Document

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

FORM 10-Q 

(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
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
 

INC RESEARCH HOLDINGS, 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.)
3201 Beechleaf Court, Suite 600, Raleigh, North Carolina 27604-1547
(Address of principal executive offices and Zip Code)
(919) 876-9300
(Registrant’s telephone number, including area code)

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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ý    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
 
x
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
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  ý
As of November 2, 2017, there were approximately 104,344,972 shares of the registrant’s common stock outstanding.



Table of Contents






INC RESEARCH HOLDINGS, 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.
 
 


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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
INC RESEARCH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands, except per share data)
Net service revenue
$
592,207

 
$
259,557

 
$
1,102,372

 
$
767,358

Reimbursable out-of-pocket expenses
230,121

 
132,234

 
493,009

 
437,167

Total revenue
822,328

 
391,791

 
1,595,381

 
1,204,525

 
 
 
 
 
 
 
 
Costs and operating expenses:
 
 
 
 
 
 
 
Direct costs (exclusive of depreciation and amortization)
405,798

 
159,641

 
722,643

 
471,196

Reimbursable out-of-pocket expenses
230,121

 
132,234

 
493,009

 
437,167

Selling, general, and administrative
88,855

 
41,743

 
176,320

 
127,818

Restructuring and other costs
6,670

 
2,881

 
12,626

 
10,283

Transaction and integration-related expenses
84,340

 
1,127

 
108,081

 
2,857

Asset impairment charges
30,000

 

 
30,000

 

Depreciation
14,049

 
5,305

 
26,279

 
15,257

Amortization
51,383

 
9,464

 
70,309

 
28,388

Total operating expenses
911,216

 
352,395

 
1,639,267

 
1,092,966

(Loss) income from operations
(88,888
)
 
39,396

 
(43,886
)
 
111,559

 
 
 
 
 
 
 
 
Other (expense) income, net:
 
 
 
 
 
 
 
Interest income
501

 
62

 
765

 
139

Interest expense
(27,432
)
 
(3,226
)
 
(33,818
)
 
(9,317
)
Loss on extinguishment of debt
(102
)
 
(439
)
 
(102
)
 
(439
)
Other expense, net
(5,953
)
 
(2,384
)
 
(16,164
)
 
(10,761
)
Total other (expense) income, net
(32,986
)
 
(5,987
)
 
(49,319
)
 
(20,378
)
(Loss) income before provision for income taxes
(121,874
)
 
33,409

 
(93,205
)
 
91,181

Income tax expense
(26,124
)
 
(6,078
)
 
(30,217
)
 
(16,042
)
Net (loss) income
$
(147,998
)
 
$
27,331

 
$
(123,422
)
 
$
75,139

 
 
 
 
 
 
 
 
(Loss) earnings per share:
 
 
 
 
 
 
 
Basic
$
(1.70
)
 
$
0.50

 
$
(1.90
)
 
$
1.39

Diluted
$
(1.70
)
 
$
0.49

 
$
(1.90
)
 
$
1.35

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
87,152

 
54,186

 
65,097

 
54,147

Diluted
87,152

 
55,567

 
65,097

 
55,836


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

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INC RESEARCH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Net (loss) income
$
(147,998
)
 
$
27,331

 
$
(123,422
)
 
$
75,139

Unrealized (loss) gain on derivative instruments, net of income tax benefit (expense) of $72, $(139), $163, and $102, respectively
(115
)
 
769

 
(248
)
 
(154
)
Foreign currency translation adjustments, net of income tax benefit (expense) of $(5,873), $0, $(5,873), and $0, respectively
4,626

 
981

 
16,958

 
5,048

Comprehensive (loss) income
$
(143,487
)
 
$
29,081

 
$
(106,712
)
 
$
80,033


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



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INC RESEARCH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30, 2017
 
December 31, 2016
 
(In thousands, except share data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
304,327

 
$
102,471

Restricted cash
1,201

 
607

Accounts receivable billed, net
557,257

 
211,476

Accounts receivable unbilled
403,123

 
173,873

Prepaid expenses and other current assets
96,894

 
34,202

Total current assets
1,362,802

 
522,629

Property and equipment, net
172,912

 
58,306

Goodwill
4,265,175

 
552,502

Intangible assets, net
1,394,728

 
114,486

Deferred income tax assets
21,337

 
14,726

Other long-term assets
80,000

 
25,858

Total assets
$
7,296,954

 
$
1,288,507

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
66,031

 
$
23,693

Accrued liabilities
445,958

 
153,559

Deferred revenue
510,930

 
277,600

Current portion of capital lease obligations
19,941

 

Current portion of long-term debt
30,750

 
11,875

Total current liabilities
1,073,610

 
466,727

Capital lease obligations, non-current
22,104

 

Long-term debt, non-current
2,984,785

 
485,849

Deferred income tax liabilities
51,108

 
8,295

Other long-term liabilities
139,038

 
26,163

Total liabilities
4,270,645

 
987,034

 
 
 
 
Commitments and contingencies (Note 18)

 

 
 
 
 
Shareholders' equity:
 
 
 
Preferred stock, $0.01 par value; 30,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2017 and December 31, 2016

 

Common stock, $0.01 par value; 600,000,000 shares authorized, 104,219,471 and 53,762,786 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
1,042

 
538

Additional paid-in capital
3,404,506

 
573,176

Accumulated other comprehensive loss, net of tax
(25,540
)
 
(42,250
)
Accumulated deficit
(353,699
)
 
(229,991
)
Total shareholders' equity
3,026,309

 
301,473

Total liabilities and shareholders' equity
$
7,296,954

 
$
1,288,507


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

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INC RESEARCH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended September 30,
 
2017
 
2016
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(123,422
)
 
$
75,139

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
96,588

 
43,645

Amortization of capitalized loan fees and original issue discount, net of Senior Notes premium
759

 
765

Share-based compensation
50,928

 
9,404

Provision for doubtful accounts
1,477

 
1,927

Provision for (benefit from) deferred income taxes
12,733

 
(5,226
)
Foreign currency transaction losses
6,264

 
18,789

Asset impairment charges
30,000

 

Loss on extinguishment of debt
102

 
439

Other non-cash items
1,404

 
160

Changes in operating assets and liabilities, net of effect of business combinations:
 
 
 
Billed and unbilled accounts receivable
59,043

 
(58,748
)
Accounts payable and accrued expenses
(10,132
)
 
(894
)
Deferred revenue
(19,425
)
 
5,753

Other assets and liabilities
3,427

 
3,971

Net cash provided by operating activities
109,746

 
95,124

Cash flows from investing activities:
 
 
 
Payments associated with business acquisitions, net of cash acquired
(1,678,814
)
 

Purchases of property and equipment
(28,153
)
 
(16,826
)
Other, net
(12
)
 

Net cash used in investing activities
(1,706,979
)
 
(16,826
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of long-term debt
2,598,000

 

Payments of debt financing costs
(25,476
)
 
(868
)
Repayments of long-term debt
(475,097
)
 

Proceeds from revolving line of credit
15,000

 
100,000

Repayments of revolving line of credit
(40,000
)
 
(105,000
)
Redemption of Senior Notes and associated breakage fees
(290,250
)
 

Payments of capital leases
(3,586
)
 

Payments for repurchase of common stock

 
(64,500
)
Proceeds from exercise of stock options
17,048

 
14,415

Payments related to tax withholding for share-based compensation
(5,391
)
 
(825
)
Net cash provided by (used in) financing activities
1,790,248

 
(56,778
)
Effect of exchange rate changes on cash and cash equivalents
8,841

 
(3,583
)
Net increase in cash and cash equivalents
201,856

 
17,937

Cash and cash equivalents, beginning of period
102,471

 
85,011

Cash and cash equivalents, end of period
$
304,327

 
$
102,948

Supplemental disclosures of non-cash investing activities:
 
 
 
Fair value of shares issued and share-based awards assumed in business combinations
$
2,769,471

 
$

Vehicles acquired through capital lease agreements
$
7,101

 
$

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

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INC RESEARCH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation and Changes in Significant Accounting Policies
Nature of Operations
INC Research Holdings, Inc. (the “Company”) is a global biopharmaceutical solutions organization. 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 clinical trials to the commercialization of biopharmaceutical products. The Company’s customers include small, mid-sized, and large companies in the pharmaceutical, biotechnology, and medical device industries.
Merger
On August 1, 2017, the Company completed the merger (the “Merger”) with Double Eagle Parent, Inc. (“inVentiv”), the parent company of inVentiv Health, Inc. Upon closing, inVentiv was merged with and into the Company, with the Company continuing as the surviving corporation. Beginning August 1, 2017, inVentiv’s results of operations are included in the accompanying condensed consolidated financial statements. For additional information related to the Merger, see Note 3 - Business Combinations.
Use of Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses for the periods presented in the financial statements. Examples of estimates and assumptions include, but are not limited to, determining the fair value of goodwill and intangible assets and their potential impairment, useful lives of tangible and intangible assets, useful lives of assets subject to capital leases, allowances for doubtful accounts, potential future outcomes of events for which income tax consequences have been recognized in the Company’s consolidated financial statements or tax returns, valuation of allowances for deferred tax assets, fair value of share-based compensation and its recognition period, claims and insurance accruals, loss contingencies, fair value of derivative instruments and related hedge effectiveness, and judgments related to revenue recognition, among others. In addition, estimates and assumptions are used in the accounting for the Merger and other business combinations, including the fair value and useful lives of acquired tangible and intangible assets and the fair value of assumed liabilities.
The Company evaluates its estimates and assumptions on an ongoing basis and bases its estimates on historical experience, current and expected future conditions, third-party evaluations, and various other assumptions that management believes are reasonable under the circumstances based on the information available to management at the time these estimates and assumptions are made. Actual results and outcomes may differ materially from these estimates and assumptions.
Unaudited Interim Financial Information
The Company prepared the accompanying unaudited condensed consolidated financial statements in accordance with 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.

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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, 2016 filed with the Securities and Exchange Commission on February 27, 2017. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year ending December 31, 2017 or any other future period. The amounts in the unaudited condensed consolidated balance sheet as of December 31, 2016 are derived from the amounts in the audited consolidated balance sheet as of December 31, 2016.
Business Combinations
The Company accounts for business combinations in accordance with ASC Topic 805, Business Combinations, using the acquisition method of accounting. The purchase price, or total consideration transferred, is determined as the fair value of assets exchanged, equity instruments issued, and liabilities assumed at the acquisition date. The acquisition method of accounting requires that the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree are measured and recorded at their fair values on the date of a business combination. Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired, including the amount assigned to identifiable intangible assets. Acquisition-related costs are expensed as incurred. The unaudited condensed consolidated financial statements reflect the results of operations of the acquiree from the date of the acquisition. For additional information, see Note 3 - Business Combinations.

Segment Information

The Company discloses financial information concerning its operating segments in accordance with ASC Topic 280, Segment Reporting, which requires segmentation based on the Company's internal organization and reporting of revenues and operating income based upon internal accounting methods commonly referred to as the "management approach." Operating segments are defined as components of an enterprise about which separate financial information is available. This information is evaluated regularly by the Chief Operating Decision Maker (“CODM”) or decision-making group, in deciding how to allocate resources and in assessing performance. The Company's CODM is its Chief Executive Officer (“CEO”).

