Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our “Selected Financial Data” and the consolidated financial statements and the related notes included elsewhere in “Financial Statements and Supplementary Data.” Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward‑looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this Annual Report on Form 10‑K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward‑looking statements contained in the following discussion and analysis.
Overview
We are one of the world’s leading global CROs, by revenue, providing outsourced clinical development services to the biotechnology and pharmaceutical industries. We believe we are one of a select group of CROs with the expertise and capability to conduct clinical trials across major therapeutic areas on a global basis. Our therapeutic expertise includes areas that are among the largest in pharmaceutical development, and we focus in particular on oncology, central nervous system inflammation, respiratory, cardiometabolic and infectious diseases. We believe that we further differentiate ourselves from our competitors through our investments in medical informatics and clinical technologies designed to enhance efficiencies, improve study predictability and provide better transparency for our clients throughout their clinical development processes. Our Data Solutions segment allows us to better serve our clients across their entire product lifecycle by (i) improving clinical trial design, recruitment, and execution; (ii) creating real-world data solutions based on the use of medicines by actual patients in normal situations; and (iii) increasing the efficiency of healthcare companies' commercial organizations through enhanced analytics and outsourcing services.
Contracts define the relationships with our clients and establish the way we earn revenue. Three types of relationships are most common: a fixed‑price contract, a time and materials contract and fee‑for‑service arrangements. In cases where the contracts are fixed price, we may bear the cost of overruns for the contracted scope, or we may benefit if the costs are lower than we anticipated for the contracted scope. In cases where our contracts are fee‑for‑service, the contracts contain an overall budget for contracted resources. If actual resources used are lower than anticipated, the client generally keeps the savings and we may be responsible for covering the cost of the unused resource if we are unable to redeploy the resource. For time and material contracts, we bill the client only for the actual hours we spend to complete the contracted scope based upon stated hourly rates by position. The duration of our contracts range from a few months to several years. Revenue for services is recognized only after persuasive evidence of an arrangement exists, the sales price is determinable, services have been rendered, and collectability is reasonably assured. Once these criteria have been met, we recognize revenue for the services provided on fixed‑fee contracts in our Clinical Research segment based on the proportional performance methodology, which determines the proportion of outputs or performance obligations which have been completed or delivered compared to the total contractual outputs or performance obligations. To measure performance, we compare the contract costs incurred to estimated total contract costs through completion. As part of the client proposal and contract negotiation process, we develop a detailed project budget for the direct costs based on the scope of the work, the complexity of the study, the geographical location involved and our historical experience. We then establish the individual contract pricing based on our internal pricing guidelines, discount agreements, if any, and negotiations with the client. The estimated total contract costs are reviewed and revised periodically throughout the lives of the contracts, with adjustments to revenue resulting from such revisions being recorded on a cumulative basis in the period in which the revisions are first identified. Our costs consist of expenses necessary to carry out the clinical development project undertaken by us on behalf of the client. These costs primarily include the expense of obtaining appropriately qualified labor to administer the project, which we refer to as direct cost headcount. Other costs we incur are attributable to the expense of operating our business generally, such as leases and maintenance of information technology and equipment. Revenue from time and materials contracts is recognized as hours are incurred. Revenues and the related costs of fee‑for‑service contracts are recognized in the period in which services are performed. We recognize revenue for services provided on fixed-fee contracts in our Data Solutions segment either ratably as earned over the contract period (for subscription-based services) or upon delivery (for delivery of data solutions or reports). Revenue from time and materials contracts is recognized as hours are incurred. Revenues and the related costs of fee-for-service contracts are recognized in the period in which services are performed.
How We Assess the Performance of Our Business
Historically, we have reported one reportable segment. In conjunction with the acquisition of Symphony Health on September 6, 2017, the Company expanded its reporting segments. The Company is now managed through two reportable segments, (i) Clinical Research and (ii) Data Solutions. Our chief operating decision maker uses gross profit as the primary measure of each segment's operating results in order to allocate resources and in assessing the Company's performance. In
addition to our GAAP financial measures, we review various financial and operational metrics. For our Clinical Research segment we review new business awards, cancellations, and backlog.
Our gross new business awards for the years ended
December 31, 2017
,
2016
and
2015
were
$2,779.8
million,
$2,367.1
million and $1,927.6 million, respectively. New business awards arise when a client selects us to execute its trial and is documented by written or electronic correspondence or for our Strategic Solutions offering when the amount of revenue expected to be recognized is measurable. The number of new business awards can vary significantly from year to year, and awards can have terms ranging from several months to several years. For our Strategic Solutions offering, the value of a new business award is the anticipated service revenue to be recognized in the corresponding quarter of the next fiscal year. For the remainder of our business, the value of a new award is the anticipated service revenue over the life of the contract, which does not include reimbursement activity or investigator fees.
