REVENUE

Description of Revenue

The Company's revenue by segment payers/customer groups for the three and nine months ended September 30, 2018, and 2017 is as follows:



	For the Three Months Ended September 30, 2018
	U.S.		Canada		U.K.		Switzerland		Other Europe		Other		Total
Payer/Customer
LCD
Clients	17	%	1	%	—	%	—	%	—	%	—	%	18	%
Patients	8	%	—	%	—	%	—	%	—	%	—	%	8	%
Medicare and Medicaid	9	%	—	%	—	%	—	%	—	%	—	%	9	%
Third-party	25	%	2	%	—	%	—	%	—	%	—	%	27	%
Total LCD revenues by payer	59	%	3	%	—	%	—	%	—	%	—	%	62	%

CDD
Biopharmaceutical and medical device companies	24	%	—	%	3	%	4	%	2	%	5	%	38	%

Total revenues	83	%	3	%	3	%	4	%	2	%	5	%	100	%



	For the Three Months Ended September 30, 2017
	U.S.		Canada		U.K.		Switzerland		Other Europe		Other		Total
Payer/Customer
LCD
Clients	19	%	1	%	—	%	—	%	—	%	—	%	20	%
Patients	9	%	—	%	—	%	—	%	—	%	—	%	9	%
Medicare and Medicaid	10	%	—	%	—	%	—	%	—	%	—	%	10	%
Third-party	27	%	2	%	—	%	—	%	—	%	—	%	29	%
Total LCD revenues by payer	65	%	3	%	—	%	—	%	—	%	—	%	68	%

CDD
Biopharmaceutical and medical device companies	15	%	—	%	3	%	4	%	3	%	7	%	32	%

Total revenues	80	%	3	%	3	%	4	%	3	%	7	%	100	%



	For the Nine Months Ended September 30, 2018
	U.S.		Canada		U.K.		Switzerland		Other Europe		Other		Total
Payer/Customer
LCD
Clients	17	%	1	%	—	%	—	%	—	%	—	%	18	%
Patients	9	%	—	%	—	%	—	%	—	%	—	%	9	%
Medicare and Medicaid	9	%	—	%	—	%	—	%	—	%	—	%	9	%
Third-party	24	%	2	%	—	%	—	%	—	%	—	%	26	%
Total LCD revenues by payer	59	%	3	%	—	%	—	%	—	%	—	%	62	%

CDD
Biopharmaceutical and medical device companies	20	%	—	%	3	%	5	%	3	%	7	%	38	%

Total revenues	79	%	3	%	3	%	5	%	3	%	7	%	100	%



	For the Nine Months Ended September 30, 2017
	U.S.		Canada		U.K.		Switzerland		Other Europe		Other		Total
Payer/Customer
LCD
Clients	19	%	1	%	—	%	—	%	—	%	—	%	20	%
Patients	9	%	—	%	—	%	—	%	—	%	—	%	9	%
Medicare and Medicaid	10	%	—	%	—	%	—	%	—	%	—	%	10	%
Third-party	26	%	2	%	—	%	—	%	—	%	—	%	28	%
Total LCD revenues by payer	64	%	3	%	—	%	—	%	—	%	—	%	67	%

CDD
Biopharmaceutical and medical device companies	15	%	—	%	3	%	5	%	3	%	7	%	33	%

Total revenues	79	%	3	%	3	%	5	%	3	%	7	%	100	%

The following is a description of the current revenue recognition policies of the Company:

LCD

LCD is an independent clinical laboratory business. It offers a comprehensive menu of frequently requested and specialty diagnostic tests through an integrated network of primary and specialty laboratories across the U.S. In addition to diagnostic testing, along with occupational and wellness testing for employers and forensic DNA analysis, LCD has also offered a range of other testing services, including food solutions services.

Within the LCD segment, with the exception of food solutions services, a revenue transaction is initiated when LCD receives a requisition order to perform a diagnostic test. The information provided on the requisition form is used to determine the party that will be billed for the testing performed and the expected reimbursement. LCD recognizes revenue and satisfies its performance obligation for services rendered when the testing process is complete and the associated results are reported. Sales are distributed among four payer portfolios - clients, patients, Medicare and Medicaid, and third-party. LCD considers negotiated discounts and anticipated adjustments, including historical collection experience for the payer portfolio, when sales are recorded.