During the third quarter of 2017, the Company realigned its operating segments as a result of the Merger with inVentiv to reflect the current structure under which performance is evaluated, strategic decisions are made, and resources are allocated. As a result of this realignment, effective August 1, 2017, the Company began evaluating its financial performance based on two reportable segments, Clinical Solutions and Commercial Solutions (see Note 14 - Segment Information for further information). The Company has reflected this change to its segment information retrospectively to the earliest period presented. Amounts of net service revenue, direct costs, and contribution margin transferred between segments as a result of this change were immaterial. In addition, this change resulted in the reclassification of gross goodwill and accumulated goodwill impairment losses between segments as discussed in Note 2 - Financial Statement Details. These changes had no impact on the Company's previously reported total consolidated net service revenue, income from operations, net income, or earnings per share.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits with banks and other financial institutions and highly liquid investments with an original maturity of three months or less at the date of purchase. Cash and cash equivalents are carried at cost, which approximates fair value.
Certain of inVentiv’s subsidiaries participated in a notional cash pooling arrangement to manage global liquidity requirements. This arrangement was assumed by the Company’s subsidiaries in conjunction with the Merger. The parties to the arrangement combine their cash balances in pooling accounts with the ability to offset bank overdrafts of one subsidiary against positive cash account balances maintained in another subsidiary’s bank account at the same financial institution. As of September 30, 2017, the

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Company’s net cash position in the pool of $6.1 million, defined as the gross cash position in the pool of $103.5 million less borrowings of $97.4 million, is reflected in the “Cash and cash equivalents” line item in the unaudited condensed consolidated balance sheet.
Restricted Cash
Restricted cash represents cash and term deposits held as security over bank deposits, lease guarantees, and insurance obligations that are restricted as to withdrawal or use. Restricted cash is classified as a current or long-term asset based on the timing and nature of when and how the cash is expected to be used or when the restrictions are expected to lapse. The Company includes changes in restricted cash balances as part of investing activities in the unaudited condensed consolidated statements of cash flows.
Property and Equipment
Property and equipment is primarily comprised of furniture, vehicles, software, office equipment, computer equipment, and lab equipment. Purchased and constructed property and equipment is initially recorded at historical cost plus the estimated value of any associated legally or contractually required retirement obligations. Property and equipment acquired in a business combination are recorded based on the estimated fair value as of the acquisition date. The Company leases vehicles for certain sales representatives in the Commercial Solutions segment. These leases are classified and accounted for as capital leases in accordance with ASC Topic 840, Leases. For further information about lease arrangements, see Note 5 - Leases.
Property and equipment assets are depreciated using the straight-line method over the respective estimated useful lives as follows:
 
Useful Life
Buildings
39 years
Furniture and fixtures
7 years
Equipment
5 to 10 years
Computer equipment and software
3 years
Vehicles
Lesser of lease term or the estimated economic life of the leased asset
Leasehold improvements
Lesser of remaining life of lease or the useful life of the asset
Expenditures for repairs and maintenance are expensed as incurred and expenditures for major improvements that increase the functionality or extend the useful life of the asset are capitalized and depreciated over the estimated useful life of the asset.
The Company capitalizes costs of computer software obtained for internal use and amortizes these costs on a straight-line basis over the estimated useful life of the product, not to exceed three years. Software cloud computing arrangements containing a software license are accounted for consistently with the acquisition of other software licenses. In the event such an arrangement does not contain a software license, the Company accounts for the arrangement as a service contract.
The Company reviews property and equipment for impairment whenever facts and circumstances indicate that the carrying amounts of these assets might not be recoverable. For assessment purposes, property and equipment are grouped with other assets and liabilities at the lowest level of which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of the carrying amount of the asset group to be held is assessed by comparing the carrying amount of the asset group to the estimated undiscounted future net cash flows expected to be generated by this asset group. If the carrying value of the asset group is not recoverable and exceeds its fair value, an impairment

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charge is recognized for the amount by which the carrying amount of the asset group exceeds its fair value.
Leases
The Company accounts for leased properties under the provisions of ASC Topic 840, Leases. The Company evaluates each lease for classification as either a capital lease or an operating lease. The Company performs this evaluation at the inception of the lease and when a modification is made to a lease. Under lease arrangements that are classified as capital leases, the Company records property as part of its property and equipment assets, and a capital lease obligation in an amount equal to the lesser of the present value of the minimum lease payments to be made over the life of the lease at the beginning of the lease term, or the fair value of the leased property. The property under capital lease is amortized on a straight-line basis as a charge to depreciation expense over the lesser of (i) the lease term, as defined, or (ii) the economic life of the leased property. During the lease term, as defined, each minimum lease payment is allocated between a reduction of the lease obligation and interest expense so as to produce a constant periodic rate of interest on the remaining balance of the lease obligation. The Company’s capital lease assets consist primarily of vehicles that the Company leases for certain sales representatives in the Commercial Solutions segment.
The majority of the Company's operations are conducted in premises occupied under lease agreements containing predominantly reasonable and standard market terms. The Company, at its option, can renew a substantial portion of the leases at defined terms or at the then fair rental rates for various periods. Office facilities leases are classified and accounted for as operating leases. The Company records rent expense for its operating leases with contractual rent increases on a straight-line basis from the "lease commencement date" as specified in the lease agreement until the end of the lease term.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over the estimated fair value of net assets acquired, including the amount assigned to identifiable intangible assets, in business combinations. The Company evaluates goodwill for impairment annually or more frequently if events or changes in circumstances indicate that goodwill might be impaired.
As of September 30, 2017, substantially all of the Company’s goodwill was associated with six reporting units for which the fair value of the majority of the Company’s reporting units did not significantly exceed their respective carrying values, as the allocation of goodwill was performed as of the merger date of August 1, 2017.
The impairment analysis requires significant judgments, estimates and assumptions. There is no assurance that the actual future earnings or cash flows of the reporting units will not decline significantly from the projections used in the impairment analysis. Goodwill impairment charges may be recognized in future periods in one or more of the reporting units to the extent changes in factors or circumstances occur, including deterioration in the macroeconomic environment, industry, deterioration in the Company’s performance or its future projections, or changes in plans for the Company’s performance or its future projections, or changes in plans for one or more of its reporting units.
Intangible assets consist primarily of trademarks, backlog, and customer relationships. The Company amortizes intangible assets related to customer relationships and trademarks on a straight-line basis over the estimated useful lives. Intangible assets related to backlog are amortized based on the Company’s expectations of when revenue associated with the backlog is expected to be earned.
The Company reviews intangible assets at each reporting period to determine if facts and circumstances indicate that the useful life is shorter than originally estimated or that the carrying amount of the assets might not be recoverable. If such facts and circumstances exist, the Company assesses the recoverability of identified assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives to their respective carrying amounts. Impairments, if

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any, are based on the excess of the carrying amount over the fair value of those assets and occur in the period in which the impairment determination was made.
As of September 30, 2017, the estimated useful lives of the Company's intangible assets were as follows:
 
Useful Life
Customer relationships
6 years
-
11 years
Acquired backlog
5 months
-
2 years
Trademarks
5 months
-
6 years
Due to the Company’s intention to relaunch its operations under a new brand name in January 2018 in connection with the Merger, the Company determined that the useful life of the intangible asset related to INC Research trademark with a carrying value of $35.0 million was no longer indefinite as of August 1, 2017. Based on this change in circumstances, the Company tested the asset for impairment as an indefinite-lived intangible asset and recorded a $30.0 million impairment charge during the three months ended September 30, 2017. The Company also determined that the remaining useful life of this asset did not extend beyond the anticipated date of the Merger-related rebranding and, as of August 1, 2017, approximated five months. Therefore, the Company reclassified this intangible asset from the indefinite-lived to the definite-lived category and began amortizing its remaining value on a straight-line basis over its remaining estimated useful life of five months. In addition, the Company assigned a value of $8.8 million to the inVentiv Health trade name in connection with the Merger, which is being amortized over the same five month period. For additional information regarding the carrying values of intangible assets, see Note 2 - Financial Statement Details.
Contingencies
In the normal course of business, the Company periodically becomes involved in various proceedings and claims, including investigations, disputes, litigations, and regulatory matters that are incidental to its business. The Company evaluates the likelihood of an unfavorable outcome of all legal and regulatory matters to which it is a party and records accruals for loss contingencies related to these matters when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Gain contingencies are not recognized until realized. Legal fees are expensed as incurred.
Because these matters are inherently unpredictable, and unfavorable developments or resolutions can occur, assessing contingencies is highly subjective and requires judgments about future events. These judgments and estimates are based, among other factors, on the status of the proceedings, the merits of the Company’s defenses, and the consultation with in-house and external counsel. The Company regularly reviews contingencies to determine whether its accruals and related disclosures are adequate. Although the Company believes that it has substantial defenses in these matters, the amount of losses incurred as a result of actual outcomes may differ significantly from the Company’s estimates.
Self-Insured and Other Insurance Risks Reserves
The Company carries insurance coverage for protection of its assets and operations from certain risks including automobile liability, general liability, real property, workers’ compensation coverage, directors’ and officers’ liability, employee healthcare benefits and other coverages the Company believes are customary to the industry. The Company’s exposure to loss for insurance and benefit claims is generally limited to the per incident deductible under the related insurance policy.
The Company retains the risk with respect to the self-insured portion of the above programs. For the self-insured retention limits, the Company estimates and accrues the liability for unpaid claims and associated expenses, including for losses incurred but not yet reported. The estimates are based on a number of factors, including the number of asserted claims and reported incidents, estimates of losses for these claims based on recent and historical settlement amounts, estimates of incurred but not yet reported claims based on historical experience, and estimates of amounts recoverable under the commercial insurance policies. A significant number of these claims typically take several years to develop and even

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longer to ultimately settle. Although the Company continuously monitors and considers these factors, the ultimate liability for claims could change materially from the current estimates due to inherent uncertainties and judgments involved in making these estimates. The Company reviews and adjusts its self-insured reserves at each reporting period, with changes recognized in current period earnings. For further information regarding self-insured reserve accruals and balances, see Note 18 - Commitments and Contingencies.
Revenue Recognition
The Company recognizes revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service offering has been delivered to the customer; (3) the collection of the fees is reasonably assured; and (4) the arrangement consideration is fixed or determinable. The Company records revenues net of any tax assessments by governmental authorities, such as value added taxes, that are imposed on and concurrent with specific revenue generating transactions. In some cases, contracts provide for consideration that is contingent upon the occurrence of uncertain future events. The Company recognizes contingent revenue when the contingency has been resolved and all other criteria for revenue recognition have been met.
The Company's arrangements are principally service contracts and historically, a majority of the net service revenue has been earned under contracts that range in duration from a few months to several years. Most of the Company's contracts can be terminated by the customer with a 30 day notice. In the event of termination, the Company's contracts provide that the customer pay the Company the fees earned through the termination date, as well as fees and expenses for winding down the project, which include both fees incurred and actual expenses, as well as non-cancellable expenditures and in some cases may include a fee to cover a portion of the remaining professional fees on the project. The Company does not recognize revenue with respect to contract start-up activities including contract and scope negotiation, feasibility analysis and conflict of interest review. The costs for these activities are expensed as incurred.
The Company recognizes revenue from its service contracts either using a fee-for-service method or proportional performance method. The majority of the Company’s service contracts represent a single unit of accounting. For fee-for-service contracts, the Company records revenue as contractual items (i.e., “units”) are delivered to the customer, or, in the event the contract is time and materials based, when labor hours are incurred. The Company uses the proportional performance method when its fees for a service obligation are fixed pursuant to the contractual terms. Revenue is recognized as services are performed and measured on a proportional performance basis, generally using output measures specific to the services provided. The Company believes the best indicator of effort expended to complete its performance requirement related to its contractual obligation are the actual units delivered to the customer or the incurrence of labor hours when no other pattern of performance exists. In the event the Company uses labor hours as the basis for determining proportional performance, the Company estimates the number of hours remaining to complete its service obligation. Actual hours incurred to complete the service requirement may differ from the Company’s estimate, and any differences are accounted for prospectively. Examples of output measures used by the Company are site or investigator recruitment, patient enrollment, data management, or other deliverables common to its Clinical Solutions segment.
The Company enters into multiple element arrangements in which the Company is engaged to provide multiple services under one agreement. In such arrangements, the Company records revenue as each separate service, or element, is delivered to the customer. Such arrangements reside predominantly within the Company’s Commercial Solutions segment where the Company is engaged to provide recruiting, deployment, and detailing services. These services may be sold individually or in combination with contractual fees based on fixed fees for each element, variable fees for each element, or a combination of both. For the arrangements that include multiple elements, arrangement consideration is allocated at inception to units of accounting based on the relative selling price. The best evidence of selling price of a unit of accounting is vendor-specific objective evidence (“VSOE”), which is the price the Company charges when the deliverable is sold separately. When VSOE is not available to determine selling price, the Company uses relevant third-party evidence (“TPE”) of selling