In the normal course of business, we experience contract cancellations, which are reflected as cancellations when the client provides us with written or electronic correspondence that the work should cease. During the years ended
December 31, 2017
,
2016
and
2015
we had
$366.0
million,
$290.6
million, and $231.7 million, respectively, of cancellations for which we received correspondence from the client. The number of cancellations can vary significantly from year to year. The value of the cancellation is the remaining amount of unrecognized service revenue, less the estimated effort to transition the work back to the client.
Our backlog consists of anticipated service revenue from new business awards that either have not started or are in process but have not been completed. Backlog varies from period to period depending upon new business awards and contract modifications, cancellations, and the amount of service revenue recognized under existing contracts. Our backlog at
December 31, 2017
,
2016
and
2015
was
$3.5
billion,
$2.9
billion, and $2.4 billion, respectively.
Industry Trends
ISR estimated in its ISR 2017 Market Report that the size of the worldwide CRO market was approximately $32 billion in 2015 and will grow at a 7% CAGR to $44 billion over the next five years. This growth will be driven by an increase in the amount of research and development expenditures and higher levels of clinical development outsourcing by biopharmaceutical companies.
Business Combinations
We have completed and will continue to consider strategic business combinations to enhance our capabilities and offerings in certain areas. In September 2017, we acquired Symphony Health, which is expected to enhance our ability to serve customers throughout the clinical research process with technologies that provide data and analytics. Additionally, in May 2017, we acquired Parallel 6, Inc., or Parallel 6, which is expected to allow us to offer our customers technologies that provide improved efficiencies by reducing study durations and costs through integrated operational management.
These transactions were accounted for as business combinations and the acquired results of operations are included in our consolidated financial information since the acquisition date.
See Note 4 to our audited consolidated financial statements found elsewhere in this Annual Report on Form 10-K for additional information with respect to these and other smaller acquisitions.
Joint Ventures
In June 2017, we closed on a joint venture transaction with Takeda Pharmaceutical Company Ltd., or Takeda, that enables us to provide clinical trial delivery and pharmacovigilance services as a strategic partner of Takeda Japan. The joint venture was effectuated through the creation of a new legal entity, Takeda PRA Development Center KK, or TDC joint venture. The TDC joint venture is based in Japan and is owned by us (50%) and Takeda (50%).
In March 2013, we entered into a joint venture agreement with A2 Healthcare Corporation to form A2PRA Corporation, or A2PRA. The joint venture provides research and development outsourcing solutions in Japan to the biopharmaceutical and medical device industries. This joint venture is based in Tokyo, Japan and is owned by us (49%) and A2 Healthcare Corporation (51%).
See Note 3 and Note 4 to our audited consolidated financial statements found elsewhere in this Annual Report on Form 10-K for additional information with respect to the joint ventures.
Sources of Revenue
Total revenues are comprised of service revenue and reimbursement revenue, each of which is described below.
Service Revenue
We generally enter into contracts with customers to provide services with payments based on either fixed‑fee, time and materials, or fee‑for‑service arrangements. Revenue for services is recognized only after persuasive evidence of an arrangement exists, the sales price is determinable, services have been rendered, and collectability is reasonably assured.
Once these criteria have been met, we recognize revenue for the services provided on fixed‑fee contracts in the Clinical Research segment based on the proportional performance methodology, which determines the proportion of outputs or performance obligations which have been completed or delivered compared to the total contractual outputs or performance obligations. To measure performance, we compare the contract costs incurred to estimated total contract costs through completion. As part of the client proposal and contract negotiation process, we develop a detailed project budget for the direct costs based on the scope of the work, the complexity of the study, the geographical location involved and our historical experience. We then establish the individual contract pricing based on our internal pricing guidelines, discount agreements, if any, and negotiations with the client. The estimated total contract costs are reviewed and revised periodically throughout the lives of the contracts, with adjustments to revenue resulting from such revisions being recorded on a cumulative basis in the period in which the revisions are first identified. The Company recognizes revenue for services provided on fixed-fee contracts in the Data Solutions segment either ratably as earned over the contract period, for subscription-based services, or upon delivery, for one-time delivery of data solutions or reports. Revenue from time and materials contracts is recognized as hours are incurred. Billable hours typically fluctuate during the terms of individual contracts, as services we provide generally increase at the beginning of a study and decrease toward the end of a study. Revenues and the related costs of fee‑for‑service contracts are recognized in the period in which services are performed.
In the Clinical Research segment, a majority of our contracts undergo modifications over the contract period and our contracts provide for these modifications. During the modification process, we recognize revenue to the extent we incur costs, provided client acceptance and payment is deemed reasonably assured.
Volume discounts are offered to certain large customers based on annual volume thresholds. We record 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.
Most of our contracts in the Clinical Research segment can be terminated by the client either immediately or after a specified period, typically 30 to 60 days, following notice. In the case of early termination, these typically contracts require payment to us of fees earned to date, the fees, and in some cases, a termination fee or some portion of the fees or profit that we could have earned under the contract if it had not been terminated early. Based on ethical, regulatory, and health considerations, this wind‑down activity may continue for several quarters or years. Therefore, revenue recognized prior to cancellation generally does not require a significant adjustment upon cancellation.
