federal statutory income tax rate of 21.0% primarily due to foreign income inclusions such as the GILTI provisions, state and local taxes on U.S. income, and research and general business credits.
Unrecognized Tax Benefits
The Company’s gross unrecognized tax benefits, exclusive of associated interest and penalties, were $9.5 million and $9.0 million as of March 31, 2021 and December 31, 2020, respectively. The increase of $0.5 million was primarily due to unrecognized tax benefits in foreign jurisdictions. The Company believes it is reasonably possible that its unrecognized tax benefits may decrease by approximately $0.6 million within the next 12 months as a result of lapses in statutes of limitations.
Tax Returns under Audit
The Company is not currently under any U.S. Federal income tax audits, however, income tax returns are under examination by tax authorities in several state and foreign jurisdictions. The Company’s federal and state tax filings are open to investigations in numerous years due to net operating loss carryforwards. Additionally, the Company currently has an ongoing examination for tax years 2017 and 2018 in the United Kingdom. The United Kingdom is the jurisdiction with the Company’s largest foreign operations. The Company believes that its reserve for uncertain tax positions is adequate to cover existing risks or exposures related to all open tax years.
11. Revenue from Contracts with Customers
Unsatisfied Performance Obligations
As of March 31, 2021, the total aggregate transaction price allocated to the unsatisfied performance obligations under contracts with contract terms greater than one year and that are not accounted for as a series pursuant to ASC Topic 606,
19
Table of Contents
Revenue from Contracts with Customers and all the related amendments was $6.93 billion. This amount includes revenue associated with reimbursable out-of-pocket expenses. The Company expects to recognize revenue over the remaining contract term of the individual projects, with contract terms generally ranging from one to five years. The amount of unsatisfied performance obligations is presented net of any constraints and, as a result, is lower than the potential contractual revenue. The contracts excluded due to constraints include contracts that do not commence within a certain period of time or that require the Company to undertake numerous activities to fulfill these performance obligations, including various activities that are outside of the Company’s control.
Timing of Billing and Performance
During the three months ended March 31, 2021, the Company recognized approximately $349.8 million of revenue that was included in the deferred revenue balance at the beginning of the period. During the three months ended March 31, 2021, approximately $26.3 million of the Company’s revenue recognized was allocated to performance obligations partially satisfied in previous periods, substantially all of which was associated with changes in scope or price for full service clinical studies. The gross and net amounts of revenue recognized solely from changes in estimates were not material.
12. Segment Information
The Company is managed through two reportable segments: Clinical Solutions and Commercial Solutions. Each reportable segment consists of multiple service offerings that, when combined, create a fully integrated biopharmaceutical services organization. Clinical Solutions offers a variety of services spanning Phases I to IV of clinical development, including full service global studies, as well as individual service offerings such as clinical monitoring, investigator recruitment, patient recruitment, data management, and study startup to assist customers with their drug development process. Commercial Solutions provides the pharmaceutical, biotechnology, and healthcare industries with commercialization services, including deployment solutions, communication solutions (public relations, advertising, and medical communications), and consulting services.
The Company’s Chief Operating Decision Maker (“CODM”) reviews segment performance and allocates resources based upon segment revenue and income from operations. Inter-segment revenue is eliminated from the segment reporting presented to the CODM and is not included in the segment revenue presented in the table below. Certain costs are not allocated to the Company’s reportable segments and are reported as general corporate expenses. These costs primarily consist of share-based compensation, general operating expenses associated with the Board and the Company’s senior leadership, finance, investor relations, and internal audit functions, and transaction and integration-related expenses. The Company does not allocate depreciation, amortization, asset impairment charges, or restructuring and other costs to its segments. Prior period segment results have been recast to reflect the transfer of the Kinapse Regulatory and Operations Consulting service lines from Commercial Solutions to Clinical Solutions to align with management reporting in 2021. Additionally, the CODM reviews the Company’s assets on a consolidated basis and does not allocate assets to its reportable segments for purposes of assessing segment performance or allocating resources.
