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synh:KinapseTopcoLimitedMember 2018-12-31 iso4217:USD xbrli:shares xbrli:pure synh:segment iso4217:USD xbrli:shares synh:plaintiff synh:Counterparty synh:action

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 

FORM 10-Q 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            .
Commission File Number: 001-36730
 
SYNEOS HEALTH, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
27-3403111
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
1030 Sync Street, Morrisville, North Carolina 27560-5468
(Address of principal executive offices and Zip Code)
(919876-9300
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, $0.01 par value per share
SYNH
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
 
  
Accelerated filer
 
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No  
As of July 31, 2019, there were approximately 103,485,261 shares of the registrant’s common stock outstanding.



Table of Contents






SYNEOS HEALTH, INC.
FORM 10-Q


TABLE OF CONTENTS
 
 
 
 
 
 
 
Page
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 5.
Item 6.
 


2



Table of Contents



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
SYNEOS HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands, except per share data)
Revenue
$
1,166,827

 
$
1,072,530

 
$
2,285,833

 
$
2,129,726

 
 
 
 
 
 
 
 
Costs and operating expenses:
 
 
 
 
 
 
 
Direct costs (exclusive of depreciation and amortization)
917,529

 
847,465

 
1,804,331

 
1,688,288

Selling, general, and administrative expenses
110,879

 
100,218

 
223,996

 
199,477

Restructuring and other costs
11,882

 
8,591

 
26,295

 
22,298

Transaction and integration-related expenses
7,654

 
18,032

 
24,312

 
43,243

Depreciation
19,248

 
17,557

 
38,819

 
35,585

Amortization
41,501

 
49,945

 
83,130

 
99,938

Total operating expenses
1,108,693

 
1,041,808

 
2,200,883

 
2,088,829

Income from operations
58,134

 
30,722

 
84,950

 
40,897

 
 
 
 
 
 
 
 
Other expense, net:
 
 
 
 
 
 
 
Interest income
2,133

 
1,655

 
3,635

 
2,494

Interest expense
(34,263
)
 
(32,894
)
 
(68,893
)
 
(64,630
)
Loss on extinguishment of debt

 
(1,877
)
 
(4,355
)
 
(2,125
)
Other income (expense), net
7,573

 
32,001

 
(1,348
)
 
19,447

Total other expense, net
(24,557
)
 
(1,115
)
 
(70,961
)
 
(44,814
)
Income (loss) before provision for income taxes
33,577

 
29,607

 
13,989

 
(3,917
)
Income tax expense
(22,285
)
 
(16,047
)
 
(32,701
)
 
(7,075
)
Net income (loss)
$
11,292

 
$
13,560

 
$
(18,712
)
 
$
(10,992
)
 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.11

 
$
0.13

 
$
(0.18
)
 
$
(0.11
)
Diluted
$
0.11

 
$
0.13

 
$
(0.18
)
 
$
(0.11
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
103,699

 
102,899

 
103,532

 
103,674

Diluted
104,818

 
104,005

 
103,532

 
103,674


The accompanying notes are an integral part of these condensed consolidated financial statements.

3



Table of Contents



SYNEOS HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
Net income (loss)
$
11,292

 
$
13,560

 
$
(18,712
)
 
$
(10,992
)
Unrealized loss on derivative instruments, net of income tax benefit of $237, $0, $332 and $0, respectively
(8,962
)
 
(1,717
)
 
(13,178
)
 
(1,283
)
Foreign currency translation adjustments, net of income tax benefit (expense) of $0, $0, $0 and $(2,868), respectively
(11,919
)
 
(69,169
)
 
8,685

 
(35,246
)
Comprehensive loss
$
(9,589
)
 
$
(57,326
)
 
$
(23,205
)
 
$
(47,521
)

The accompanying notes are an integral part of these condensed consolidated financial statements.