Increases in the estimated total direct costs to complete a contract without a corresponding proportional increase to the total contract price result in a cumulative adjustment to the amount of revenue recognized in the period the change in estimate is determined.
Our Data Solutions segment enters into contracts with some of its larger data suppliers that involve non-monetary terms. We will issue purchase credits to be used toward the data supplier's purchase of the Company's products, services or consulting. In exchange, we receive monetary discounts on the data received from the data suppliers. The fair value of the revenue earned from the customer purchases is determined based on similar product offerings to other customers. At the end of the contract year, any unused purchase credits will be forfeited or carried over to the next contract year based on the terms of the data supplier contract. For the year ended December 31, 2017, we recognized service in kind revenue of $5.8 million from these transactions, which is included in service revenue in the accompanying consolidated statements of operations.
Clinical Research segment service revenue was
$1,857.9 million
,
$1,580.0 million
, and
$1,375.8 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. Changes in service revenue from period to period are driven primarily by changes in backlog at the beginning of a period, as well as new business awards during such period. Additionally, service revenue and billable hours will generally be impacted by the mix of studies that are active during a period, as different studies have different staffing requirements, as well as the life cycles of projects that are active during a period.
Data Solutions segment service revenue was
$90.5 million
for the year ended
December 31, 2017
. Refer to Note 2 - Significant Accounting Policies of our audited consolidated financial statements for further discussion of our Data Solutions segment's revenue recognition policy.
Our service revenues are derived from a wide range of client types. During the year ended
December 31, 2017
, we derived
53%
of our service revenue from large pharmaceutical companies,
16%
of our service revenue from small‑ to mid‑sized pharmaceutical companies,
16%
of our service revenue from large biotechnology companies,
14%
of our service revenue from all other biotechnology companies and
1%
of our service revenue from non-pharmaceutical companies. For the years ended
December 31, 2017
,
2016
, and
2015
, our top five clients represented approximately
42%
, 45%, and 41%, respectively, of service revenue; this revenue was derived from a combination of fixed‑fee contracts, fee‑for‑service contracts and time and materials contracts. One client accounted for
10.3%
of service revenue during the year ended
December 31, 2017
. Two of our clients accounted for 11.0% and 10.4% of service revenue during the year ended December 31, 2016, respectively. One client accounted for 10.7% of service revenue during the year ended
December 31, 2015
. No individual project accounted for 10% or more of service revenue for the years ended
December 31, 2017
,
2016
and
2015
.
Reimbursement Revenue and Reimbursable Out‑of‑Pocket Costs
We incur out‑of‑pocket costs, which are reimbursable by our customers. We include these out‑of‑pocket costs as reimbursement revenue and reimbursable out‑of‑pocket expenses in our consolidated statement of operations.
As is customary in our industry, we also routinely enter into separate agreements on behalf of our clients with independent physician investigators in connection with clinical trials. We also receive funds from our clients for investigator fees, which are netted against the related costs, since such fees are the obligation of our clients, without risk or reward to us. We are not obligated either to perform the service or to pay the investigator in the event of default by the client. In addition, we do not pay the independent physician investigator until funds are received from the client. Accordingly, unlike reimbursable out‑of‑pocket costs, we do not recognize these investigator fees in revenue.
Reimbursement costs and investigator fees are not included in our backlog because they are pass‑through costs to our clients.
We believe that the fluctuations in reimbursement costs and reimbursement revenue from period to period are not meaningful to our underlying performance.
Costs and Expenses
Our costs and expenses are comprised primarily of our direct costs, selling, general and administrative costs, depreciation and amortization and income taxes. In addition, we incur reimbursable out‑of‑pocket expenses; however, as noted above, our reimbursable out‑of‑pocket expenses are directly offset by our reimbursement revenue. Since reimbursement revenue is offset by our out‑of‑pocket reimbursable expenses, we monitor and measure costs as a percentage of service revenue rather than total revenue as we believe this is a more meaningful comparison and better reflects the operations of our business.
Direct Costs
For our Clinical Research segment, direct costs consist primarily of labor‑related charges. They include elements such as salaries, benefits and incentive compensation for our employees. In addition, we utilize staffing agencies to procure primarily part time individuals to perform work on our contracts. Labor-related charges as a percentage of the Clinical Research segment's total direct costs were
96.4%
, 96.6%, and 95.7% for the years ended
December 31, 2017
,
2016
and
2015
, respectively. The cost of labor procured through staffing agencies is included in these percentages and represents
5.6%
, 5.1%, and 4.1% of the Clinical Research segment's total direct costs for the years ended
December 31, 2017
,
2016
and
2015
, respectively. Our remaining direct costs are items such as travel, meals, postage and freight, patient costs, medical waste and supplies. The total of all these items as a percentage of the Clinical Research segment's total direct costs were
3.6%
, 3.4%, and 4.3% for the year ended
December 31, 2017
,
2016
and
2015
, respectively.