20
Table of Contents
Information about reportable segment operating results was as follows (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Clinical Solutions
|
|
$
|
937,954
|
|
|
$
|
882,501
|
|
Commercial Solutions
|
|
|
270,791
|
|
|
|
280,854
|
|
Total revenue
|
|
|
1,208,745
|
|
|
|
1,163,355
|
|
Segment direct costs:
|
|
|
|
|
|
|
|
|
Clinical Solutions
|
|
|
716,113
|
|
|
|
682,174
|
|
Commercial Solutions
|
|
|
220,042
|
|
|
|
233,658
|
|
Total segment direct costs
|
|
|
936,155
|
|
|
|
915,832
|
|
Segment selling, general, and administrative expenses:
|
|
|
|
|
|
|
|
|
Clinical Solutions
|
|
|
87,532
|
|
|
|
76,344
|
|
Commercial Solutions
|
|
|
20,971
|
|
|
|
22,610
|
|
Total segment selling, general, and administrative expenses
|
|
|
108,503
|
|
|
|
98,954
|
|
Segment operating income:
|
|
|
|
|
|
|
|
|
Clinical Solutions
|
|
|
134,309
|
|
|
|
123,983
|
|
Commercial Solutions
|
|
|
29,778
|
|
|
|
24,586
|
|
Total segment operating income
|
|
|
164,087
|
|
|
|
148,569
|
|
Direct costs and operating expenses not allocated to segments:
|
|
|
|
|
|
|
|
|
Share-based compensation included in direct costs
|
|
|
9,095
|
|
|
|
8,182
|
|
Share-based compensation included in selling, general, and administrative expenses
|
|
|
8,258
|
|
|
|
7,816
|
|
Corporate selling, general, and administrative expenses
|
|
|
20,553
|
|
|
|
18,777
|
|
Restructuring and other costs
|
|
|
7,228
|
|
|
|
8,720
|
|
Depreciation and amortization
|
|
|
57,938
|
|
|
|
56,107
|
|
Total income from operations
|
|
$
|
61,015
|
|
|
$
|
48,967
|
|
13. Operations by Geographic Location
The following table summarizes total revenue by geographic area (in thousands, all intercompany transactions have been eliminated):
|
|
Three Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Revenue:
|
|
|
|
|
|
|
|
|
North America (a)
|
|
$
|
739,001
|
|
|
$
|
753,045
|
|
Europe, Middle East, and Africa
|
|
|
316,176
|
|
|
|
268,022
|
|
Asia-Pacific
|
|
|
126,457
|
|
|
|
117,053
|
|
Latin America
|
|
|
27,111
|
|
|
|
25,235
|
|
Total revenue
|
|
$
|
1,208,745
|
|
|
$
|
1,163,355
|
|
(a) Revenue for the North America region includes revenue attributable to the United States of $693.9 million and $713.4 million, or 57.4% and 61.3% of total revenue, for the three months ended March 31, 2021 and 2020, respectively. No other country represented more than 10% of total revenue for any period.
21
Table of Contents
The following table summarizes long-lived assets by geographic area (in thousands, all intercompany transactions have been eliminated):
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
|
North America (a)
|
|
$
|
151,611
|
|
|
$
|
161,531
|
|
Europe, Middle East, and Africa
|
|
|
36,508
|
|
|
|
38,745
|
|
Asia-Pacific
|
|
|
9,392
|
|
|
|
11,167
|
|
Latin America
|
|
|
5,107
|
|
|
|
4,757
|
|
Total property and equipment, net
|
|
$
|
202,618
|
|
|
$
|
216,200
|
|
(a) Long-lived assets for the North America region include property and equipment, net attributable to the United States of $145.8 million and $156.0 million as of March 31, 2021 and December 31, 2020, respectively.
14. Concentration of Credit Risk
Financial assets that subject the Company to credit risk primarily consist of cash and cash equivalents, accounts receivable, and unbilled services (including contract assets). The Company’s cash and cash equivalents consist principally of cash and are maintained at several financial institutions with reputable credit ratings. The Company maintains cash depository accounts with several financial institutions worldwide and is exposed to credit risk related to the potential inability to access liquidity in financial institutions where its cash and cash equivalents are concentrated. The Company has not historically incurred any losses with respect to these balances and believes that they bear minimal credit risk.
As of March 31, 2021 and December 31, 2020, the majority of the Company’s cash and cash equivalents were held within the United States.
No single customer accounted for greater than 10% of the Company’s revenue for the three months ended March 31, 2021 and 2020.
As of March 31, 2021 and December 31, 2020, no single customer accounted for greater than 10% of the Company’s accounts receivable and unbilled services (including contract assets) balances.
15. Related-Party Transactions
For the three months ended March 31, 2021, the Company had revenue of $0.3 million and, as of March 31, 2021, receivables of $0.3 million from one customer whose board of directors included a member who was also a member of the Company’s Board.
There were no material related party transactions for the three months ended March 31, 2020.
16. Commitments and Contingencies
Legal Proceedings
The Company is involved in various claims and legal actions arising in the ordinary course of business. The Company accrues a liability when a loss is considered probable and the amount can be reasonably estimated. When a material loss contingency is reasonably possible but not probable, the Company does not record a liability, but instead discloses the nature and the amount of the claim, and an estimate of the loss or range of loss, if such an estimate can be made. Legal fees are expensed as incurred. In the opinion of management, the outcome of any existing claims and legal or regulatory proceedings, other than the specific matters described below, if decided adversely, is not expected to have a material adverse effect on the Company's business, financial condition, results of operations, or cash flows.