4



Table of Contents



SYNEOS HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 30, 2019
 
December 31, 2018
 
(in thousands, except par value)
ASSETS
 
 
 
Current assets:
 
 
 
Cash, cash equivalents, and restricted cash
$
107,256

 
$
155,932

Accounts receivable and unbilled services, net
1,287,509

 
1,256,731

Prepaid expenses and other current assets
71,985

 
79,299

Total current assets
1,466,750

 
1,491,962

Property and equipment, net
187,747

 
183,486

Operating lease right-of-use assets
227,715

 

Goodwill
4,336,355

 
4,333,159

Intangible assets, net
1,051,065

 
1,133,612

Deferred income tax assets
9,111

 
9,317

Other long-term assets
118,238

 
103,373

Total assets
$
7,396,981

 
$
7,254,909

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
128,812

 
$
98,624

Accrued expenses
569,446

 
563,527

Deferred revenue
710,905

 
777,141

Current portion of operating lease obligations
29,760

 

Current portion of finance lease obligations
16,004

 
13,806

Current portion of long-term debt
199,575

 
50,100

Total current liabilities
1,654,502

 
1,503,198

Long-term debt
2,534,842

 
2,737,019

Operating lease long-term obligations
228,704

 

Finance lease long-term obligations
28,390

 
26,759

Deferred income tax liabilities
33,223

 
25,120

Other long-term liabilities
93,421

 
106,669

Total liabilities
4,573,082

 
4,398,765

 
 
 
 
Commitments and contingencies (Note 17)

 

 
 
 
 
Shareholders' equity:
 
 
 
Preferred stock, $0.01 par value; 30,000 shares authorized, 0 shares issued and outstanding at June 30, 2019 and December 31, 2018

 

Common stock, $0.01 par value; 600,000 shares authorized, 103,460 and 103,372 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
1,035

 
1,034

Additional paid-in capital
3,404,389

 
3,402,638

Accumulated other comprehensive loss, net of tax
(92,688
)
 
(88,195
)
Accumulated deficit
(488,837
)
 
(459,333
)
Total shareholders' equity
2,823,899

 
2,856,144

Total liabilities and shareholders' equity
$
7,396,981

 
$
7,254,909


The accompanying notes are an integral part of these condensed consolidated financial statements.

5



Table of Contents



SYNEOS HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended June 30,
 
2019
 
2018
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net loss
$
(18,712
)
 
$
(10,992
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
121,949

 
135,523

Share-based compensation
28,061

 
16,254

Provision for doubtful accounts
783

 
(1,734
)
Provision for (benefit from) deferred income taxes
8,793

 
(7,682
)
Foreign currency transaction adjustments
(957
)
 
(19,633
)
Fair value adjustment of contingent obligations
(940
)
 
2,388

Loss on extinguishment of debt
4,355

 
2,125

Other non-cash items
1,147

 
4,024

Changes in operating assets and liabilities, net of effect of business combinations:
 
 
 
Accounts receivable, unbilled services, and deferred revenue
(89,535
)
 
(68,629
)
Accounts payable and accrued expenses
32,005

 
(3,269
)
Other assets and liabilities
(3,435
)
 
16,799

Net cash provided by operating activities
83,514

 
65,174

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(28,066
)
 
(32,586
)
Investments in unconsolidated affiliates
(3,000
)
 

Net cash used in investing activities
(31,066
)
 
(32,586
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of long-term debt, net of discount
183,195

 

Payments of debt financing costs
(1,032
)
 
(3,421
)
Repayments of long-term debt
(256,136
)
 
(97,500
)
Proceeds from accounts receivable financing agreement
38,200

 

Repayments of accounts receivable financing agreement
(22,400
)
 

Payments of contingent consideration related to business combinations
(8
)
 

Payments of finance leases
(4,677
)
 
(8,863
)
Payments for repurchase of common stock
(49,671
)
 
(74,985
)
Proceeds from exercise of stock options
24,377

 
7,458

Payments related to tax withholding for share-based compensation
(11,763
)
 
(2,383
)
Net cash used in financing activities
(99,915
)
 
(179,694
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(1,209
)
 
(1,151
)
Net change in cash, cash equivalents, and restricted cash
(48,676
)
 
(148,257
)
Cash, cash equivalents, and restricted cash - beginning of period
155,932

 
321,976

Cash, cash equivalents, and restricted cash - end of period
$
107,256

 
$
173,719


The accompanying notes are an integral part of these condensed consolidated financial statements.