The following are descriptions of the LCD payer portfolios:

Clients

Client payers represent the portion of LCD’s revenue related to physicians, hospitals, health systems, accountable care organizations (ACOs), employers and other entities where payment is received exclusively from the entity ordering the testing service. Generally, client sales are recorded on a fee-for-service basis at LCD’s client list price, less any negotiated discount. A portion of client billing is for laboratory management services, collection kits and other non-testing services or products. In these cases, revenue is recognized when services are rendered or delivered.

This portfolio also includes LCD's nutritional chemistry services. LCD offers a broad range of services to the food and nutraceutical and animal feed industries. Revenue is recognized using an output-based measure of progress based on the volume of activities in each period.

Patients

This portfolio includes revenue from uninsured patients and member cost-share for insured patients (e.g., coinsurance, deductibles and non-covered services). Uninsured patients are billed based upon LCD’s patient fee schedules, net of any discounts negotiated with physicians on behalf of their patients. LCD bills insured patients as directed by their health plan and after consideration of the fees and terms associated with an established health plan contract.

Medicare and Medicaid

This portfolio relates to fee-for-service revenue from traditional Medicare and Medicaid programs. Net revenue from these programs is based on the fee schedule established by the related government authority. In addition to contractual discounts, other adjustments including anticipated payer denials are considered when determining net revenue. Any remaining adjustments to revenue are recorded at the time of final collection and settlement. These adjustments are not material to LCD’s results of operations in any period presented.

Third-Party

Third-party includes revenue related to MCOs. The majority of LCD's third-party revenue is reimbursed on a fee-for-service basis. These payers are billed at LCD's established list price and revenue is recorded net of contractual discounts. The majority of LCD’s MCO sales are recorded based upon contractually negotiated fee schedules with sales for non-contracted MCOs recorded based on historical reimbursement experience.

In addition to contractual discounts, other adjustments including anticipated payer denials are considered when determining revenue. Any remaining adjustments to revenue are recorded at the time of final collection and settlement. These adjustments are not material to LCD’s results of operations in any period presented.

Third-party reimbursement is also received through capitation agreements with MCOs and independent physician associations (IPAs). Under capitated agreements, revenue is recognized based on a negotiated per-member, per-month payment for an agreed upon menu of tests, or based upon the proportionate share earned by LCD from a capitation pool. When the agreed upon reimbursement is based solely on an established rate per member, revenue is not impacted by the volume of testing performed. Under a capitation pool arrangement, the aggregate value of an established rate per member is distributed based on the volume and complexity of the procedures performed by laboratories participating in the agreement. LCD recognizes revenue monthly, based upon the established capitation rate or anticipated distribution from a capitated pool.

CDD

CDD is a contract research organization (CRO) business that provides end-to-end drug development services from early-stage research to clinical trial management and beyond. CDD provides these services predominantly to biopharmaceutical and medical device companies across the world. Because the CDD client base generally consumes these drug development services across the entire portfolio of CDD pre-clinical and clinical services offerings, there is little variability in the customer base of any particular CDD service offering. The nature of CDD’s obligations include agreements to manage a full clinical trial, provide services for a specific phase of a trial, or provide research products to the customer. Generally, the amount of the transaction price estimated at the beginning of the contract is equal to the amount expected to be billed to the customer. Other payments may also factor into the calculation of transaction price, such as volume-based rebates that are retroactively applied to prior transactions in the period.

Historically, a majority of CDD’s net revenues have been earned under contracts that range in duration from a few months to a few years, but can extend in duration up to five years or longer. Occasionally, CDD also has entered into minimum volume arrangements with certain customers. Under these types of arrangements, if the annual minimum dollar value of a service commitment is not reached, the customer is required to pay CDD for the shortfall. Annual minimum commitment shortfalls are not recognized until the end of the period when the amount has been determined and agreed to by the customer.

CDD recognizes revenue either as services are performed or as products are delivered, depending on the nature of the work contracted. If performance is completed at a specific point in time, the Company evaluates the nature of the agreement to determine when the good or service is transferred into the customer’s control.