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On December 1, 2017, the first of two virtually identical actions alleging federal securities law claims was filed against the Company and certain of its officers on behalf of a putative class of its shareholders. The first action, captioned Bermudez v. INC Research, Inc., et al, No. 17-09457 (S.D.N.Y.) in the Southern District of New York, names as defendants the Company, Michael Bell, Alistair Macdonald, Michael Gilbertini, and Gregory S. Rush (the “Bermudez action”), and the second action, Vaitkuvienë v. Syneos Health, Inc., et al, No. 18-0029 (E.D.N.C.) in the Eastern District of North Carolina, filed on January 25, 2018 (the “Vaitkuvienë action”), names as defendants the Company, Alistair Macdonald, and Gregory S. Rush (the “Initial Defendants”). Both complaints allege similar claims under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of purchasers of the Company’s common stock between May 10, 2017 and November 8, 2017 (for the Vaitkuvienë action) and November 9, 2017 (for the Bermudez action). The complaints allege that the Company published inaccurate or incomplete information regarding, among other things, the financial performance and business outlook for inVentiv’s business prior to the 2017 merger (the “Merger”) with Double Eagle Parent, Inc. (“inVentiv”), the parent company of inVentiv Health, Inc., and with respect to the combined company following the Merger. On January 30, 2018, two alleged shareholders separately filed motions seeking to be appointed lead plaintiff and approving the selection of lead counsel. On March 30, 2018, Plaintiff in the Bermudez action filed a notice of voluntary dismissal of the Bermudez action, without prejudice, and as to all defendants. On May 29, 2018, the Court in the Vaitkuvienë action appointed the San Antonio Fire & Police Pension Fund and El Paso Firemen & Policemen’s Pension Fund as Lead Plaintiffs and, on June 7, 2018, the Court entered a schedule providing for, among other things, Lead Plaintiffs to file an amended complaint by July 23, 2018 (later extended to July 30, 2018). Lead Plaintiffs filed their amended complaint on July 30, 2018, which also includes a claim against the Initial Defendants, as well as each member of the board of directors at the time of the INC Research - inVentiv Health merger vote in July 2017 (the “Defendants”), contending that the inVentiv merger proxy was misleading under Section 14(a) of the Act. Lead Plaintiffs seek, among other things, orders (i) declaring that the lawsuit is a proper class action and (ii) awarding compensatory damages in an amount to be proven at trial, including interest thereon, and reasonable costs and expenses incurred in this action, including attorneys’ fees and expert fees, to Lead Plaintiffs and other class members. Defendants filed a Motion to Dismiss Plaintiffs’ Amended Complaint on September 20, 2018. Lead Plaintiffs filed a Response in Opposition to such motion on November 21, 2018, and Defendants filed a Reply to such response on December 5, 2018. The District Court referred the Motion to Dismiss to a magistrate judge for a report and recommendation. On September 26, 2019, the magistrate judge stayed the action and, on August 7, 2020, the magistrate judge lifted the stay. Also on August 7, 2020, the magistrate judge issued a report (the “Magistrate Report”) recommending to the District Court that Defendants’ Motion to Dismiss be denied. On September 4, 2020, Defendants filed written objections to the Magistrate Report, requesting that the District Court grant the Motion to Dismiss. Lead Plaintiffs filed a Response in Opposition to such objections on October 2, 2020. The Company and the other defendants deny the allegations in these complaints and intend to defend vigorously against these claims.
The Company is presently unable to predict the duration, scope, or result of the foregoing putative class actions, or any other related lawsuit. As such, the Company is presently unable to develop a reasonable estimate of a possible loss or range of losses, if any, related to these matters. While the Company intends to defend the putative class action litigation vigorously, the outcome of such litigation or any other litigation is necessarily uncertain. The Company could be forced to expend significant resources in the defense of these lawsuits or future ones, and it may not prevail. As such, these matters could have a material adverse effect on the Company's business, annual, or interim results of operations, cash flows, or its financial condition.
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Assumed Contingent Tax-Sharing Obligations
As a result of the Merger, the Company assumed contingent tax-sharing obligations arising from inVentiv Health, Inc.’s 2016 merger with Double Eagle Parent, Inc. During the three months ended March 31, 2021, the Company made payments of $6.2 million to fully settle this outstanding obligation. As of December 31, 2020, the estimated fair value of the assumed contingent tax-sharing obligations was $6.8 million.
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