6



Table of Contents



SYNEOS HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
 
(in thousands)
Shareholders' equity, beginning balance
$
2,838,370

 
$
2,907,259

 
$
2,856,144

 
$
3,022,579

Impact from adoption of ASU 2014-09

 

 

 
(98,815
)
Shareholders' equity, adjusted beginning balance
2,838,370

 
2,907,259

 
2,856,144

 
2,923,764

 
 
 
 
 
 
 
 
Common stock:
 
 
 
 
 
 
 
Beginning balance
1,038

 
1,038

 
1,034

 
1,044

Stock repurchase
(5
)
 
(10
)
 
(12
)
 
(19
)
RSU distributions net of shares for tax withholding

 

 
4

 
1

Stock option exercises
2

 
1

 
9

 
3

Ending balance
1,035

 
1,029

 
1,035

 
1,029

 
 
 
 
 
 
 
 
Additional paid-in capital:
 
 
 
 
 
 
 
Beginning balance
3,402,953

 
3,394,586

 
3,402,638

 
3,414,389

Stock repurchase
(16,735
)
 
(33,500
)
 
(38,867
)
 
(64,482
)
RSU distributions net of shares for tax withholding
(241
)
 
(60
)
 
(11,778
)
 
(2,384
)
Stock option exercises
4,618

 
1,915

 
24,335

 
7,539

Share-based compensation
13,794

 
8,375

 
28,061

 
16,254

Ending balance
3,404,389

 
3,371,316

 
3,404,389

 
3,371,316

 
 
 
 
 
 
 
 
Accumulated other comprehensive (loss) income:
 
 
 
 
 
 
 
Beginning balance
(71,807
)
 
15,822

 
(88,195
)
 
(22,385
)
Impact from adoption of ASU 2018-02

 

 

 
3,850

Adjusted beginning balance
(71,807
)
 
15,822

 
(88,195
)
 
(18,535
)
Unrealized loss on derivative instruments, net of taxes
(8,962
)
 
(1,717
)
 
(13,178
)
 
(1,283
)
Foreign currency translation adjustment, net of taxes
(11,919
)
 
(69,169
)
 
8,685

 
(35,246
)
Ending balance
(92,688
)
 
(55,064
)
 
(92,688
)
 
(55,064
)
 
 
 
 
 
 
 
 
Accumulated deficit:
 
 
 
 
 
 
 
Beginning balance
(493,814
)
 
(504,187
)
 
(459,333
)
 
(370,469
)
Impact from adoption of ASU 2014-09

 

 

 
(98,815
)
Impact from adoption of ASU 2018-02

 

 

 
(3,850
)
Adjusted beginning balance
(493,814
)
 
(504,187
)
 
(459,333
)
 
(473,134
)
Stock repurchase
(6,315
)
 
(3,982
)
 
(10,792
)
 
(10,483
)
Net income (loss)
11,292

 
13,560

 
(18,712
)
 
(10,992
)
Ending balance
(488,837
)
 
(494,609
)
 
(488,837
)
 
(494,609
)
 
 
 
 
 
 
 
 
Shareholders' equity, ending balance
$
2,823,899

 
$
2,822,672

 
$
2,823,899

 
$
2,822,672


The accompanying notes are an integral part of these condensed consolidated financial statements.



7



Table of Contents



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 Phase 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, 2018, filed with the Securities and Exchange Commission on March 18, 2019. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019 or any other future period. The unaudited condensed consolidated balance sheet at December 31, 2018 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, 2018.
Allowance for Doubtful Accounts
The Company maintains a credit approval process and makes judgments in connection with assessing its customers’ ability to pay throughout the contractual obligation period. Generally, the Company has the ability to limit credit exposure by discontinuing services in the event of non-payment. The Company has certain customers that may depend on the ability to continue to raise capital in order to complete the development or commercialization of their products. The Company monitors its customers’ credit worthiness and applies judgment in establishing a provision for estimated credit losses based on historical experience, current receivables aging, and identified customer-specific circumstances that would affect the customers’ ability to meet their obligation. Despite this assessment, from time to time, customers are unable to meet their payment obligations, which could impact the Company’s results of operations.
Recently Adopted Accounting Standards
Leases. In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-02 (“ASU 2016-02”), Leases (Topic 842), as further amended, to increase transparency and comparability among organizations by requiring the recognition of, at the lease commencement date, a lease liability for the obligation to make lease payments, and a right-of-use ("ROU") asset for the right to use the underlying asset, on the balance sheet. The Company adopted ASU 2016-02, and all related amendments, collectively “ASC 842”, as of January 1, 2019, using the modified retrospective approach.