For our Data Solutions segment, direct costs consist primarily of data costs. Data costs as a percentage of the Data Solutions segment's total direct costs were
71.0%
for the year ended
December 31, 2017
. Labor-related charges, such as salaries, benefits and incentive compensation for our employees, were
23.0%
of the Data Solutions segment's total direct costs
for the year ended
December 31, 2017
. Our remaining direct costs are items such as travel, meals, and supplies and were
6.0%
of the Data Solutions segment's total direct costs for the year ended
December 31, 2017
.
Historically, direct costs have increased with an increase in service revenues. The future relationship between direct costs and service revenues may vary from historical relationships. Direct costs as a percentage of service revenues were
65.9%
, 65.4%, and 64.4% during the years ended
December 31, 2017
,
2016
, and
2015
, respectively. Several factors will cause direct costs to decrease as a percentage of service revenues. Deployment of our billable staff in an optimally efficient manner has the most impact on our ratio of direct cost to service revenue. The most effective deployment of our staff is when they are fully engaged in billable work and are accomplishing contract related activities at a rate that meets or exceeds budgeted targets. We also seek to optimize our efficiency by performing work using the employee with the lowest cost. Generally, the following factors may cause direct costs to increase as a percentage of service revenues: our staff are not fully deployed, as is the case when there are unforeseen cancellations or delays, or when our staff are accomplishing tasks at levels of effort that exceed budget, such as rework; as well as pricing pressure from increased competition.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of administration payroll and benefits, marketing expenditures, and overhead costs such as information technology and facilities costs. These expenses also include central overhead costs that are not directly attributable to our operating business and include certain costs related to insurance, professional fees and property.
Transaction‑Related Costs
Transaction-related costs consist of expenses incurred with our secondary offerings, transaction-related stock-based compensation awards, revaluations of contingent consideration related to business combinations, the closing of our accounts receivable financing agreement, fees associated with the Incremental Borrowing (defined below), and our refinancing of the 2013 Credit Facilities (defined below).
Loss on Modification or Extinguishment of Debt
Loss on modification or extinguishment of debt for the year ended December 31, 2017 was associated with the September 2017 incremental borrowing under the 2016 Credit Facilities, or the Incremental Borrowing, redemption on our 9.5% senior notes due 2023, or Senior Notes, and the December 2017 amendment to the 2016 Credit Facilities, or the 2017 Refinancing. Loss on extinguishment of debt for the year ended December 31, 2016 was associated with our cash tender offer on Senior Notes and the refinancing of our variable rate first lien term loan due 2020, or 2013 First Lien Term Loan, and revolving line of credit, or 2013 Revolver, collectively known as the 2013 Credit Facilities.
Depreciation and Amortization
Depreciation represents the depreciation charged on our fixed assets. The charge is recorded on a straight‑line method, based on estimated useful lives of three to seven years for computer hardware and software and five to seven years for furniture and equipment. Leasehold improvements are depreciated over the lesser of the life of the lease term or the useful life of the improvements. Amortization expense consists of amortization recorded on acquisition‑related intangible assets. Customer relationships, backlog, databases and finite‑lived trade names are amortized on an accelerated basis, which coincides with the period of economic benefit we expect to receive. All other finite‑lived intangibles are amortized on a straight‑line basis. In accordance with GAAP, we do not amortize goodwill and indefinite‑lived intangible assets.
Income Taxes
Because we conduct operations on a global basis, our effective tax rate has and will continue to depend upon the geographic distribution of our pre‑tax earnings among several different taxing jurisdictions. Our effective tax rate can also vary based on changes in the tax rates of the different jurisdictions. Our effective tax rate is also impacted by tax credits and the establishment or release of deferred tax asset valuation allowances and tax reserves, as well as significant non‑deductible items such as portions of transaction‑related costs.
Foreign subsidiaries are taxed separately in their respective jurisdictions. We have foreign net operating loss carryforwards in some jurisdictions. The carryforward periods for these losses vary from five years to an indefinite carryforward period depending on the jurisdiction. Our ability to offset future taxable income with the net operating loss carryforwards may be limited in certain instances, including changes in ownership.