Service contracts generally take the form of fee-for-service or fixed-price arrangements subject to pricing adjustments based on changes in scope. In cases where performance spans multiple accounting periods, revenue is recognized as services are performed, measured on a proportional-performance basis, using either input or output methods that are specific to the service provided. In an output method, revenue is determined by dividing the actual units of output achieved by the total units of output required under the contract and multiplying that percentage by the total contract value. The total contract value, or total contractual payments, represents the aggregate contracted price for each of the agreed upon services to be provided. When using an input method, revenue is recognized by dividing the actual units of input incurred by the total units of input budgeted in the contract, and multiplying that percentage by the total contract value. In each situation, the Company believes that the methods used most accurately depict the progress of the Company towards completing its obligations. Billing schedules and payment terms are generally negotiated on a contract-by-contract basis. In some cases, CDD bills the customer for the total contract value in progress-based installments as certain non-contingent billing milestones are reached over the contract duration. These milestones include, but are not limited to, contract signing, initial dosing, investigator site initiation, patient enrollment and/or database lock. The term “billing milestone” relates only to a billing trigger in a contract whereby amounts become billable and payable in accordance with a negotiated predetermined billing schedule throughout the term of a project. These billing milestones are generally not performance-based (i.e., there is no potential additional consideration tied to specific deliverables or performance). In other cases, billing and payment terms are tied to the passage of time (e.g., monthly billings). In either case, the total contract value and aggregate amounts billed to the customer would be the same at the end of the project.

Proportional performance contracts typically contain a single service (e.g., management of a clinical study) and, therefore, no allocation of the contract price is required. Fee-for-service contracts are typically priced based on transaction volume. Since the volume of activities in a fee-for-service contract is unspecified, the contract price is entirely variable and is allocated to the time period in which it is earned. For contracts that include multiple distinct goods and services, CDD allocates the contract price to the goods and services based on a customer price list, if available. If a price list is not available, CDD will estimate the transaction price using either market prices or an “expected cost plus margin” approach.

CDD attempts to negotiate terms that provide for billing and payment of services prior or within close proximity to the provision of services, but this is not always possible. During an ongoing project, cash payments are not necessarily representative of aggregate revenue earned at any particular point in time because revenues are recognized when services are provided while amounts billed and paid are in accordance with the negotiated billing and payment terms.

In some cases, payments received are in excess of revenue recognized. For example, a contract invoicing schedule may provide for an upfront payment of 10% of the full contract value upon contract signing, but at the time of signing performance of services has not yet begun. Payments received in advance of services being provided are deferred as contract liabilities on the balance sheet. As the contracted services are subsequently performed and the associated revenue is recognized the contract liability balance is reduced by the amount of revenue recognized during the period.

In other cases, services may be provided and revenue recognized before the customer is invoiced. In these cases revenue recognized will exceed amounts billed, and the difference, representing a contract asset, is recorded for the amount that is currently not billable to the customer pursuant to contractual terms. Once the customer is invoiced the contract asset is reduced for the amount billed and a corresponding account receivable is recorded. All contract assets are billable to customers within one year from the respective balance sheet date.

Most contracts are terminable with or without cause by the customer, either immediately or upon notice. These contracts often require payment to CDD of expenses to wind-down the study or project, fees earned to date and, in some cases, a termination fee or a payment to CDD of some portion of the fees or profits that could have been earned by CDD under the contract if it had not been terminated early. Termination fees are included in net revenues when services are performed and realization is assured.

The full range of drug development services provided by CDD are as follows:

Preclinical services include the sale of research models, fee-for-service activities such as bioanalytical testing services, and proportional performance activities such as toxicology studies. Revenue for sale of research models is recognized at a point in time, typically upon shipment, when control transfers to the customer. Revenue for bioanalytical testing services is recognized upon communication of results to the customer. Revenue for proportional performance activities, including toxicology studies, is recognized using an input-based measure of progress as expenses are incurred for the research models, labor hours, and other costs attributable to the study.

Through its central laboratory, CDD produces and supplies specimen collection kits that are utilized in clinical studies, and provides transportation, project management, data management, and laboratory testing services on an as-needed basis throughout the duration of its customers’ clinical studies. Revenue for central laboratory services is recognized using an output-based measure of progress based on volume of activities in each period. CDD also provides long-term specimen storage services, for which revenue is recognized using an input-based measure of progress based on costs incurred.