8



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Results for reporting periods beginning on January 1, 2019 are presented under ASC 842, while prior period amounts continue to be reported and disclosed in accordance with the Company’s historical accounting treatment under Accounting Standards Codification 840, Leases (“ASC 840”). In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, does not require the Company to reassess if a contract is or contains a lease and allows the Company to carry forward the historical lease classifications and historical initial direct costs. The Company made an accounting policy election under ASC 842 not to recognize ROU assets and lease liabilities for leases with a term of 12 months or less. Lease payments for these leases are recognized as lease costs on a straight-line basis over the lease term. The Company also elected to account for lease components and the associated non-lease components in the contracts as a single lease component for all classes of underlying assets.
Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities, mainly related to operating leases, of approximately $214.0 million, as of January 1, 2019. The Company’s accounting for finance leases (previously classified as capital leases under ASC 840) remained substantially unchanged.
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. 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. 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.
Accounts Receivable and Unbilled Services, net
Accounts receivable and unbilled services, net of allowance for doubtful accounts, consisted of the following (in thousands):
 
June 30, 2019
 
December 31, 2018
Accounts receivable billed
$
781,440

 
$
733,142

Less: Allowance for doubtful accounts
(5,296
)
 
(4,587
)
Accounts receivable billed, net
776,144

 
728,555

Accounts receivable unbilled
419,337

 
422,860

Contract assets
92,028

 
105,316

Accounts receivable and unbilled services, net
$
1,287,509

 
$
1,256,731


Accounts Receivable Factoring Arrangement
In May 2017, the Company entered into 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 six months ended June 30, 2019 and 2018, the Company factored $113.7 million and $100.9 million, respectively, of trade accounts receivable on a non-recourse basis and received $112.8 million and $100.5 million, respectively, in cash proceeds from the sale. The fees associated with these transactions were insignificant.

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Goodwill
The changes in the carrying amount of goodwill by segment for the six months ended June 30, 2019 were as follows (in thousands):
 
Total
 
Clinical
Solutions
 
Commercial
Solutions
Balance at December 31, 2018:
 
 
 
 
 
Gross carrying amount
$
4,349,325

 
$
2,780,945

 
$
1,568,380

Accumulated impairment losses (a)
(16,166
)
 
(8,142
)
 
(8,024
)
Goodwill, net of accumulated impairment losses
4,333,159

 
2,772,803

 
1,560,356

2019 Activity:
 
 
 
 
 
Business combinations (b)
(250
)
 

 
(250
)
Impact of foreign currency translation
3,446

 
1,209

 
2,237

Balance at June 30, 2019:
 
 
 
 
 
Gross carrying amount
4,352,521

 
2,782,154

 
1,570,367

Accumulated impairment losses (a)
(16,166
)
 
(8,142
)
 
(8,024
)
Goodwill, net of accumulated impairment losses
$
4,336,355

 
$
2,774,012

 
$
1,562,343


(a) Accumulated impairment losses associated with the Clinical Solutions segment were recorded prior to 2019 and related to the former Phase I Services segment, now a component of the Clinical Solutions segment. Accumulated impairment losses associated with the Commercial Solutions segment were recorded prior to 2019 and related to the former Global Consulting segment, now a component of the Commercial Solutions segment. No impairment of goodwill was recorded for the six months ended June 30, 2019.
(b) Amount represents measurement period adjustments to goodwill recognized in connection with the acquisition of Kinapse Topco Limited (“Kinapse”).
Transaction and Integration-Related Expenses
Transaction and integration-related expenses consisted of the following (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Professional fees
$
6,678

 
$
11,073

 
$
19,523

 
$
25,774

Debt modification and related expenses
1,732

 
1,317

 
3,973

 
1,317

Integration and personnel retention-related costs
909

 
4,448

 
1,756

 
13,741

Fair value adjustments to contingent obligations
(1,665
)
 