Exchange Rate Fluctuations
The majority of our foreign operations transact in the Euro, or EUR or British Pound, or GBP. As a result, our revenue and expenses are subject to exchange rate fluctuations with respect to these currencies. We have translated these currencies into U.S. dollars using the following average exchange rates:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
U.S. Dollars per:
|
|
|
|
|
|
Euro
|
1.13
|
|
|
1.11
|
|
|
1.11
|
|
British Pound
|
1.29
|
|
|
1.35
|
|
|
1.53
|
|
Results of Operations
Consolidated Results of Operations for the Year Ended
December 31, 2017
Compared to the Year Ended
December 31, 2016
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
2017
|
|
2016
|
Revenue
|
|
|
|
Service revenue
|
$
|
1,948,374
|
|
|
$
|
1,580,023
|
|
Reimbursement revenue
|
311,015
|
|
|
231,688
|
|
Total revenue
|
2,259,389
|
|
|
1,811,711
|
|
Operating expenses
|
|
|
|
Direct costs
|
1,283,868
|
|
|
1,032,688
|
|
Reimbursable out-of-pocket costs
|
311,015
|
|
|
231,688
|
|
Selling, general and administrative
|
321,987
|
|
|
269,893
|
|
Transaction-related costs
|
87,709
|
|
|
44,834
|
|
Depreciation and amortization
|
78,227
|
|
|
69,506
|
|
Loss on disposal of fixed assets
|
358
|
|
|
753
|
|
Income from operations
|
176,225
|
|
|
162,349
|
|
Interest expense, net
|
(46,729
|
)
|
|
(54,913
|
)
|
Loss on modification or extinguishment of debt
|
(15,023
|
)
|
|
(38,178
|
)
|
Foreign currency (losses) gains, net
|
(39,622
|
)
|
|
24,029
|
|
Other (expense) income, net
|
(304
|
)
|
|
607
|
|
Income before income taxes and equity in income of unconsolidated joint ventures
|
74,547
|
|
|
93,894
|
|
(Benefit from) provision for income taxes
|
(12,623
|
)
|
|
28,494
|
|
Income before equity in income of unconsolidated joint ventures
|
87,170
|
|
|
65,400
|
|
Equity in income of unconsolidated joint ventures, net of tax
|
123
|
|
|
2,775
|
|
Net income
|
$
|
87,293
|
|
|
$
|
68,175
|
|
Net income attributable to noncontrolling interest
|
(366
|
)
|
|
—
|
|
Net income attributable to PRA Health Sciences, Inc.
|
$
|
86,927
|
|
|
$
|
68,175
|
|
Service revenue
increased
by
$368.4 million
, or
23.3%
, from
$1,580.0 million
during the year ended
December 31, 2016
to
$1,948.4 million
during the year ended
December 31, 2017
. Service revenue for the year ended
December 31, 2017
benefited from an increase in billable hours and an increase in the effective rate of the hours billed on our studies, an increase of
$90.5 million
due to the acquisition of Symphony Health which was completed on September 6, 2017, and by a favorable impact of
$7.1
million from foreign currency exchange rate fluctuations. The growth in service revenue and the increase in billable hours were due largely to the increase in our backlog as we entered the year, the type of services we are providing on our active studies, which was driven by the life cycles of projects that were active during the period, the growth in new business awards as a result of higher demand for our services across the industries we serve, and more effective sales efforts and the growth in the overall CRO market. New business awards arise when a client selects us to execute its trial. The number
of awards can vary significantly from period to period and our studies have terms ranging from several months to several years. The increase in our effective rate of the hours billed on our studies is attributable to the contract pricing terms on our current mix of active studies and the mix of clients and the services that we provide to those clients.
Direct costs
increased
by
$251.2 million
, or
24.3%
, from
$1,032.7 million
during the year ended
December 31, 2016
to
$1,283.9 million
during the year ended
December 31, 2017
. Salaries and related benefits in our Clinical Research segment increased
$184.3 million
as we continue to hire billable staff to ensure appropriate staffing levels for our current studies and future growth and an unfavorable impact of
$6.4 million
from foreign currency exchange rate fluctuations. The addition of our Data Solutions segment resulted in
$52.2 million
of incremental direct costs during 2017. Direct costs as a percentage of service revenue increased from
65.4%
during the year ended
December 31, 2016
to
65.9%
during the year ended
December 31, 2017
. The increase in direct costs as a percentage of revenue was primarily due to the aforementioned increase in salaries and related benefits.
Selling, general and administrative expenses increased by
$52.1 million
, or
19.3%
, from
$269.9 million
during the year ended
December 31, 2016
to
$322.0 million
during the year ended
December 31, 2017
. Selling, general and administrative expenses as a percentage of service revenue decreased from
17.1%
during the year ended
December 31, 2016
to
16.5%
during the year ended
December 31, 2017
. The decrease in selling, general and administrative expenses as a percentage of service revenue is primarily related to our continued efforts to effectively leverage our selling and administrative functions.
During the year ended December 31, 2017, we incurred transaction-related expenses of
$87.7 million
. These costs consist of
$6.4 million
of fees incurred in connection with the acquisition of Symphony Health,
$5.3 million
of stock-based compensation expense related to the release of a portion of the transfer restrictions on vested options and $1.0 million of third-party costs incurred in connection with our August 2017 secondary offering. The Company also recognized changes in the fair value of contingent consideration of $75.0 million related to our recent acquisitions. During the year ended December 31, 2016, we incurred transaction-related expenses of
$44.8 million
. These costs consist of $10.1 million of stock-based compensation expense associated with the release of the transfer restrictions on a portion of shares issuable upon exercise of vested service-based options in connection with the announcement of our March, May, and November 2016 secondary offerings. These costs also include $32.0 million of stock-based compensation expense related to the vesting and release of the transfer restrictions of certain performance-based stock options. In addition, we incurred $2.7 million of third-party fees associated with the secondary offerings and the closing of our accounts receivable financing agreement.