CDD provides clinical development and commercialization services, including clinical pharmacology services, full management of Phase II through IV clinical studies, and market access solutions. Revenue for clinical pharmacology services, which includes first-in-human trials, is recognized using an output-based measure of progress based on bed nights. Revenue for full service clinical studies is recognized using an input-based measure of progress based on costs incurred (including pass-through costs such as investigator grants and reimbursable out-of-pocket expenses). Revenue for market access solutions is recognized using various methods. Revenue for fee-for-service arrangements, such as reimbursement consulting hotlines and patient assistance programs, is recognized using an output method based on transaction volume which corresponds to the amount charged to the customer. For consulting services billed based on time and materials; revenue is recognized using the right to invoice practical expedient.

Contract costs

The Company incurs sales commissions in the process of obtaining contracts with customers, which are recoverable through the service fees in the contract. Sales commissions that are payable upon contract award are recognized as assets and amortized over the expected contract term, along with related payroll tax expense. The amortization of commission expense is based on the weighted average contract duration for all commissionable awards in the respective business in which the commission expense is paid, which approximates the period over which goods and services are transferred to the customer. The amortization period of sales commissions ranges from approximately 12 months to 57 months, depending on the business. For businesses that enter into primarily short-term contracts, the Company applies the practical expedient which allows costs to obtain a contract to be expensed when incurred if the amortization period of the assets that would otherwise have been recognized is one year or less. Amortization of assets from sales commissions is included in selling, general, and administrative expense.

The Company incurs costs to fulfill contracts with customers, which are recoverable through the service fees in the contract. Contract fulfillment costs include software implementation costs and setup costs for certain market access solutions. These costs are recognized as assets and amortized over the expected term of the contract to which the implementation relates, which is the period over which services are expected to be provided to the customer. This period typically ranges from 24-60 months. Amortization of deferred contract fulfillment costs is included in cost of goods sold.



	September 30, 2018		December 31, 2017
Sales commission assets	$	22.8	$	24.0
Deferred contract fulfillment costs	12.5		1.7
Total	$	35.3	$	25.7

Amortization related to sales commission assets and associated payroll taxes for the three-month periods ended September 30, 2018, and 2017, was $4.2 and $3.5, respectively, and for the nine-month periods ended September 30, 2018, and 2017, was $12.8 and $10.6, respectively. Amortization related to deferred contract fulfillment costs for the three-month periods ended September 30, 2018, and 2017, was $0.8 and $0.1, respectively, and for the nine-month periods ended September 30, 2018, and 2017, was $3.3 and $0.3, respectively. Impairment expense related to contract costs was immaterial to the Company’s consolidated statement of operations. The Company applies the practical expedient to not recognize the effect of financing in its contracts with customers, when the difference in timing of payment and performance is one year or less.

Contract Assets and Liabilities

The following table provides information about receivables, contract assets (unbilled services), and contract liabilities (unearned revenue) from contracts with customers. While CDD attempts to negotiate terms that provide for billing and payment of services prior or in close proximity to the provision of services, this is not always possible and there are fluctuations in the level of unbilled services and unearned revenue from period to period.



	September 30, 2018		December 31, 2017
Receivables, which are included in Accounts Receivable, net	$	665.7	$	694.4
Unbilled services	322.6		318.2
Unearned revenue	286.2		377.4

Revenue recognized during the period, that was included in the unearned revenue balance at the beginning of the period for the nine-month period ended September 30, 2018, was $144.8. Bad debt expense on receivables for the nine-month period ended September 30, 2018, was immaterial to the Company’s consolidated statement of operations.

Performance Obligations Under Long-Term Contracts

Long-term contracts at the Company consist primarily of fully managed clinical studies within the CDD segment. The amount of existing performance obligations under such long-term contracts unsatisfied as of September 30, 2018, was $4,199.6. The Company expects to recognize approximately 39% of the remaining performance obligations as revenue over the next 12 months, and the balance thereafter.

The Company applied the practical expedient and does not disclose information about remaining performance obligations that have original expected durations of one year or less. The Company also did not disclose information about remaining performance obligations when the variable consideration was related to a wholly unsatisfied performance obligation within a series of obligations.

Within CDD, revenue of $10.9 and $20.5 was recognized during the three and nine months ended September 30, 2018, respectively, from performance obligations that were satisfied in previous periods. This revenue comes from adjustments related to changes in scope and estimates in full service clinical studies.