1,194

 
(940
)
 
2,388

Other

 

 

 
23

Total transaction and integration-related expenses
$
7,654

 
$
18,032

 
$
24,312

 
$
43,243


Accumulated Other Comprehensive Loss, Net of Tax
Accumulated other comprehensive loss, net of tax, consisted of the following (in thousands):
 
June 30, 2019
 
December 31, 2018
Foreign currency translation adjustments
$
(72,270
)
 
$
(80,955
)
Unrealized loss on derivative instruments
(20,418
)
 
(7,240
)
Accumulated other comprehensive loss
$
(92,688
)
 
$
(88,195
)


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Changes in accumulated other comprehensive loss, net of tax, for the three months ended June 30, 2019 were as follows (in thousands):
 
Unrealized Loss on Derivative Instruments
 
Foreign Currency Translation Adjustments
 
Total
Balance at March 31, 2019
$
(11,456
)
 
$
(60,351
)
 
$
(71,807
)
Other comprehensive loss before reclassifications
(9,544
)
 
(11,919
)
 
(21,463
)
Amount of gain reclassified from accumulated other comprehensive loss into statement of operations
582

 

 
582

Net current period other comprehensive loss, net of tax
(8,962
)
 
(11,919
)
 
(20,881
)
Balance at June 30, 2019
$
(20,418
)
 
$
(72,270
)
 
$
(92,688
)
Changes in accumulated other comprehensive loss, net of tax, for the six months ended June 30, 2019 were as follows (in thousands):
 
Unrealized Loss on Derivative Instruments
 
Foreign Currency Translation Adjustments
 
Total
Balance at December 31, 2018
$
(7,240
)
 
$
(80,955
)
 
$
(88,195
)
Other comprehensive (loss) gain before reclassifications
(14,246
)
 
8,685

 
(5,561
)
Amount of gain reclassified from accumulated other comprehensive loss into the statement of operations
1,068

 

 
1,068

Net current period other comprehensive (loss) gain, net of tax
(13,178
)
 
8,685

 
(4,493
)
Balance at June 30, 2019
$
(20,418
)
 
$
(72,270
)
 
$
(92,688
)

The income tax effects allocated to each component of other comprehensive income (loss) for the three months ended June 30, 2019 were as follows (in thousands):
 
Before-Tax Amount
 
Tax Benefit
 
Net-of-Tax Amount
Foreign currency translation adjustments
$
(11,919
)
 
$

 
$
(11,919
)
Unrealized (loss) gain on derivative instruments:
 
 
 
 
 
Unrealized loss during period
(9,800
)
 
256

 
(9,544
)
Reclassification adjustment for gains realized in net income
601

 
(19
)
 
582

Net unrealized loss on derivative instruments
(9,199
)
 
237

 
(8,962
)
   Other comprehensive loss
$
(21,118
)
 
$
237

 
$
(20,881
)
The income tax effects allocated to each component of other comprehensive income (loss) for the six months ended June 30, 2019 were as follows (in thousands):
 
Before-Tax Amount
 
Tax Benefit
 
Net-of-Tax Amount
Foreign currency translation adjustments
$
8,685

 
$

 
$
8,685

Unrealized (loss) gain on derivative instruments:
 
 
 
 
 
Unrealized loss during period
(14,616
)
 
370

 
(14,246
)
Reclassification adjustment for gains realized in net loss
1,106

 
(38
)
 
1,068

Net unrealized loss on derivative instruments
(13,510
)
 
332

 
(13,178
)
   Other comprehensive loss
$
(4,825
)
 
$
332

 
$
(4,493
)


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For the three months ended June 30, 2018, the income tax provision related to the components of other comprehensive loss was fully offset by the increase in the valuation allowance, resulting in no income tax impact for the period.
The income tax effects allocated to each component of other comprehensive loss for the six months ended June 30, 2018 were as follows (in thousands):
 
Before-Tax Amount
 
Tax Benefit
 
Net-of-Tax Amount
Foreign currency translation adjustments
$
(32,378
)
 
$
(2,868
)
 
$
(35,246
)
Unrealized loss on derivative instruments:
 
 
 
 
 
Unrealized loss during the period
(685
)
 