Depreciation and amortization expense
increased
by
$8.7 million
, or
12.5%
, from
$69.5 million
during the year ended
December 31, 2016
to
$78.2 million
during the year ended
December 31, 2017
. Depreciation and amortization expense as a percentage of service revenue was
4.4%
during the year ended
December 31, 2016
and
4.0%
during the year ended
December 31, 2017
. The decrease in depreciation and amortization expense as a percentage of service revenue is primarily due the continued decline in amortization of our acquired intangibles, which are amortized on an accelerated basis.
Interest expense, net
decreased
by
$8.2 million
from
$54.9 million
during the year ended
December 31, 2016
to
$46.7 million
during the year ended
December 31, 2017
. The cash tender of our Senior Notes during March 2016 and refinancing of our variable first lien term loans in December 2016 contributed to a 1.2% decrease in the weighted average interest rate and resulted in a $12.5 million reduction in interest expense. The $550.0 million Incremental Borrowing during the year ended December 31, 2017 to fund the Symphony Health acquisition contributed to a $5.9 million increase in interest expense. Additionally, interest expense decreased by $2.3 million due to lower amortization of debt issuance costs, which was partially offset by an increase of $0.9 million related to the amortization of our terminated interest rate swaps and interest expense on our current interest rate swap.
Loss on modification or extinguishment of debt was
$15.0 million
during the year ended
December 31, 2017
compared to
$38.2 million
during the year ended
December 31, 2016
. The loss on modification or extinguishment of debt during the year ended December 31, 2017 is related to the Incremental Borrowing, the 2017 Refinancing, and the extinguishment of the Senior Notes. The Incremental Borrowing was to fund the acquisition of Symphony Health and we recognized $3.1 million in fees in loss on modification of debt. The 2017 Refinancing was to reduce the interest rate margin and amend the payment schedule on the 2016 First Lien Term Loan as well as increase the 2016 Revolver's borrowing capacity, which resulted in a $0.6 million loss on modification of debt. The voluntary redemption of the remaining Senior Notes resulted in a $11.3 million loss on extinguishment of debt, which consists of $9.2 million early payment premium and $2.1 million write-off of unamortized debt issuance cost. The $38.2 million loss on extinguishment of debt incurred during the year ended December 31, 2016 was associated with our cash tender offer on our Senior Notes and our refinancing of the 2013 Credit Facilities. The loss of $21.5 million due to our cash tender offer consisted of a $17.4 million early tender premium, a $3.7 million write-off of unamortized debt issuance cost and $0.4 million of fees associated with the transaction. The refinancing of
our 2013 Credit Facilities resulted in a $16.7 million loss on extinguishment of debt, which consisted of the write-off of $15.8 million write-off of unamortized debt issuance costs and $0.9 million of fees associated with the transaction.
Foreign currency (losses) gains, net changed by
$63.7 million
from foreign currency gains of
$24.0 million
during the year ended December 31, 2016 to foreign currency losses of
$39.6 million
during the year ended December 31, 2017. The foreign currency gains and losses are due to fluctuations in the U.S. dollar, gains or losses that arise in connection with the revaluation of short-term inter-company balances between our domestic and international subsidiaries, and gains or losses from foreign currency transactions, such as those resulting from the settlement of third-party accounts receivables and payables denominated in a currency other than the local currency of the entity making the payment. During the year ended December 31, 2017, foreign currency losses were primarily due to the U.S. dollar weakening against the EUR, GBP, Canadian dollar, or CAD, and Russian ruble, or RUB by 13.7%, 9.3%, 7.1% and 6.2%, respectively. During the year ended December 31, 2016, the foreign currency gains were primarily a result of the weakening of the GBP against the U.S. dollar by 16.7% following the decision by voters in the United Kingdom, to approve a referendum to exit the European Union, commonly referred to as Brexit, in June 2016.
(Benefit from) provision for income taxes
decreased
by
$41.1 million
from a provision of
$28.5 million
during the year ended
December 31, 2016
to a benefit of
$12.6 million
during the year ended
December 31, 2017
. Our effective tax benefit rate was
16.9%
during the year ended December 31, 2017, and an effective tax rate of
30.3%
during the year ended
December 31, 2016
. The change in the effective tax rate was primarily attributable to (i) the benefit realized from the tax deduction of stock awards in excess of the amount recognized in the financial statements per guidance under ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting", (ii) the release of the valuation allowance against the federal net deferred tax assets, and (iii) the decrease in the net U.S. deferred tax liabilities due to the Tax Cuts and Jobs Act enacted December 22, 2017.