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price, if available. When neither VSOE nor TPE of selling price exists, the Company uses its best estimate of selling price, which generally consists of an expected margin on the cost of services.
Changes in the scope of work are common, especially under long-term contracts, and generally result in a renegotiation of future contract pricing terms and a change in contract value. If the customer does not agree to contract modification, the Company could bear the risk of cost overruns. Renegotiated amounts are not included in net revenue until written authorization is received, the amount is earned, and realization is assured.
The Company offers volume rebates to its large customers based on annual volume thresholds. The Company records an estimate of the annual volume rebate as a reduction of revenue throughout the period based on the estimated total rebate to be earned for the period.
Deferred Revenue
Deferred revenue represents receipts of payments from customers in advance of services being provided and the related revenue being earned or reimbursable expenses being incurred. As the contracted services are subsequently performed and the associated revenue is recognized, the deferred revenue balance is reduced by the amount of the revenue recognized during the period.
Under certain contracts, the Company is entitled to additional compensation if performance-based criteria are achieved. Because there is substantive uncertainty regarding the ability to realize such amounts at the onset of the arrangements, the Company does not recognize such revenues until it has met the performance-based criteria and other revenue recognition criteria described above.
Recently Adopted Accounting Standards
Income Taxes. Effective January 1, 2017, the Company elected to early adopt Accounting Standard Update (“ASU”) No. 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory. Under the updated accounting guidance the Company recognizes income tax consequences immediately when the transfer of an inter-entity asset other than inventory occurs across jurisdictions rather than deferring the tax effects of those transactions until a transfer is made to a third party. The Company adopted this standard using the modified retrospective approach and recorded a cumulative-effect adjustment as of January 1, 2017. As a result, the Company recorded (i) a reduction in prepaid income taxes of $11.7 million, (ii) a net increase in deferred income tax assets of $9.7 million, and (iii) a decrease in retained earnings of $2.0 million. Prior periods have not been adjusted.
Recently Issued Accounting Standards Not Yet Adopted
Leases. In February 2016, the Financial Accounting Standards board (“FASB”) issued ASU No. 2016-02, Leases. ASU 2016-02 requires organizations to recognize lease assets and lease liabilities on the balance sheet, including leases that were previously classified as operating leases. The ASU also requires additional disclosures about leasing arrangements related to the amount, timing, and uncertainty of cash flows arising from leases. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments is permitted and the new guidance will be applied using a modified retrospective approach. The Company reassessed the impact of adopting this standard in light of the Merger and plans to adopt the standard on January 1, 2019.
Revenue from Contracts with Customers. In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 eliminates transaction- and industry-specific revenue recognition guidance under current GAAP and replaces it with a single principles based model for determining revenue recognition. ASU 2014-09 requires that companies recognize revenue when a customer obtains control of promised goods or services. Revenue will be recognized in the amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. The standard also requires disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and changes in judgments, as

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well as assets recognized from costs incurred to obtain or fulfill a contract. FASB issued several amendments to the standard, including clarifications on principal versus agent considerations, identifying performance obligations, disclosure of prior-period performance obligations and accounting for licenses of intellectual property.
For public entities, the standard is effective for reporting periods beginning after December 15, 2017. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Entities can adopt the standard either retrospectively to each period presented (full retrospective approach), or retrospectively with the cumulative effect of initially applying the guidance recognized as of the date of adoption (modified retrospective or cumulative effect approach).
In preparation for adoption of the standard, the Company has established a project management and implementation team consisting of internal resources and external advisors. The Company reached preliminary conclusions on certain key accounting assessments related to the standard and is finalizing its evaluation of the impact of adopting this new standard on its financial reporting and disclosures, accounting policies, business processes, internal controls, and systems functionality. In particular, the Company has concluded that under the new standard, the majority of its contracts will contain a single performance obligation. The Company expects to account for the majority of revenue related to customer clinical trials in its Clinical Solutions segment under single performance obligations over time using project costs as an input method to measure progress. The Company anticipates that under the new standard the majority of arrangements in its Commercial Solutions segment will consist of a single performance obligation as the pattern of services delivered are substantially the same over the contract period. Additionally, the Company will no longer present net service revenue and reimbursable costs separately on the statement of operations as such presentation is no longer permitted under the standard.
The Company anticipates that, as a result of adopting the new standard, revenue recognition may be delayed at certain phases of the customer contract life cycle, particularly during the first years of the contract. Such deferral of revenue recognition could differ materially from that applied under the current revenue recognition standard. While the Company expects its revenue to be deferred in the early stages of the contract, such impact may be partially mitigated on an aggregate basis because at any given time, the Company’s portfolio of contracts consists of contracts in varying stages of completion. The Company continues to evaluate questions relating to (i) the timing and quantification of variable components of estimated service revenue, (ii) gathering and tracking new information to meet the expanded disclosure requirements, and (iii) the financial impact of adopting this standard. The Company expects to complete these evaluations in the fourth quarter of 2017 and will adopt the new standard effective January 1, 2018 using the modified retrospective approach.
2. Financial Statement Details
Billed Accounts Receivable, net
Billed accounts receivable, net consisted of the following (in thousands):
 
September 30, 2017
 
December 31, 2016
Accounts receivable billed
$
564,618

 
$
217,360

Allowance for doubtful accounts
(7,361
)
 
(5,884
)
Accounts receivable billed, net
$
557,257

 
$
211,476


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Property and Equipment, net
Property and equipment, net of accumulated depreciation, consisted of the following (in thousands):
 
September 30, 2017
 
December 31, 2016
Software
$
64,575

 
$
52,531

Vehicles
37,347

 

Computer equipment
56,009

 
26,311

Leasehold improvements
53,297

 
14,814

Office furniture, fixtures, and equipment
20,240

 
10,894

Buildings and land
4,485

 
4,004

Assets not yet placed in service
14,332

 
13,396

 
250,285

 
121,950

Less accumulated depreciation
(77,373
)
 
(63,644
)
Property and equipment, net
$
172,912

 
$
58,306

As of September 30, 2017, the gross book value of vehicles under capital leases was $37.3 million and accumulated depreciation was $2.1 million. Amortization charges related to these assets were $2.3 million for the three and nine month ended September 30, 2017, respectively, and are included in the “Depreciation” line item of the accompanying unaudited condensed consolidated statements of operations.
Goodwill and Intangible Assets
Effective August 1, 2017, the Company realigned its segment financial reporting to reflect changes in the organizational structure following the Merger (see Note 14 - Segment Information for further information). The Company has reflected this change to its segment information retrospectively to the earliest period presented. The change resulted in the reclassification of gross goodwill and previously recognized accumulated goodwill impairment losses of $8.1 million from the former Phase I Services segment to the Clinical Solutions segment. In addition, gross goodwill and previously recognized accumulated goodwill impairment losses of $8.0 million related to the Global Consulting business unit, which previously had been included in the Clinical Solutions segment was reclassified into the Commercial Solutions segment as a result of the Merger.

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Changes in the carrying amount of goodwill by segment for the nine months ended September 30, 2017 were as follows (in thousands):
 
Total
 
Clinical
Solutions
 
Commercial
Solutions
Balance at December 31, 2016:
 
 
 
 
 
Gross carrying amount
$
568,668

 
$
560,644

 
$
8,024

Accumulated impairment losses (a)
(16,166
)
 
(8,142
)
 
(8,024
)
Goodwill net of accumulated impairment losses
552,502

 
552,502

 

2017 Activity:
 
 
 
 
 
Business combinations (b)
3,708,366

 
2,250,320

 
1,458,046

Impact of foreign currency translation
4,307

 
5,294

 
(987
)
Balance at September 30, 2017:
 
 
 
 
 
Gross carrying amount
4,281,341

 
2,816,258

 
1,465,083

Accumulated impairment losses (a)
(16,166
)
 
(8,142
)
 
(8,024
)
Goodwill net of accumulated impairment losses
$
4,265,175

 
$
2,808,116

 
$
1,457,059

(a) Accumulated impairment losses associated with the Clinical Solutions segment were recorded in fiscal periods prior to 2017 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 in fiscal periods prior to 2017 and related to the former Global Consulting segment, now a component of the Commercial Solutions segment. No impairment of goodwill was recorded for the nine months ended September 30, 2017.
(b) 2017 amount represents goodwill recognized in connection with the Merger and is subject to further adjustments before the close of the measurement period. Goodwill associated with the Merger is not deductible for income tax purposes. See Note 3 - Business Combinations for further information.
As discussed in Note 3 - Business Combinations, in conjunction with the Merger, the Company acquired certain intangible assets related to customer relationships, acquired backlog, and trademarks. Additionally, due to the Company’s intention to relaunch its operations under a new brand name in January 2018 in connection with the Merger, the Company determined that the useful life of the intangible asset related to the INC Research trademark with a carrying value of $35.0 million was no longer indefinite as of August 1, 2017. The Company tested the asset for impairment as an indefinite-lived intangible asset and recorded a $30.0 million impairment charge during the three months ended September 30, 2017. The Company also determined that the remaining useful life of this asset did not extend beyond the anticipated date of Merger-related rebranding and, as of August 1, 2017, approximated five months. Therefore, the Company reclassified the remaining value of the INC Research trademark from an indefinite-lived intangible asset to a definite-lived intangible asset and began amortizing its remaining value on a straight-line basis over its remaining estimated useful life of five months.
Intangible assets, net consisted of the following (in thousands):
 
September 30, 2017
 
December 31, 2016
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
1,373,240

 
$
(230,664
)
 
$
1,142,576

 
$
267,703

 
$
(188,217
)
 
$
79,486

Acquired backlog
247,620

 
(21,946
)
 
225,674

 

 

 

Trademarks
32,518

 
(6,040
)
 
26,478

 

 

 

Total finite-lived intangibles
1,653,378

 
(258,650
)
 
1,394,728

 
267,703

 
(188,217
)
 
79,486

Trademarks — indefinite-lived

 

 

 
35,000

 

 
35,000

Intangible assets, net
$
1,653,378

 
$
(258,650
)
 
$
1,394,728

 
$
302,703

 
$
(188,217
)
 
$
114,486


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The identifiable intangible assets are amortized over their estimated useful lives. The future estimated amortization expense for intangible assets is expected to be as follows (in thousands):
Fiscal Year Ending:
 
2017 (remaining 3 months)
$
112,216

2018
203,832

2019
188,643

2020
166,347

2021
143,914

2022 and thereafter
579,776

Total
$
1,394,728

Accrued Liabilities and Other Long-Term Liabilities
Accrued liabilities consisted of the following (in thousands):
 
September 30, 2017
 
December 31, 2016
Compensation, including bonuses, fringe benefits, and payroll taxes
$
222,961