 
(685
)
Reclassification adjustment of realized gains to net loss
(598
)
 

 
(598
)
Net unrealized loss on derivative instruments
(1,283
)
 

 
(1,283
)
Other comprehensive loss
$
(33,661
)
 
$
(2,868
)
 
$
(36,529
)

Other Income (Expense), Net
Other income (expense), net consisted of the following (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net realized foreign currency gain (loss)
$
7,275

 
$
5,685

 
$
(1,131
)
 
$
168

Net unrealized foreign currency gain
880

 
25,997

 
957

 
19,633

Other, net
(582
)
 
319

 
(1,174
)
 
(354
)
Total other income (expense), net
$
7,573

 
$
32,001

 
$
(1,348
)
 
$
19,447


3. Business Combinations
inVentiv Health Merger
On August 1, 2017, the Company completed a merger (the “Merger”) with Double Eagle Parent, Inc. (“inVentiv”), the parent company of inVentiv Health, Inc., with the Company surviving as the accounting and legal entity acquirer. The Merger was accounted for as a business combination using the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. 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. The goodwill in connection with the Merger is primarily attributable to the assembled workforce of inVentiv and the expected synergies of the Merger.
In connection with the Merger, the Company assumed certain contingent tax-sharing obligations of inVentiv. The fair value of the contingent tax-sharing liability is remeasured at the end of each reporting period, with changes in the estimated fair value reflected in earnings until the liability is fully settled. The estimated fair value of the contingent tax-sharing obligations liability was $14.7 million and $15.7 million as of June 30, 2019 and December 31, 2018, respectively. The liability is included in accrued expenses and other long-term liabilities on the accompanying unaudited condensed consolidated balance sheets.

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Kinapse Limited Acquisition
In August 2018, the Company completed its acquisition of Kinapse, a provider of advisory and operational solutions to the global life sciences industry. The total purchase consideration was $100.1 million plus assumed debt, and included cash acquired of $4.9 million. The Company recognized $74.5 million of goodwill and $57.3 million of intangible assets, principally customer relationships, as a result of the acquisition. The goodwill is not deductible for income tax purposes. The Company’s assessment of fair value and the purchase price allocation related to this acquisition 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 acquisition date). The operating results from the Kinapse acquisition have been included in the Company’s Commercial Solutions segment from the date of acquisition.
4. Long-Term Debt Obligations
The Company’s debt obligations consisted of the following (in thousands):
 
June 30, 2019
 
December 31, 2018
Secured Debt
 
 
 
Term Loan A due March 2024
$
1,150,000

 
$
975,000

Term Loan B due August 2024
977,364

 
1,221,000

Accounts receivable financing agreement due June 2020
185,200

 
169,400

Total secured debt
2,312,564

 
2,365,400

Unsecured Debt
 
 
 
7.5% Senior Unsecured Notes due 2024
403,000

 
403,000

Total debt obligations
2,715,564

 
2,768,400

Add: unamortized Senior Notes premium, net of term loan original issuance discount
28,250

 
32,303

Less: unamortized deferred issuance costs
(9,397
)
 
(13,584
)
Less: current portion of debt
(199,575
)
 
(50,100
)
Total debt obligations, non-current portion
$
2,534,842

 
$
2,737,019


Concurrent with the completion of the Merger on August 1, 2017, the Company entered into a credit agreement (as amended, the "Credit Agreement") for: (i) a $1.0 billion Term Loan A facility that would mature on August 1, 2022 (the “Term Loan A”); (ii) a $1.6 billion Term Loan B facility that would mature on August 1, 2024 (the “Term Loan B”); and (iii) a five-year $500.0 million revolving credit facility (the “Revolver”) that would mature on August 1, 2022.
On May 4, 2018, the Company entered into Amendment No. 1 to the Credit Agreement, which, among other things, modified the terms of the Credit Agreement to reduce by 0.25% overall the applicable margins for Alternate Base Rate (as defined in the Credit Agreement) loans and Adjusted Eurocurrency Rate (as defined in the Credit Agreement) loans with respect to both the Term Loan A and Term Loan B facilities.
During the six months ended June 30, 2019, the Company voluntarily prepaid $65.0 million towards reducing its outstanding Term Loan B balance, which was applied against the regularly-scheduled quarterly principal payments. As a result of these and previous voluntary prepayments, the Company is not required to make a mandatory principal payment against the Term Loan B principal balance until maturity in August 2024. Additionally, during the six months ended June 30, 2019, the Company made mandatory principal repayments of $12.5 million towards its Term Loan A.