Consolidated Results of Operations for the Year Ended
December 31, 2016
Compared to the Year Ended
December 31, 2015
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
2016
|
|
2015
|
Revenue
|
|
|
|
Service revenue
|
$
|
1,580,023
|
|
|
$
|
1,375,847
|
|
Reimbursement revenue
|
231,688
|
|
|
238,036
|
|
Total revenue
|
1,811,711
|
|
|
1,613,883
|
|
Operating expenses
|
|
|
|
Direct costs
|
1,032,688
|
|
|
886,528
|
|
Reimbursable out-of-pocket costs
|
231,688
|
|
|
238,036
|
|
Selling, general and administrative
|
269,893
|
|
|
246,417
|
|
Transaction-related costs
|
44,834
|
|
|
—
|
|
Depreciation and amortization
|
69,506
|
|
|
77,952
|
|
Loss on disposal of fixed assets
|
753
|
|
|
652
|
|
Income from operations
|
162,349
|
|
|
164,298
|
|
Interest expense, net
|
(54,913
|
)
|
|
(61,747
|
)
|
Loss on modification or extinguishment of debt
|
(38,178
|
)
|
|
—
|
|
Foreign currency gains, net
|
24,029
|
|
|
14,048
|
|
Other income (expense), net
|
607
|
|
|
(1,434
|
)
|
Income before income taxes and equity in income (losses) of unconsolidated joint ventures
|
93,894
|
|
|
115,165
|
|
Provision for income taxes
|
28,494
|
|
|
30,004
|
|
Income before equity in income (losses) of unconsolidated joint ventures
|
65,400
|
|
|
85,161
|
|
Equity in income (losses) of unconsolidated joint ventures, net of tax
|
2,775
|
|
|
(3,396
|
)
|
Net income
|
$
|
68,175
|
|
|
$
|
81,765
|
|
Service revenue increased by $204.2 million, or 14.8%, from $1,375.8 million during the year ended December 31, 2015 to $1,580.0 million during the year ended December 31, 2016. Service revenue for the year ended December 31, 2016 benefited from an increase in billable hours and an increase in the effective rate of the hours billed on our studies, offset by an unfavorable impact of $5.3 million from foreign currency exchange rate fluctuations. The growth in
service revenue and the increase in billable hours were due largely to the increase in our backlog as we entered the year, the type of services we are providing on our active studies, which was driven by the life cycles of projects that were active during the period, the growth in new business awards as a result of higher demand for our services across the industries we serve, and more effective sales efforts and the growth in the overall CRO market. New business awards arise when a client selects us to execute its trial. The number of awards can vary significantly from period to period and our studies have terms ranging from several months to several years. The increase in our effective rate of the hours billed on our studies is attributable to the contract pricing terms on our current mix of active studies and the mix of clients and the services that we provide to those clients.
Direct costs increased by $146.2 million, or 16.5%, from $886.5 million during the year ended December 31, 2015 to $1,032.7 million during the year ended December 31, 2016. The increase in direct costs was primarily due to an increase in labor-related costs of $170.6 million, as we continued to hire billable staff to support our current projects and as we hired additional staff in anticipation of our growing portfolio of studies, offset by a favorable impact of $21.3 million from foreign currency exchange rate fluctuations. Direct costs as a percentage of service revenue increased from 64.4% during the year ended December 31, 2015 to 65.4% during the year ended December 31, 2016. This increase in direct costs as a percentage of service revenue is primarily due to the $8.3 million impact of research and development credits, or R&D Credits, recorded during the year ended December 31, 2015 that related to prior years. The R&D Credits are the result of a comprehensive analysis we have been performing across the organization to determine whether expenditures incurred qualify as research and development as defined by the respective jurisdiction.
Selling, general and administrative expenses increased by $23.5 million, or 9.5%, from $246.4 million during the year ended December 31, 2015 to $269.9 million during the year ended December 31, 2016. Selling, general and administrative expenses as a percentage of service revenue decreased from 17.9% during the year ended December 31, 2015 to 17.1% during the year ended December 31, 2016. This decrease in selling, general and administrative expenses as a percentage of service revenue is primarily related to our continued efforts to effectively manage our selling and administrative functions as we continue to grow.
During the year ended December 31, 2016, we incurred transaction-related expenses of $44.8 million. The costs consist of $10.1 million of stock-based compensation expense associated with the release of the transfer restrictions on a portion of shares issuable upon exercise of vested service-based options in connection with the announcement of our March, May, and November 2016 secondary offerings. The costs also include $32.0 million of stock-based compensation expense related to the vesting and release of the transfer restrictions of certain performance-based stock options. In addition, we incurred $2.7 million of third-party fees associated with the secondary offerings and the closing of our accounts receivable financing agreement. There were no transaction-related expenses incurred for the year ended December 31, 2015.
Depreciation and amortization expense decreased by $8.4 million, or 10.8%, from $78.0 million during the year ended December 31, 2015 to $69.5 million during the year ended December 31, 2016. Depreciation and amortization expense as a percentage of service revenue was 5.7% during the year ended December 31, 2015 and 4.4% during the year ended December 31, 2016. The decrease in depreciation and amortization expense as a percentage of service revenue is primarily due the continued decline in amortization of our acquired intangibles, which are amortized on an accelerated basis.