 
$
77,049

Accrued interest
16,217

 
72

Accrued taxes
28,354

 
1,072

Accrued rebates to customers
20,227

 
13,580

Accrued professional and investigator fees
84,640

 
43,010

Accrued restructuring and other costs, current portion
15,769

 
6,084

Other liabilities
57,790

 
12,692

Total accrued liabilities
$
445,958

 
$
153,559

Other long-term liabilities consisted of the following (in thousands):
 
September 30, 2017
 
December 31, 2016
Uncertain tax positions
$
24,253

 
$
14,813

Accrued restructuring and other costs, less current portion
4,463

 
2,508

Contingent tax sharing obligation assumed through business combinations, non-current portion
66,875

 

Other liabilities
43,447

 
8,842

Total other long-term liabilities
$
139,038

 
$
26,163

Accumulated Other Comprehensive Loss, net of tax
Accumulated other comprehensive loss, net of tax, consisted of the following (in thousands):
 
September 30, 2017
 
December 31, 2016
Foreign currency translation adjustments, net of tax
$
(26,398
)
 
$
(43,356
)
Unrealized gains on derivative instruments, net of tax
858

 
1,106

Accumulated other comprehensive loss, net of tax
$
(25,540
)
 
$
(42,250
)

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Changes in accumulated other comprehensive loss, net of tax for the three months ended September 30, 2017 were as follows (in thousands):
 
Unrealized gain on derivative instruments, net of tax
 
Foreign currency translation adjustments, net of tax
 
Total
Balance at June 30, 2017
$
973

 
$
(31,024
)
 
$
(30,051
)
Other comprehensive gain before reclassifications
20

 
4,626

 
4,646

Amount of gain reclassified from accumulated other comprehensive loss into statement of operations
(135
)
 

 
(135
)
Net current period other comprehensive (loss) gain, net of tax
(115
)
 
4,626

 
4,511

Balance at September 30, 2017
$
858

 
$
(26,398
)
 
$
(25,540
)
Changes in accumulated other comprehensive loss, net of tax for the nine months ended September 30, 2017 were as follows (in thousands):
 
Unrealized gain on derivative instruments, net of tax
 
Foreign currency translation adjustments, net of tax
 
Total
Balance at December 31, 2016
$
1,106

 
$
(43,356
)
 
$
(42,250
)
Other comprehensive gain before reclassifications
46

 
16,958

 
17,004

Amount of gain reclassified from accumulated other comprehensive loss into statement of operations
(294
)
 

 
(294
)
Net current period other comprehensive (loss) gain, net of tax
(248
)
 
16,958

 
16,710

Balance at September 30, 2017
$
858

 
$
(26,398
)
 
$
(25,540
)
Unrealized gains on derivative instruments represent the effective portion of gains associated with interest rate swaps. Designated as cash flow hedges, the interest rate swaps limit the variable interest rate exposure associated with the Company’s term loans. The Company reclassifies these gains into net income as it makes interest payments on its term loan. Amounts to be reclassified to net income in the next 12 months are expected to be immaterial.

The tax effects allocated to each component of other comprehensive income for the three months ended September 30, 2017 were as follows (in thousands):
 
Before-Tax Amount
 
Tax (Expense) or Benefit
 
Net-of-Tax Amount
Foreign currency translation adjustments
$
10,499

 
$
(5,873
)
 
$
4,626

Unrealized (loss) gain on derivative instruments:
 
 
 
 
 
Unrealized gain arising during period
34

 
(14
)
 
20

Reclassification adjustment for gains realized in net income
(221
)
 
86

 
(135
)
Net unrealized (loss)
(187
)
 
72

 
(115
)
Other comprehensive income
$
10,312

 
$
(5,801
)
 
$
4,511


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The tax effects allocated to each component of other comprehensive income for the nine months ended September 30, 2017 were as follows (in thousands):
 
Before-Tax Amount
 
Tax (Expense) or Benefit
 
Net-of-Tax Amount
Foreign currency translation adjustments
$
22,831

 
$
(5,873
)
 
$
16,958

Unrealized (loss) gain on derivative instruments:
 
 
 
 
 
Unrealized gains arising during period
67

 
(21
)
 
46

Reclassification adjustment for gains realized in net income
(478
)
 
184

 
(294
)
Net unrealized (loss)
(411
)
 
163

 
(248
)
Other comprehensive income
$
22,420

 
$
(5,710
)
 
$
16,710

Other Expense, net
Other expense, net consisted of the following (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net realized foreign currency (loss) gain
$
(5,147
)
 
$
2,978

 
$
(9,298
)
 
$
8,439

Net unrealized foreign currency loss
(381
)
 
(5,196
)
 
(6,264
)
 
(18,789
)
Other, net
(425
)
 
(166
)
 
(602
)
 
(411
)
Total other expense, net
$
(5,953
)
 
$
(2,384
)
 
$
(16,164
)
 
$
(10,761
)
3. Business Combinations
Transaction Overview
On August 1, 2017 (the “Merger Date”), the Company completed the Merger with inVentiv 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 preliminarily 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.
At the Merger Date, the shares of inVentiv’s outstanding common stock were converted into 49,297,022 shares of the Company’s common stock at an exchange ratio of 3.4928. In addition, inVentiv equity awards held by current employees and certain members of the former inVentiv board of directors were converted into Company equity awards using the exchange ratio. The value of the Merger consideration was approximately $4.5 billion, as discussed below.
Concurrent with the completion of the Merger, on August 1, 2017, the Company entered into a Credit Agreement (the “2017 Credit Agreement”) for (i) a $1.0 billion Term Loan A facility that matures on August 1, 2022 (“Term Loan A”), (ii) a $1.6 billion Term Loan B facility that matures on August 1, 2024 (“Term Loan B”), and (iii) a five-year $500.0 million revolving credit facility (the “Revolver”). The Company used available cash and borrowings under the 2017 Credit Agreement to, among other things, (i) repay and extinguish approximately $445.0 million of outstanding loans and obligations under the Company’s existing long-term credit facility, (ii) repay approximately $1.7 billion of outstanding obligations under inVentiv’s long-term borrowings and associated accrued interest, which was treated as Merger consideration, (iii) pay approximately $290.3 million to partially redeem the principal balance of the 7.5% Senior Unsecured Notes due 2024 (“Senior Notes”) assumed in the Merger, which included an early redemption penalty of $20.3 million, and (iv) pay certain fees and other transaction expenses related to

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the Merger. For additional information related to the 2017 Credit Agreement, see Note 4 - Long-Term Debt Obligations.
For the three and nine months ended September 30, 2017, the Company incurred $84.3 million and $108.1 million, respectively, of Merger-related expenses which were accounted for separately from the business combination and expensed as incurred within the “Transaction and integration related expenses” line item of the unaudited condensed consolidated statements of operations. These costs consisted primarily of investment banker fees, advisory fees, legal costs, accounting and consulting fees, share-based compensation expense, and employee retention bonuses. The Company also incurred approximately $5.8 million of bridge financing fees which are included in the “Interest expense” line item in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2017. The Company deferred $25.5 million of financing costs incurred as a result of the 2017 Credit Agreement. These costs will be amortized over the term of the related debt.
In connection with the Merger, the Company assumed certain contingent tax sharing obligations of inVentiv. The fair value of the assumed contingent tax sharing obligation payable to the former stockholders of inVentiv is preliminarily estimated to be $66.7 million at the Merger Date and is included in the “Accrued liabilities” and “Other long-term liabilities” line items of the accompanying unaudited condensed consolidated balance sheet. The assumed contingent tax sharing obligation is based on the future realization of certain prior transaction tax deductions that created net operating losses acquired by the Company in the Merger (the “Acquired NOLs”) which arose from inVentiv’s 2016 acquisition by Double Eagle Parent, Inc. As such transaction tax deductions are realized as a result of reducing federal or state income taxes payable, the Company is obligated to make payments to the former stockholders of inVentiv. The amount of Acquired NOLs is estimated to be approximately $192.0 million ($73.0 million of estimated net tax benefits), but in no event is permitted to exceed $220.0 million, and will be paid to the former shareholders of inVentiv if and when such deductions reduce income taxes payable.
The results of inVentiv’s operations are included in the Company’s unaudited condensed consolidated statements of operations beginning on the Merger Date. For the three months ended September 30, 2017, net service revenue attributable to inVentiv was $340.8 million and reimbursable out-of-pocket revenue was $89.6 million. Following the closing of the Merger, the Company began integrating inVentiv’s operations. As a result, computing a separate measure of inVentiv’s stand-alone profitability for the period after the Merger Date is impracticable.
Fair Value of Consideration Transferred
The preliminary Merger Date fair value of the consideration transferred consisted of the following (in thousands, except for share and per share amounts):
Fair value of common stock issued to acquiree stockholders (a)
$
2,753,239

Fair value of replacement share-based awards issued to acquiree employees (b)
16,232

Repayment of term loan obligations and accrued interest (c)
1,736,152

Total consideration transferred
$
4,505,623

(a) Represents the fair value of 49,297,022 shares of the Company’s common stock at $55.85 per share, the closing price per share on the Merger closing date of August 1, 2017.
(b) Represents the fair value of replacement share-based awards attributable to pre-combination services. For further information about the valuation of share-based awards, see Note 10 - Share-Based Compensation.
(c) Represents repayment of inVentiv’s term loan obligations and related accrued interest as part of the Merger consideration on the Merger Date. For further information, see Note 4 - Long-Term Debt Obligations.


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Allocation of Consideration Transferred
The following table summarizes the preliminary allocation of the consideration transferred based on management’s estimates of Merger Date fair values of assets acquired and liabilities assumed, with the excess of the purchase price over the estimated fair values of the identifiable net assets acquired recorded as goodwill (in thousands):     
Assets acquired:
 
Cash and cash equivalents
$
57,338

Restricted cash
433

Accounts receivable
368,242

Unbilled accounts receivable
256,003

Other current assets
76,330

Property and equipment
114,181

Intangible assets
1,378,400

Other assets
48,872

Total assets acquired
2,299,799

Liabilities assumed:
 
Accounts payable
38,870

Accrued liabilities
290,908

Deferred revenue
242,257

Capital leases
40,928

Long-term debt, current and non-current
730,278

Deferred income taxes
28,518

Other liabilities
130,783

Total liabilities assumed
1,502,542

Total identifiable assets acquired, net
797,257

Goodwill
$
3,708,366

The goodwill in connection with the Merger is primarily attributable to the assembled workforce of inVentiv and the expected synergies, of which $2.25 billion of the goodwill recognized in connection with the Merger was assigned to the Clinical Solutions segment and $1.46 billion to the Commercial Solutions segment. Goodwill generated in the Merger is not deductible for income tax purposes. The Company’s assessment of fair value and purchase price allocation are preliminary and subject to change upon completion. 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 Merger Date).
The following table summarizes the preliminary estimates of the fair value of identified intangible assets and their respective useful lives (in thousands, except for estimated useful lives):
 
Estimated Fair Value
 
Estimated Useful Life
Customer relationships
$
1,103,700

 
6 years
-
11 years
Backlog
247,200

 
5 months
-
2 years
Trademarks subject to amortization
27,500

 
5 months
-
6 years
Total intangible assets
$
1,378,400

 
 
 
 

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Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information was derived from the historical financial statements of the Company and inVentiv and presents the combined results of operations as if Merger had occurred on January 1, 2016. The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results that would have actually occurred had the Merger been completed on January 1, 2016. In addition, the unaudited pro forma financial information does not give effect to any anticipated cost savings, operating efficiencies or other synergies that may result from the Merger, or any estimated costs that have been or will be incurred by the Company to integrate the assets and operations of inVentiv. Consequently, actual future results of the Company will differ from the unaudited pro forma financial information presented.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands, except per share data)
Pro forma total revenue
$
1,025,942

 
$
1,094,547

 
$
3,145,253

 
$
3,272,934

Pro forma net (loss) income
(88,953
)
 
11,979

 
(82,885
)
 
(87,177
)
Pro forma (loss) earnings per share:
 
 
 
 
 
 
 
   Basic
$
(0.86
)
 
$
0.12

 
$
(1.01
)
 
$
(0.84
)
   Diluted
$
(0.86
)
 
$
0.11

 
$
(1.01
)
 
$
(0.84
)
The unaudited pro forma adjustments primarily relate to the depreciation of acquired property and equipment, amortization of acquired intangible assets and interest expense and amortization of deferred financing costs related to the new financing arrangements. In addition, the unaudited pro forma net income (loss) for the three and nine months ended September 30, 2017 was adjusted to exclude certain merger-related nonrecurring adjustments; these adjustments were included in the nine months ended September 30, 2016 giving effect to the Merger as if it had occurred on January 1, 2016. These merger-related nonrecurring adjustments include transaction costs, retention and severance payments, share-based compensation expense related to the acceleration of share-based compensation awards and replacement share-based awards, and financing fees. These nonrecurring adjustments to net income (loss) in the aggregate, net of tax effects (where applicable), were $68.2 million for the three months ended September 30, 2017 and $90.9 million and $(90.9) million for the nine months ended September 30, 2017 and 2016, respectively. There were no adjustments associated with nonrecurring merger-related expenses recorded to net income in the aggregate for the three months ended September 30, 2016.