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Amendment No. 2 to the Credit Agreement
On March 26, 2019, the Company entered into Amendment No. 2 to the Credit Agreement (“the Second Amendment”). The Second Amendment, among other things, modifies the terms of the Credit Agreement to refinance the existing Term Loan A facility and the Revolver as follows:
(a) to increase the existing Term Loan A facility by $587.5 million to $1.55 billion. $187.5 million of such increase was applied at closing to repay a portion of the Company’s existing Term Loan B facility and the fees and expenses incurred in connection with the Second Amendment, and the remaining $400.0 million will be available to be funded in multiple draws within nine months of closing and applied to further prepay loans under the Term Loan B facility and/or redeem, repay, defease or discharge all or a portion of the Company’s 7.5% Senior Unsecured Notes due 2024 (the “Senior Notes”);
(b) to increase the existing Revolver commitments available by $100.0 million to $600.0 million, and reduce the margin spread by 0.25% overall, resulting in (i) for Adjusted Eurocurrency Rate loans, a margin spread of 1.50% and (ii) for Alternate Base Rate loans, a margin spread of 0.50%, with a single 0.25% step-down based on the achievement of certain leverage ratios; and
(c) to extend the maturity of the Term Loan A facility and the Revolver to March 26, 2024.
The Term Loan A facility and the Revolver will continue to be subject to the same affirmative covenants and negative covenants. The financial covenant will be set at a First Lien Leverage Ratio (as defined in the Credit Agreement) of 5.00:1.00 with a single step-down to 4.50:1.00 commencing with the fiscal quarter ending March 31, 2020. The Company was in compliance with all covenants of the Credit Agreement as of June 30, 2019.
In connection with the Second Amendment, during the three months ended March 31, 2019, the Company recorded a $4.4 million loss on extinguishment of debt, mainly due to the write-off of the deferred issuance costs and debt discount.
The funded amount of the Term Loan A facility was issued net of a discount and debt issuance costs totaling $2.8 million. These costs are being accreted as a component of interest expense using the effective interest rate method over the term of this facility.
The Company recorded debt issuance costs and related fees in connection with the Revolver and the unfunded amount of the Term Loan A facility of approximately $3.5 million, which are included in other long-term assets in the unaudited condensed consolidated balance sheet. These costs are amortized as a component of interest expense on a straight-line basis over the related terms.
Covenant Restrictions under our Lease Agreement
The lease agreement for the Company’s new corporate headquarters in Morrisville, North Carolina includes a provision that requires the Company to issue a letter of credit in certain amounts to the landlord based on the Company’s debt rating issued by Moody’s Investors Service (or other nationally-recognized debt rating agency). As of June 30, 2019 (and through the date of this filing), the Company’s credit rating was Ba3. As such, no letter of credit was required through the date of this filing. Any letters of credit issued in accordance with the aforementioned requirements would be issued under the Revolver, and would reduce its available borrowing capacity by the same amount.
As of June 30, 2019, the Company had $580.5 million (net of $19.5 million in outstanding letters of credit) of available borrowings for working capital and other purposes under the Revolver and $0.8 million of letters of credit that were not secured by the Revolver.