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4. Long-Term Debt Obligations
The Company’s debt obligations consisted of the following (in thousands):
 
September 30, 2017
 
December 31, 2016
Secured Debt
 
 
 
Term Loan A due August 2021
$

 
$
475,000

Revolving credit facility due August 2021

 
25,000

Term Loan A due August 2022
1,000,000

 

Term Loan B due August 2024
1,600,000

 

Revolving credit facility due August 2022

 

Total secured debt
2,600,000

 
500,000

Unsecured Debt
 
 
 
7.5% Senior Unsecured Notes due 2024
405,000

 

Total debt obligations
3,005,000

 
500,000

Add: unamortized premium, net of original issue debt discount
32,332

 

Less: unamortized deferred issuance costs
(21,797
)
 
(2,276
)
Less: current portion of debt
(30,750
)
 
(11,875
)
Total debt obligations, non-current portion
$
2,984,785

 
$
485,849

2017 Credit Agreement
Concurrent with the completion of the Merger, on August 1, 2017, the Company entered into the 2017 Credit Agreement for (i) a $1.0 billion Term Loan A facility that matures on August 1, 2022, (ii) a $1.6 billion Term Loan B facility that matures on August 1, 2024, and (iii) a five-year $500.0 million revolving credit facility (the “Revolver”). The Company used available cash and the borrowings under the 2017 Credit Agreement to, among other things, (i) repay and extinguish approximately $445.0 million of outstanding loans and obligations under the Company’s previously existing long-term credit facility, (ii) repay approximately $1.7 billion of outstanding obligations under inVentiv’s long-term credit facility and the associated accrued interest, (iii) pay approximately $290.3 million to partially redeem the principal of the Senior Notes assumed in the Merger, which included an early redemption penalty of $20.3 million, and (iv) pay certain fees, premiums, and other transaction expenses related to the Merger.
All obligations under the 2017 Credit Agreement are guaranteed by the Company and certain of the Company's direct and indirect wholly-owned domestic subsidiaries. The obligations under the 2017 Credit Agreement are secured by substantially all of the assets of the Company and the guarantors, including 65% of the capital stock of certain controlled foreign subsidiaries.
As of September 30, 2017, $1.0 billion was outstanding on the Term Loan A. The Company is not required to make principal payments on the Term Loan A until January 31, 2018. From January 31, 2018 through July 31, 2022, the Term Loan A has scheduled quarterly principal payments of the initial principal borrowed of 0.625%, or $6.25 million per quarter in year 1; 1.25%, or $12.5 million per quarter in year 2; 1.875%, or $18.75 million per quarter in year 3; and 2.50%, or $25.0 million per quarter thereafter; with the remaining outstanding principal due on August 1, 2022.
As of September 30, 2017, $1.6 billion was outstanding on the Term Loan B. The Company is not required to make principal payments on the Term Loan B until January 31, 2018. Under the 2017 Credit Agreement, the Company is required to make quarterly principal payments of the initial principal borrowed of 0.25%, or $4.0 million per quarter; with the remaining outstanding principal due on August 1, 2024.
The term loans and the Revolver bear interest at a rate per annum equal to the adjusted Eurocurrency Rate (“Eurocurrency Rate”) plus an applicable rate or an alternate base rate (“Base Rate”) plus an applicable rate. The Company may select among the Eurocurrency Rate or the Base Rate, whichever is lower, except in circumstances where the Company request a loan with less than a three-days’ notice. In

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such cases, the Company must use the Base Rate. The Eurocurrency Rate is equal to LIBOR, subject to adjustment for reserve requirements. The Base Rate is equal to the highest of (i) the federal funds rate plus 0.50%; (ii) the Eurocurrency Rate for an interest period of one month plus 1.00%, (iii) the rate of interest per annum publicly announced from time to time by Credit Suisse as its prime rate; and (iv) 0.00%
Eurocurrency Rate term loans are one-, two-, three-, or six-month loans (or, with permission, twelve-month loans) and interest is due on the last day of each three-month period of the loans. Base Rate term loans have interest due the last day of each three-month period beginning in January 2018. In advance of the last day of the then-current type of loan, the Company may select a new type of loan, so long as it does not extend beyond the term loan’s maturity date. Additionally, the 2017 Credit Agreement permits the Borrower to increase its term loan or Revolver commitments under the term loan facilities and/or revolving credit facility and/or to request the establishment of one or more new term loan facilities and/or revolving facilities in an aggregate amount to be no less than $725.0 million, if certain net leverage requirements are met. The availability of such additional capacity is subject to, among other things, receipt of commitments from existing lenders or other financial institutions.
The applicable margins with respect to Base Rate and Eurocurrency Rate borrowings are determined depending on the “First Lien Leverage Ratio” or the "Secured Net Leverage Ratio" (as defined in the 2017 Credit Agreement) and range as follows:
 
Base Rate
 
Eurocurrency Rate
Term Loan A
0.50
%
-
0.75%
 
1.50
%
-
1.75%
Term Loan B
1.00
%
-
1.25%
 
2.00
%
-
2.25%
Revolver
0.25
%
-
0.75%
 
1.25
%
-
1.75%
The Company also pays a quarterly commitment fee between 0.25% and 0.375% on the average daily unused balance of the Revolver depending on the “First Lien Leverage Ratio” at the adjustment date. As of September 30, 2017, the interest rate on the Term Loan A and the Revolver was 2.985% and the interest rate on the Term Loan B was 3.485%.
Letters of Credit
The Revolver includes letters of credit ("LOCs") with a sublimit of $150.0 million. Fees are charged on all outstanding LOCs at an annual rate equal to the margin in effect on Eurocurrency Rate revolving loans plus fronting fees. The fee is payable quarterly in arrears on the last day of the calendar quarter after the issuance date until the underlying LOC expires. As of September 30, 2017, there were no outstanding Revolver borrowings and $14.8 million of LOCs outstanding, leaving $485.2 million in available borrowings under the Revolver. In addition, as of September 30, 2017, the Company had $5.4 million of LOCs that were not secured by the Revolver.
Additionally, the lease for the new corporate headquarters in Morrisville, North Carolina includes a provision which requires the Company to issue a letter of credit 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). From June 14, 2017 through June 14, 2020, if the debt rating of the Company is Ba3 or better, no letter of credit is required, or if the debt rating of the Company is B1 or lower, a letter of credit equal to 25% of the remaining minimum annual rent and estimated operating expenses (approximately $24.2 million as of September 30, 2017) is required to be issued to the landlord. This LOC would remain in effect until the Company’s debt rating was increased to Ba3 and maintained for a twelve-month period. After June 14, 2020, if the debt rating of the Company is Ba2 or better, no letter of credit is required; if the debt rating is Ba3, a letter of credit equal to 25% of the then remaining minimum annual rent and estimated operating expenses is required to be issued to the landlord; or if the debt rating of the Company is B1 or lower, a letter of credit equal to 100% of the then remaining minimum annual rent and estimated operating expenses is required to be issued to the landlord. These letters of credit would remain in effect until the Company’s debt rating is Ba2 or better and maintained for a twelve-month period.

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As of September 30, 2017 (and through the date of this filing), the Company’s debt rating was Ba3. As such, no letter of credit is currently required. Any letters of credit issued in accordance with the aforementioned requirements would be issued under the Company’s Revolver, and would reduce its available borrowing capacity by the same amount accordingly.
Debt Covenants
The 2017 Credit Agreement contains usual and customary restrictive covenants that, among other things, place limitations on the Company's ability to pay dividends or make other restricted payments; prepay, redeem or purchase debt; incur liens; make loans and investments; incur additional indebtedness; amend or otherwise alter debt and other material arrangements; make acquisitions and dispose of assets; transact with affiliates; and engage in transactions that are not related to the Company's existing business. Each of the restrictive covenants is subject to important exceptions and qualifications that would allow the Company to engage in these activities under certain conditions, including the Company’s ability to (i) pay dividends each year in an amount up to the greater of (a) 6% of the net cash proceeds received by the Company from any public offering and (b) 5% of the Company’s market capitalization and (ii) pay unlimited dividends if the Company’s Secured Leverage Ratio is no greater than 3.0 to 1.0. As of September 30, 2017, the Company was in compliance with all applicable debt covenants.
In addition, with respect to the Term Loan A and Revolver, the 2017 Credit Agreement requires the Company to maintain a maximum First Lien Leverage Ratio of no more than 5.0 to 1.0 as of the last day of each fiscal quarter ending on or before December 31, 2018 (beginning with the first full fiscal quarter ending after the closing date of the Credit Agreement), and 4.5 to 1.0 from and after March 31, 2019.
7.5% Senior Unsecured Notes due 2024
As a result of the August 2017 Merger, the Company assumed $675.0 million of principal balance of Senior Unsecured Notes. Upon closing of the Merger, the Company immediately redeemed $270.0 million of the principal balance of Senior Notes and paid $20.3 million of the applicable early redemption penalty.
Interest on the remaining Senior Notes is payable semi-annually on the first day of April and October of each year and are guaranteed by the Company and certain of the Company's direct and indirect wholly-owned domestic subsidiaries. The Senior Notes are unsecured obligations and will (i) rank equal in right of payment to all of the Company’s existing and future senior unsecured obligations, (ii) be effectively subordinated to the Company’s secured indebtedness, including the 2017 Credit Agreement, to the extent of the value of the assets securing such indebtedness, (iii) rank senior in right of payment to any of the Company’s future indebtedness that is expressly subordinated in right of payment to the Senior Notes and the guarantees and (iv) be structurally subordinated to any existing and future obligations of any subsidiaries of the Company that do not guarantee the Senior Notes.
On or after October 1, 2019, the Company may redeem the Senior Notes in whole or in part, at a redemption price equal to the percentage of principal amount set forth below, plus accrued and unpaid interest during the twelve-month period beginning on the first of October of each of the years indicated below:
Year
Percentage
2019
103.750%
2020
101.875%
2021 and thereafter
100.000%

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Maturities of Debt Obligations
As of September 30, 2017, the contractual maturities of the Company’s debt obligations (excluding capital leases which are presented in Note 5 - Leases) were as follows (in thousands):
2017 (remaining 3 months)
$