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Accounts Receivable Financing Agreement
On June 29, 2018, the Company entered into an accounts receivable financing agreement (as amended) with a termination date of June 29, 2020, unless terminated earlier pursuant to its terms. Under this agreement, certain of the Company’s consolidated subsidiaries will sell accounts receivable and unbilled services (including contract assets) balances to a wholly-owned, bankruptcy-remote special purpose entity (“SPE”). The SPE can borrow up to $250.0 million from a third-party lender, secured by liens on certain receivables and other assets of the SPE. 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 receivables. Loans under this agreement will accrue interest at a reserve-adjusted LIBOR rate or a base rate equal to the higher of (i) the applicable lender’s prime rate and (ii) the federal funds rate plus 0.50%. The Company may prepay loans upon one business day’s prior notice and may terminate or reduce the facility limit of the accounts receivable financing agreement with 15 days’ prior notice.
As of June 30, 2019, the Company had $185.2 million of outstanding borrowings under the accounts receivable financing agreement, which are recorded in the current portion of long-term debt on the accompanying unaudited condensed consolidated balance sheet. The remaining maximum capacity available for borrowing under this agreement was $64.8 million as of June 30, 2019. The Company expects to renew this accounts receivable financing agreement prior to June 29, 2020.
Maturities of Debt Obligations
As of June 30, 2019, the contractual maturities of the Company’s debt obligations were as follows (in thousands):
 
Principal
 
Interest
2019
$

 
$
65,827

2020
228,325

 
126,766

2021
79,063

 
120,320

2022
107,813

 
116,384

2023
115,000

 
110,852

2024 and thereafter
2,185,363

 
56,376

Less: deferred issuance costs
(9,397
)
 
 
Unamortized Senior Notes premium, net of term loan original issuance discount
28,250

 
 
Total
$
2,734,417

 
$
596,525


5. Leases
The Company’s operating leases are primarily related to its office facilities. The Company’s finance leases are related to vehicles that the Company leases for certain sales representatives in its Commercial Solutions segment. These leases have remaining lease terms of less than one year to 13 years, some of which include options to extend the term or terminate the lease. These options to extend or terminate a lease are included in the lease terms when it is reasonably certain that the Company will exercise that option.
ROU assets and lease liabilities are recognized based on the present value of the fixed lease payments over the lease term at the commencement date. The ROU assets also include any initial direct costs incurred and lease payments made at or before the commencement date, and are reduced by lease incentives. The Company uses its incremental borrowing rate as the discount rate to determine the present value of the lease payments for leases that do not have a readily determinable implicit discount rate. The Company’s incremental borrowing rate is the rate of interest that it would have to borrow on a

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collateralized basis over a similar term and amount in a similar economic environment. The Company determines the incremental borrowing rates for its leases by adjusting the local risk free interest rate with a credit risk premium corresponding to the Company’s credit rating.
The Company records rent expense for its operating leases on a straight-line basis from the lease commencement date until the end of the lease term. The Company records finance lease cost as a combination of the amortization expense for the ROU assets and interest expense for the outstanding lease liabilities using the discount rate discussed above. Variable lease payments for operating leases are related to the office facilities and include but are not limited to common area maintenance, parking, electricity, and management fees. The variable lease payments for finance leases are related to maintenance programs for leased vehicles. Variable lease payments are based on occurrence or based on usage; therefore, they are not included as part of the initial calculations of the ROU assets and liabilities.
The components of lease cost were as follows (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
Classification
June 30, 2019
 
June 30, 2019
Operating leases:
 

 
 
Fixed lease costs
Selling, general, and administrative expenses
$
16,965

 
$
34,105

Short-term lease costs
Selling, general, and administrative expenses
195

 
574

Variable lease costs
Selling, general, and administrative expenses
8,864

 
16,654

Total operating lease costs
 
$
26,024

 
$
51,333

Finance leases:
 
 
 
 
Amortization of right-of-use assets
Depreciation
$
3,991

 
$
8,310

Interest on lease liabilities
Interest expense
414

 
808

Variable lease costs
Selling, general, and administrative expenses
1,803

 
3,630

Total finance lease costs
 
$
6,208

 
$
12,748


Supplemental balance sheet information related to finance leases was as follows (in thousands):

 
June 30, 2019
Property and equipment, gross
$
59,344

Accumulated depreciation
(20,741
)
Property and equipment, net
$
38,603

 
 
Current portion of finance lease obligations
$
16,004

Finance lease long-term obligations
28,390

Total finance lease liabilities
$
44,394





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Supplemental cash flow information related to leases was as follows (in thousands):
 
Six Months Ended
 
June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows for operating leases
$
(28,452
)
Operating cash flows for finance leases
(808
)
Financing cash flows for finance leases
(4,677
)
 
 
Right-of-use assets obtained in exchange for lease obligations:
 
Operating leases
$
41,286

Finance leases
12,286