2018
41,000

2019
66,000

2020
91,000

2021
116,000

2022 and thereafter
2,691,000

Deferred issuance costs
(21,797
)
Senior Notes premium, net of original issue debt discount
32,332

Total long-term debt
3,015,535

Less current portion
(30,750
)
Total long-term debt, less current portion
$
2,984,785

On October 10, 2017, the Company made a voluntary prepayment of $25.0 million on the Term Loan B, which will be applied against the regularly-scheduled quarterly principal payments. As a result of this prepayment, the outstanding balance under the term loan was reduced to $1.58 billion and the Company is not required to make a mandatory principal payment until July 31, 2019, which has not been reflected in the table above. 
2016 Credit Agreement
In August 2016, the Company entered into the First Amendment to Credit Agreement and Increase Revolving Joinder, which amended the 2015 Credit Agreement (as amended, the "2016 Credit Agreement"). The five-year $675.0 million 2016 Credit Agreement was comprised of a $475.0 million term loan and a $200.0 million revolving line of credit. As of September 30, 2016, $475.0 million was outstanding on the term loan, bearing interest at 2.03%, and $25.0 million was outstanding on the revolving line of credit, bearing interest at 2.04%.
Debt Extinguishment Costs and Senior Notes Redemption Penalty
On the Merger Date, the Company paid a contractual early redemption penalty of $20.3 million to redeem 40% of the Senior Notes that were assumed in the Merger. In accordance with ASC Topic 805, Business Combinations, the carrying value of the Senior Notes assumed in the Merger was adjusted to estimated fair value, which resulted in an increase of the amount of the Company’s consolidated debt and recognition of a premium on the Senior Notes, of which $20.3 million was allocated to the redeemed portion of the Senior Notes. This portion of the premium offset the early redemption penalty, resulting in no gain or loss on the extinguishment of the Senior Notes. The remaining balance of the premium associated with the fair value adjustment is being amortized as a component of interest expense using the effective interest rate method over the term of the remaining Senior Notes.
In August 2016, the Company entered into the First Amendment which amended the 2015 Credit Agreement, as discussed above. In conjunction with this amendment, the Company recognized a loss on extinguishment of debt of $0.4 million.
Debt Issuance Costs and Debt Discount
The Company recorded debt issuance costs related to its term loans of approximately $21.8 million and $2.3 million, respectively as of September 30, 2017 and December 31, 2016. These costs were recorded as a reduction of the principal balance of the associated debt and are being amortized as a component of interest expense using the effective interest method over the term of the term loans.

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The Company recorded total debt issuance costs related to its revolving lines of credit of approximately $5.5 million and $1.0 million as of September 30, 2017 and December 31, 2016, respectively. Debt issuance costs associated with the revolving line of credit are included in other assets in the consolidated balance sheets. The debt issuance costs are amortized as a component of interest expense using the effective interest method over the term of the Revolver.
Borrowings under the 2017 Credit Agreement were issued net of a discount. As of September 30, 2017, the balance associated with this discount was $1.9 million, which is being accreted as a component of interest expense using the effective interest rate method over the term of the Credit Agreement.
5. Leases
Operating Leases
The Company leases its office facilities, office equipment, and other assets under non-cancellable operating lease agreements. Operating leases are expensed on a straight-line basis over the term of the lease and may include certain renewal options and escalation clauses.
In January 2017, the Company entered into a twelve-year lease for its new corporate headquarters building in Morrisville, North Carolina, where it intends to relocate all employees from its two existing locations in Raleigh, North Carolina. In June 2017, this lease was amended to add additional office space and extend the term of the lease to 13 years. The Company expects the construction of the new building to be completed in late-2018 and anticipates completing its relocation efforts prior to the current leases expiring in early 2019. Additionally, in February 2017, the Company entered into a new eleven-year lease agreement for new office space in Farnborough, United Kingdom, which is near its existing Camberley site. The Company also anticipates completing its relocation efforts prior to the Camberley lease expiring in 2018.
Rent expense and sublease income under the operating lease agreements were as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Rent expense
$
21,186

 
$
5,102

 
$
31,039

 
$
14,719

Less: Sublease income
(349
)
 

 
(349
)
 

Net rent expense
$
20,837

 
$
5,102

 
$
30,690

 
$
14,719

In connection with the Merger, the Company has established a restructuring plan to consolidate its facilities worldwide. For additional information related to the restructuring activities associated with the Merger, see Note 8 - Restructuring and Other Costs.
Capital Leases
The Company leases vehicles for certain sales representatives in the Commercial Solutions segment. These lease arrangements are classified and accounted for as capital leases. Certain vendors have the right to declare the Company in default of its agreements if any such vendor, including the lessors under its vehicle leases, determines that a change in the Company’s financial condition poses a substantially increased credit risk.

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Future Minimum Lease Payments
As of September 30, 2017, future minimum rentals payable under the Company’s non-cancellable operating leases with terms in excess of one year, and maturities of the future minimum lease payments under capital lease obligations are summarized as follows (in thousands):
Fiscal Year
Operating Leases
 
Capital Leases
2017 (remaining 3 months)
$
15,751

 
$
4,248

2018
59,067

 
18,862

2019
51,321

 
13,918

2020
44,461

 
5,826

2021
39,384

 
1,569

2022 and thereafter
143,793

 

Total future minimum lease payments (a) (b)
$
353,777

 
44,423

Less: Amounts representing interest and fees (b)
 

 
(2,378
)
Present value of capital lease obligations (c)
 

 
42,045

Less: Current portion
 

 
(19,941
)
Capital lease obligations, less current portion
 
 
$
22,104

(a) Amounts of future minimum rentals payable under non-cancellable operating leases do not include future expected sublease income. Additionally, amounts related to leases that are included within our restructuring accrual as of September 30, 2017 have not been included in the table above. For additional information related to the facility restructuring activities, see Note 8 - Restructuring and Other Costs.
(b) Future capital lease commitments include interest and management fees, which are not recorded on the unaudited condensed consolidated balance sheet as of September 30, 2017 and will be expensed as incurred.
(c) Capital lease obligations have a weighted average imputed interest rate of approximately 3.5% and mature in various installments through December, 2022.
The Company had no lease arrangements classified as capital leases and no capital lease obligations as of December 31, 2016.
6. Derivative Financial Instruments
In May 2016, the Company entered into interest rate swap agreements with a combined notional value of $300.0 million in an effort to limit its exposure to variable interest rates on its term loan. Interest began accruing on the interest rate swaps on June 30, 2016, and the swaps will mature on June 30, 2018 and May 14, 2020. The material terms of these agreements are substantially the same as those contained within the 2017 Credit Agreement, including monthly settlements with the swap counterparty.
The interest rate swaps have been designated as cash flow hedges because these transactions were executed to manage the Company’s exposure to variable interest rate movements and their impact on future interest payments. The effective portion of changes in fair value of derivative instruments that qualify as cash flow hedges is recorded in accumulated other comprehensive loss and subsequently reclassified to net income in the period the hedged transaction is recognized in earnings. The ineffective portion of the change in fair value of derivative instruments is recognized as non-operating income or expensed immediately when incurred and included in the “Interest expense” line item in the accompanying unaudited condensed consolidated statements of operations. The cash flows from derivative instruments designated as cash flow hedges are classified in the same category as the cash flows from the hedged items in the consolidated statements of cash flows. The amounts of hedge ineffectiveness recorded in net income during the three- and nine-month periods ended September 30, 2017 and September 30, 2016 were immaterial and were attributable to the inconsistencies in certain terms between the interest rate swaps and the credit agreement.

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The fair values of the Company’s interest rate swaps designated as hedging instruments and the line items on the accompanying unaudited condensed consolidated balance sheets at the end of each period were as follows (in thousands):
 
Balance Sheet Classification
 
September 30, 2017
 
December 31, 2016
Interest rate swaps - current
Prepaid expenses and other current assets
 
$
734

 
$
461

Interest rate swaps - non-current
Other long-term assets
 
1,029

 
1,717

7. Fair Value Measurements
Assets and Liabilities Carried at Fair Value
As of September 30, 2017 and December 31, 2016, the Company’s financial assets and liabilities carried at fair value included cash and cash equivalents, restricted cash, trading securities, billed and unbilled accounts receivable, accounts payable, accrued liabilities, capital leases and other financing arrangements, and interest rate derivative instruments.
The fair value of cash and cash equivalents, restricted cash, billed and unbilled accounts receivable, accounts payable, and accrued liabilities approximates their respective carrying amounts because of the liquidity and short-term nature of these financial instruments.
A three-level fair value hierarchy that prioritizes the inputs used to measure fair value is described below. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 — Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable through correlation with market data; and
Level 3 — Unobservable inputs that are supported by little or no market data, which require the reporting entity to develop its own assumptions.
Financial Instruments Subject to Recurring Fair Value Measurements

As of September 30, 2017, 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
 
Total
Assets:
 
 
 
 
 
 
 
Trading securities (a)
$
15,628

 
$

 
$

 
$
15,628

Derivative instruments (b)

 
1,763

 

 
1,763

Total assets
$
15,628

 
$
1,763

 
$

 
$
17,391

(a) Represents fair value of investments in mutual funds based on quoted market prices which are used to offset the liability associated with the deferred compensation plan (see Note 13 - Employee Benefit Plans for further information).
(b) Represents fair value of interest rate swap arrangements.
As of December 31, 2016, the fair value of the interest rate swaps was approximately $2.2 million. The fair value of interest rate swaps is determined using the market standard methodology of discounted future variable cash receipts. The variable cash receipts are determined by discounting the future expected cash receipts that would occur if variable interest rates rise above the fixed rate of the swaps. The variable interest rates used in the calculation of projected receipts on the swap are based on an

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expectation of future interest rates derived from observable market interest rate curves and volatilities. These derivatives were identified as Level 2 assets and recorded in the "Prepaid expenses and other current assets" and "Other long-term assets" line items on the accompanying unaudited condensed consolidated balance sheets. The Company had no other assets or liabilities subject to recurring fair value measurements as of December 31, 2016.
During the nine months ended September 30, 2017 there were no transfers of assets or liabilities between Level 1, Level 2 or Level 3 fair value measurements.
Financial Instruments Subject to Non-Recurring Fair Value Measurements
Certain assets, including goodwill and identifiable intangible assets, are carried on the accompanying unaudited condensed consolidated balance sheets at cost and are not remeasured to fair value on a recurring basis. These assets are classified as Level 3 fair value measurements within the fair value hierarchy. Goodwill and indefinite-lived intangible assets are tested for impairment annually or more frequently if events or changes in circumstances indicate a triggering event has occurred. The Company tests finite-lived intangible assets for impairment upon the occurrence of certain triggering events. As of September 30, 2017 and December 31, 2016, assets carried on the balance sheet and not remeasured to fair value on a recurring basis totaled $5,659.9 million and $667.0 million, respectively.
Fair Value Disclosures for Financial Instruments Not Carried at Fair Value
The Company’s financial instruments not recorded at fair value that are subject to fair value disclosure requirements include long-term borrowings. The estimated fair value of the outstanding term loans and Senior Unsecured Notes is determined based on the market prices for similar financial instruments or model-derived valuations based on observable inputs. These liabilities were considered to be Level 2 fair value measurements. The estimated fair values of the Company’s outstanding term loans, Revolver, and Senior Unsecured Notes were as follows (in thousands):
 
September 30, 2017
 
December 31, 2016
 
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
Term Loan A due August 2021
$

 
$

 
$
475,000

 
$
475,000

Revolving credit facility due August 2021

 

 
25,000

 
25,000

Term Loan A due August 2022
1,000,000

 
1,000,000

 

 

Term Loan B due August 2024
1,598,056

 
1,606,000

 

 

7.5% Senior Unsecured Notes due 2024 (net of unamortized premium/discount)
439,276

 
449,550

 

 

8. Restructuring and Other Costs
Merger Related Restructuring
In connection with the Merger, the Company has established a restructuring plan to eliminate redundant positions and reduce its facility footprint worldwide. The Company expects to continue the ongoing evaluations of its workforce and facilities infrastructure needs through 2020 in an effort to optimize its resources worldwide. Additionally, in conjunction with the Merger, the Company assumed certain liabilities related to employee severance and facility closure costs as a result of actions taken by inVentiv prior to the Merger. During the nine months ended September 30, 2017, the Company recognized approximately $3.0 million of employee severance costs related to the Merger.
2017 Restructuring
During the nine months ended September 30, 2017, the Company recognized approximately $4.9 million of employee severance costs and incurred $1.2 million of facility closure and lease termination costs related to the Company’s pre-Merger focus on optimizing its resources worldwide. Additionally, during the nine months

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ended September 30, 2017, the Company incurred $1.3 million of consulting costs related to the continued consolidation of its legal entities and restructuring of its contract management process to meet the requirements of upcoming accounting regulation changes and $0.7 million of other costs.
2016 CEO Transition Plan
In July 2016, the Company entered into a transition agreement with its former CEO related to his transition from the position of CEO effective October 1, 2016, and subsequent services to be rendered through his separation date of February 28, 2017. Payments under this agreement are expected to be made through August 2018. In addition, in September 2016, the Company entered into retention agreements with certain key employees coinciding with the CEO transition for retention periods of up to one year. For the nine months ended September 30, 2017, the Company recognized $0.8 million of costs associated with these retention agreements and made payments of $0.9 million related to these agreements in September 2017. As of September 30, 2017, all payments related to these agreements were completed.
Accrued Restructuring Liabilities
The following table summarizes activity related to the liabilities associated with restructuring, and other costs during the nine months ended September 30, 2017 (in thousands):
 
Employee Severance Costs, Including Executive Transition Costs
 
Facility Closure and Lease Termination Costs
 
Other Costs
 
Total
Balance at December 31, 2016
$
4,695

 
$
3,817

 
$
80

 
$
8,592

Restructuring liabilities assumed through business combinations
6,865

 
7,950

 

 
14,815

Restructuring charges incurred(a)
8,696

 
492

 
1,938

 
11,126

Cash payments made
(9,528
)
 
(2,856
)
 
(1,917
)
 
(14,301
)
Balance at September 30, 2017
$
10,728

 
$
9,403

 
$
101

 
$
20,232

(a) Total restructuring and other costs for the nine months ended September 30, 2017 include $1.5 million of other non-cash expenses that were not recorded as a restructuring liability and are therefore excluded from the roll-forward above.
The Company expects the employee severance costs accrued as of September 30, 2017 will be paid within the next twelve months. Certain facility costs will be paid over the remaining lease terms of the exited facilities which range from 2018 through 2027. Liabilities associated with these costs are included in the “Accrued liabilities” and “Other long-term liabilities” line items in the accompanying unaudited condensed consolidated balance sheets. Costs recognized in net income during the period related to these activities are included in the “Restructuring and other costs” line item in the unaudited condensed consolidated statements of operations. These costs are not allocated to the Company’s reportable segments because they are not part of the segment performance measures regularly reviewed by management.

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9. Shareholders' Equity
On August 1, 2017, the Company completed its Merger with inVentiv. In accordance with the terms of the Merger Agreement, the Company issued 49,297,022 fully diluted shares of the Company’s common stock with a par value of $0.01 per share in exchange for all outstanding inVentiv shares of common stock.
The following is a summary of the Company's authorized, issued and outstanding shares:
 
September 30, 2017
 
December 31, 2016
Shares Authorized:
 

 
 

Class A common stock
300,000,000

 
300,000,000

Class B common stock
300,000,000

 
300,000,000

Preferred stock
30,000,000

 
30,000,000

Total shares authorized
630,000,000

 
630,000,000

Shares Issued and Outstanding:
 

 
 

Class A common stock
104,219,471

 
53,762,786

Class B common stock

 

Preferred stock

 

Total shares issued and outstanding
104,219,471

 
53,762,786

In July 2016, the Company announced a stock repurchase program for shares of the Company’s common stock pursuant to which the Company was authorized to repurchase up to $150.0 million of its outstanding common stock in the open market, in block trades, or in privately negotiated transactions. The program commenced on August 1, 2016 and was scheduled to end no later than December 31, 2017. Through this program, in August 2016, the Company repurchased 4,500,000 shares of its common stock in a private transaction for a total purchase price of approximately $64.5 million. The Company immediately retired all of the repurchased common stock and no further repurchases were made under this program. On July 23, 2017, the Company terminated the repurchase program.
10. Share-Based Compensation
Share-Based Awards Exchanged in Business Combination
As a result of the Merger, the Company assumed the equity incentive plans formerly related to inVentiv. In connection with the Merger, the vesting conditions of certain outstanding time- and performance-based stock option awards and restricted stock units (“RSUs”) of inVentiv were modified at the discretion of its board of directors. These modifications were treated as modifications of share-based awards and accounted for according to the provisions of ASC Topic 718, Compensation - Stock Compensation. As provided by the merger agreement, each vested option to purchase shares of inVentiv common stock outstanding immediately prior to the effective date of the Merger was automatically converted into a vested option to acquire shares of the Company’s common stock, on substantially the same terms and conditions, adjusted by the 3.4928 exchange ratio; and each restricted stock unit of inVentiv outstanding immediately prior to the effective date of the Merger was automatically converted into shares of the Company’s common stock at an exchange ratio of 3.4928. The fair value of these awards was allocated to the purchase consideration in the amount of $16.2 million and post-combination expense in the amount of $27.1 million, based on the portion of the vesting period completed prior to the date of the Merger. The assumed awards related to the Merger have been identified as applicable in the tables that follow.
Similarly, at the discretion of the Company’s board of directors, upon the Merger certain share-based awards of the Company outstanding immediately prior to the effective date of the Merger vested, and certain performance-based restricted stock units were converted into time-based restricted stock units at 100% of the target. The outstanding awards of approximately 50 employees were impacted. The aggregate incremental fair value of these awards was approximately $2.7 million, of which approximately $0.8 million was recognized during the three and nine months ended September 30, 2017. The remainder

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of the incremental fair value will be recognized over the remaining requisite service period of approximately two years.
The following table summarizes the weighted average assumptions used in the Black-Scholes option pricing model to estimate the fair values of the stock option awards assumed through the business combination:
 
Three months ended September 30, 2017
Expected volatility
24.5
%
-
24.6%
Expected life (in years)
4.75

-
5.00
Risk-free interest rate
1.8%
Expected dividend yield
—%
As of September 30, 2017, there were 3,340,546 shares available for future grants under all of the Company’s equity incentive plans.
Stock Option Awards Activity
The following table summarizes stock option activity for the nine months ended September 30, 2017:
 
Number of
Options
 
Weighted
Average
Exercise Price
 
Weighted Average
Remaining
Contractual Life
(in years)
 
Aggregate Intrinsic Value
(in thousands)
(b)
Outstanding at December 31, 2016
2,170,235

 
$
22.15

 
 
 
 
Assumed through business combinations(a)
1,336,406

 
$
28.63

 
 
 
 
Granted
64,899

 
$
56.32

 
 
 
 
Exercised
(810,260
)
 
$
15.97

 
 
 
 
Forfeited
(52,891
)
 
$
31.28

 
 
 
 
Expired
(1,314
)
 
$
42.76

 
 
 
 
Outstanding at September 30, 2017
2,707,075

 
$
27.83

 
7.71
 
$
66,501

Vested and expected to vest at September 30, 2017
2,707,075

 
$
27.83

 
7.71
 
$
66,501

Exercisable at September 30, 2017
2,308,531

 
$
25.26

 
7.63
 
$
62,682

(a) Represents fully vested stock options issued as replacement awards in connection with the Merger.
(b) Represents the total pretax intrinsic value (i.e., the aggregate difference between the closing price of the Company’s common stock on September 30, 2017 of $52.30 and the exercise price for in-the-money options) that would have been received by the holders if all instruments had been exercised on September 30, 2017.
As of September 30, 2017, there was $4.5 million of unrecognized compensation expense related to non-vested stock options, which is expected to be recognized over a weighted average period of 2.2 years.

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Restricted Stock Unit Award Activity
The following table summarizes the RSU activity during the nine months ended September 30, 2017:
 
Number of Shares
 
Weighted Average
Grant Date Fair Value
Non-vested at December 31, 2016
708,695

 
 
Assumed through business combinations(a)
35,752

 
$
55.85

Granted
601,297

 
$
52.78

Vested
(337,713
)
 
 
Forfeited
(31,626
)
 
 
Non-vested at September 30, 2017
976,405

 
 
(a) Represents fully vested RSUs issued as replacement awards and immediately converted into shares of the Company’s common stock in connection with the Merger with inVentiv.
At September 30, 2017, there was $37.7 million of unrecognized compensation expense related to unvested RSUs, which is expected to be recognized over a weighted average period of 2.5 years.
Merger-Related Performance-Based Awards
In August 2017, the Board of Directors and Compensation Committee granted certain executive officers a total of 127,917 performance-based RSUs (“PRSUs”). These performance-based awards are subject to the Company achieving a certain level of annual net income growth over the vesting period by reducing operating costs through execution of the cost saving initiatives. These PRSUs will vest on January 1, 2021 provided the performance criteria are met and will settle no later than March 15, 2021. These awards are included in the table above. Compensation expense related to PRSUs is recorded based on the estimated quantity of awards that are expected to vest. At each reporting period, management re-assesses the probability that the performance conditions will be achieved and adjusts compensation expense to reflect any changes in the estimated probability of vesting until the actual level of achievement of the performance targets is known. 
Employee Stock Purchase Plan
The Company recognized share-based compensation expense of $0.4 million and $1.2 million under the 2016 Employee Stock Purchase Plan (“ESPP”) for the three and nine months ended September 30, 2017, respectively. The Company recognized share-based compensation expense of $0.1 million under the ESPP for both the three and nine months ended September 30, 2016. As of September 30, 2017, there were 125,974 shares issued and 874,026 shares reserved for future issuance under the ESPP.
Share-based Compensation Expense
The total amount of share-based compensation expense recognized in the unaudited condensed consolidated statements of operations was as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Income Statement Classification
2017
 
2016
 
2017
 
2016
Direct costs
$
5,388

 
$
1,860

 
$
11,055

 
$
4,402

Selling, general, and administrative expenses
2,165

 
1,657

 
8,546

 
5,002

Transaction and integration-related expenses
31,327

 

 
31,327

 

Total share-based compensation expense
$
38,880

 
$
3,517

 
$
50,928

 
$
9,404


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11. Earnings Per Share
Basic earnings per share is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed based on the weighted average number of common shares plus the effect of dilutive potential common shares outstanding during the period. A reconciliation of the numerators and denominators of the basic and diluted per share computations of common stock based on the Company’s consolidated earnings is as follows (in thousands, except per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Net (loss) income
$
(147,998
)
 
$
27,331

 
$
(123,422
)
 
$
75,139

Denominator:
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
87,152

 
54,186

 
65,097

 
54,147

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options and other awards under deferred share-based compensation programs

 
1,381

 

 
1,689

Diluted weighted average common shares outstanding
87,152

 
55,567

 
65,097

 
55,836

(Loss) earnings per share:
 
 
 
 
 
 
 
Basic
$
(1.70
)
 
$
0.50

 
$
(1.90
)
 
$
1.39

Diluted
$
(1.70
)
 
$
0.49

 
$
(1.90
)
 
$
1.35

Potential common shares outstanding that are considered antidilutive are excluded from the computation of diluted earnings per share. Potential common shares related to stock options and other awards under deferred share-based compensation programs may be determined to be antidilutive based on the application of the treasury stock method. Potential common shares are also considered antidilutive in the event of net loss from operations.
The number of potential shares outstanding that were considered antidilutive using the treasury stock method and therefore excluded from the computation of diluted earnings per share, weighted for the portion of the period they were outstanding are as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Antidilutive stock options and other awards
126

 
787

 
488

 
806

Antidilutive stock options and other awards under deferred share-based compensation programs excluded based on reporting of net loss for the period
1,534

 

 
1,275

 

Total common stock equivalents excluded from diluted earnings per share computation
1,660

 
787

 
1,763

 
806

12. Income Taxes
Income Tax Expense

For the three and nine months ended September 30, 2017, the Company recorded income tax expense of $26.1 million and $30.2 million, respectively, on a pre-tax loss of $121.9 million and $93.2 million, respectively. The effective tax rate for the three and nine months ended September 30, 2017 varied from the U.S. federal statutory income tax rate primarily due to (i) discrete tax expense related to a change in the Company’s method of accounting for undistributed foreign earnings, (ii), relative amount of income from operations earned in international jurisdictions with lower statutory income tax rates than the U.S., and (iii) discrete tax adjustments related to excess tax benefits on share-based compensation. As a result

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of the Merger and associated debt financing, the Company re-evaluated and changed its assertion with respect to the majority of its previously undistributed historical foreign earnings based on cash needs in the United States. As of December 31, 2016, the Company had approximately $191.0 million of untaxed foreign earnings, of which $163.0 million is no longer considered indefinitely reinvested as a result of the change in assertion. In addition, the Company had approximately $90.0 million of previously taxed foreign earnings, of which, $72.0 million is planned to be repatriated to the United States, as such deferred taxes related to foreign exchange losses have been recorded. As a result of this change in assertion, the Company recognized a discrete tax expense of $53.0 million during the three months ended September 30, 2017 to record a deferred tax liability associated with the Company’s undistributed foreign earnings balance as of December 31, 2016. Furthermore, the Company intends to repatriate a significant portion of its current year foreign earnings and has recorded deferred income taxes on these earnings, which has been included in the calculation of its annual effective tax rate.
For the three and nine months ended September 30, 2016, the Company recorded income tax expense of $6.1 million and $16.0 million, respectively, compared to a pre-tax income of $33.4 million and $91.2 million, respectively. The effective tax rate for the three and nine months ended September 30, 2016 was lower than the U.S. federal statutory income tax rate primarily due to reductions of income tax expense resulting from (i) relative amount of income from operations earned in international jurisdictions with lower statutory income tax rates than the United States, (ii) discrete tax adjustments related to excess tax benefits on share-based compensation of $4.6 million and $12.6 million, respectively, and (iii) discrete tax adjustments related to foreign exchange losses associated with historical foreign branch transactions of $1.5 million during the nine months ended September 30, 2016.
Unrecognized Tax Benefits
As of September 30, 2017 and December 31, 2016, the amounts of the Company’s gross unrecognized tax benefits, exclusive of associated interest and penalties, were $46.6 million and $15.7 million, respectively, a portion of which reduced deferred tax assets and a portion of which is included in the “Other long-term liabilities” line item of the accompanying unaudited condensed consolidated balance sheets. Of the $46.6 million, if recognized, $20.7 million would impact the Company’s effective income tax rate and income tax provision in the period of recognition. The increase in the unrecognized tax benefits in the three months ended September 30, 2017 relates to the additions of uncertain tax positions resulting from the Merger in the third quarter of 2017. The Company does not anticipate that the balance of gross unrecognized tax benefits, excluding interest and penalties, will change significantly during the next twelve months.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as part of the provision for income tax expense in the unaudited condensed consolidated statements of operations. As of September 30, 2017 and December 31, 2016, accrued interest and accrued penalties related to unrecognized tax benefits totaled $4.6 million and $0.1 million, respectively.
Acquired Deferred Income Tax Assets and Liabilities
As a result of the Merger, the Company assumed a net deferred tax liability of approximately $28.5 million which consisted primarily of (i) a deferred tax liability of approximately $469.0 million related to temporary differences associated with amortization of intangible assets, (ii) a deferred tax liability of approximately $54.0 million related to unremitted foreign earnings, (iii) a deferred tax asset of approximately $398.0 million related to net operating loss (“NOL”) carryforwards, and (iv) a deferred tax asset of $48.0 million for deferred financing costs. The NOL carryforwards acquired in the Merger consisted of (i) $1.0 billion of U.S. federal NOL carryforwards, (ii) $1.0 billion of domestic state and local NOL carryforwards, and (iii) $67.0 million of foreign NOL carryforwards.
A portion the NOL carryforwards acquired from inVentiv was generated prior to their acquisition by the Company and therefore is subject to ownership change provisions under Section 382 of the Internal Revenue Code (“Section 382”). Section 382 requires a corporation to limit the amount of its future periods taxable income that can be offset by historic NOL carryforwards and tax credit carryforwards in the event of an “ownership change”, as defined in Section 382. As of September 30, 2017, the Company recorded a

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valuation allowance of $43.0 million due to uncertainties related to the Company’s ability to utilize some of the deferred tax assets associated with state and foreign NOL carryforwards discussed above. The valuation allowance is based on the Company’s estimate of taxable income in various state and foreign jurisdictions and the period over which deferred income tax assets will be recoverable. The Company does not expect that Section 382 limitations will significantly impact the Company’s ability to utilize its federal NOL carryforwards within the applicable expiration periods. However, the Company has assumed a contingent tax sharing obligation related to certain pre-Merger transaction tax deductions. As the transaction tax deductions are realized through the utilization of certain acquired net operating losses, the Company is obligated to make payments to the former stockholders of inVentiv. The amount of acquired NOLs subject to this contingent tax sharing obligation is estimated to be approximately $192.0 million.
inVentiv’s federal income tax return for tax year 2014 is currently under examination by the Internal Revenue Service. In addition, inVentiv’s income tax returns for various tax years are currently under examination by the respective tax authorities in Germany, India, and Japan. The Company believes that its reserve for uncertain tax positions is adequate to cover existing risks or exposures related to all open tax years.
Recently Adopted Accounting Standards
Effective January 1, 2017, the Company adopted new guidance under ASU No. 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory. For additional discussion of the new guidance, see Note 1 - Basis of Presentation and Changes in Significant Accounting Policies to the accompanying unaudited condensed consolidated financial statements.
13. Employee Benefit Plans
Defined Contribution Retirement Plans
The Company offers defined contribution retirement benefit plans that comply with Section 401(k) of the IRS Code under which it matches employee deferrals at varying percentages and specified limits of the employee’s salary.
The Company’s contributions related to its defined contribution retirement plans were as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Total defined contribution retirement plan contributions
$
4,737

 
$
2,462

 
$
10,509

 
$
7,565

The Company's contributions associated with these defined contribution benefit plans are recorded in the "Direct costs" and "Selling, general and administrative" expense line items in the accompanying unaudited condensed consolidated statements of operations.
Deferred Compensation Plan

As a result of the Merger, the Company assumed inVentiv’s nonqualified Deferred Compensation Plan for certain executives pursuant to Section 409A of the IRC (“NQDC Plan”). Under this plan, participants can defer, on a pre-tax basis, from 1.0% up to a maximum of 100.0% of salary and performance and non-performance based bonus. The Company does not make matching contributions into the NQDC Plan. Distributions will be made to participants upon termination of employment or death in a lump sum, unless installments are selected.

As of September 30, 2017, the NQDC Plan deferred compensation liabilities were $16.4 million and are included in the “Other long-term liabilities” line item in the accompanying unaudited condensed consolidated balance sheets. The assets associated with the NQDC Plan are subject to the claims of the creditors and primarily consist of investments in mutual funds maintained in a “rabbi trust”. These investments are classified as trading securities and included in the “Other long-term assets” line item in

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the accompanying consolidated balance sheets. During the three and nine months ended September 30, 2017, gains (losses) on these investments were immaterial and were included in “Selling, general and administrative” expense line item of the accompanying consolidated statement of operations.

14. Segment Information
During the third quarter of 2017, the Company realigned its operating segments as a result of the Merger to reflect the current structure under which performance is evaluated, strategic decisions are made and resources are allocated. As a result of this realignment, effective August 1, 2017, the Company began evaluating its financial performance based on two reportable segments: Clinical Solutions and Commercial Solutions. Historical segment reporting has been revised to reflect these changes to the Company’s segment structure.

Each reportable business segment is comprised of multiple service offerings that, when combined, create a fully integrated biopharmaceutical solutions organization. Clinical Solutions offers a variety of services spanning phase I to phase 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 commercialization services to the pharmaceutical, biotechnology, and healthcare industries, which include outsourced selling solutions, communication solutions (public relations and advertising), and consulting related services.

The Company’s CODM reviews segment performance and allocates resources based upon segment revenue and income from operations. Revenue and costs for reimbursed out-of-pocket expenses are not allocated to the Company’s segments. 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 and general operational expenses associated with the Company’s senior leadership, finance, human resources, information technology, facilities, and legal functions. The Company does not allocate depreciation, amortization, asset impairment charges, restructuring, or transaction and integration-related costs to its segments. Additionally, the CODM reviews the Company’s assets on a consolidated basis and does not allocate assets to its reportable segments as they are not included in the review performed by the CODM for purposes of assessing segment performance or allocating resources.


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Information about reportable segment operating results is as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017 (a)
 
2016
 
2017 (a)
 
2016
Net service revenue:
 
 
 
 
 
 
 
Clinical Solutions
$
432,780

 
$
257,291

 
$
937,781

 
$
760,998

Commercial Solutions
159,427

 
2,266

 
164,591

 
6,360

Total segment net service revenue
592,207

 
259,557

 
1,102,372

 
767,358

Reimbursable out-of-pocket expenses not allocated to segments
230,121

 
132,234

 
493,009

 
437,167

Total consolidated net service revenue
$
822,328

 
$
391,791

 
$
1,595,381

 
$
1,204,525

Segment direct costs:
 
 
 
 
 
 
 
Clinical Solutions
$
284,872

 
$
155,667

 
$
591,383

 
$
460,909

Commercial Solutions
115,538

 
2,114

 
120,205

 
5,885

Total segment direct costs
400,410

 
157,781

 
711,588

 
466,794

Segment selling, general, and administrative expenses:
 
 
 
 
 
 
 
Clinical Solutions
59,142

 
36,647

 
131,208

 
111,123

Commercial Solutions
18,113

 

 
18,113

 

Total segment selling, general, and administrative expenses
77,255

 
36,647

 
149,321

 
111,123

Segment operating income:
 
 
 
 
 
 
 
Clinical Solutions
$
88,766

 
$
64,977

 
$
215,190

 
$
188,966

Commercial Solutions
25,776

 
152

 
26,273

 
475

Total segment operating income
114,542

 
65,129

 
241,463

 
189,441

Operating expenses not allocated to segments:
 
 
 
 
 
 
 
Reimbursable out-of-pocket expenses not allocated to segments
230,121

 
132,234

 
493,009

 
437,167

Share-based compensation not allocated to direct costs
5,388

 
1,860

 
11,055

 
4,402

Share-based compensation not allocated to selling, general, and administrative expenses
2,165

 
1,657

 
8,546

 
5,002

Corporate selling, general, and administrative expenses not allocated to segments
9,435

 
3,439

 
18,453

 
11,693

Restructuring and other cost