Interest expense, net decreased by $6.8 million from $61.7 million during the year ended December 31, 2015 to $54.9 million during the year ended December 31, 2016. The cash tender on our Senior Notes during 2016, as well as a 0.8% decrease in the weighted average interest rate on our outstanding debt as compared to the year ended December 31, 2015, resulted in a $9.7 million reduction in interest expense. Additionally, interest expense decreased $1.6 million due to lower amortization of debt issuance costs, which was offset by an increase of $4.7 million related to the amortization of our terminated interest rate swaps and interest expense on our current interest rate swap.
Losses on modification or extinguishment of debt were $38.2 million during the year ended December 31, 2016 and there were no losses on modification of debt during the year ended December 31, 2015. The $38.2 million loss on extinguishment of debt incurred during the year ended December 31, 2016 was associated with our cash tender offer on our Senior Notes and our refinancing of the 2013 Credit Facilities. The loss of $21.5 million due to our cash tender offer consisted of a $17.4 million early tender premium, a $3.7 million write-off of unamortized debt issuance cost and $0.4 million of fees associated with the transaction. The refinancing of our 2013 Credit Facilities resulted in a $16.7 million loss on extinguishment of debt, which consisted of the write-off of $15.8 million write-off of unamortized debt issuance costs and $0.9 million of fees associated with the transaction.
Foreign currency gains, net increased by $10.0 million from $14.0 million during the year ended December 31, 2015 to $24.0 million during the year ended December 31, 2016. The foreign currency gains and losses are due to fluctuations in the
U.S. dollar, gains or losses that arise in connection with the revaluation of short-term inter-company balances between our domestic and international subsidiaries, and gains or losses from foreign currency transactions, such as those resulting from the settlement of third-party accounts receivables and payables denominated in a currency other than the local currency of the entity making the payment. During the year ended December 31, 2016, the foreign currency gains were primarily a result of the weakening of the British Pound against the U.S. dollar by 16.7% following Brexit. During the year ended December 31, 2015, foreign currency gains were primarily due to the devaluation of the Canadian dollar, Euro and British Pound against the U.S. dollar by 16.1%, 10.1% and 4.6%, respectively.
Provision for income taxes decreased by $1.5 million from $30.0 million during the year ended December 31, 2015 to $28.5 million during the year ended December 31, 2016. Our effective tax rate was 30.3% and 26.1% during the years ended December 31, 2016 and December 31, 2015, respectively. The change in the effective tax rate was primarily attributable to a decrease in global pre-tax income related to an increase in the overall U.S. loss, the impact of that loss on the valuation allowance and the increase of foreign earnings that are taxed currently in the U.S.
Segment Results of Operations for the Years Ended December 31, 2017, December 31, 2016 and December 31, 2015
Clinical Research
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
|
2017
|
|
2016
|
|
2015
|
|
2017 vs. 2016
|
|
2016 vs. 2015
|
(in thousands)
|
Service revenue
|
$
|
1,857,876
|
|
|
$
|
1,580,023
|
|
|
$
|
1,375,847
|
|
|
$
|
277,853
|
|
|
17.6
|
%
|
|
$
|
204,176
|
|
|
14.8
|
%
|
Gross profit
|
626,186
|
|
|
547,335
|
|
|
489,319
|
|
|
78,851
|
|
|
14.4
|
%
|
|
58,016
|
|
|
11.9
|
%
|
Gross profit %
|
33.7
|
%
|
|
34.6
|
%
|
|
35.6
|
%
|
|
(0.9
|
)%
|
|
|
|
(1.0
|
)%
|
|
|
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Service revenue increased by
$277.9 million
, or
17.6%
, from
$1,580.0 million
during the year ended December 31, 2016 to
$1,857.9 million
during the year ended December 31, 2017. Service revenue for the year ended December 31, 2017 benefited from an increase in billable hours and an increase in the effective rate of hours billed on our studies. The growth in service revenue and the increase in billable hours were due largely to the increase in our backlog as we entered the year, the type of services we are providing on our active studies, which was driven by the life cycles of projects that were active during the period, the growth in new business awards as a result of higher demand for our services across the industries we serve, and more effective sales efforts and the growth in the overall CRO market. New business awards arise when a client selects us to execute its trial. The number of awards can vary significantly from period to period and our studies have terms ranging from several months to several years. The increase in our effective rate of the hours billed on our studies is attributable to the contract pricing terms on our current mix of active studies and the mix of clients and the services that we provide to those clients.
Gross profit increased by
$78.9 million
, or
14.4%
, from
$547.3 million
during the year ended December 31, 2016 to
$626.2 million
during the year ended December 31, 2017 primarily due to an increase in revenue. Gross profit as a percentage of revenue decreased from
34.6%
during the year ended December 31, 2016 to
33.7%
for the same period in 2017.
Gross profit as a percentage of revenue decreased primarily due to an increase in labor-related costs of
$184.3 million
, as we continued to hire billable staff to ensure appropriate staffing levels for our current studies and our future growth.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Service revenue increased by
$204.2 million
, or
14.8%
, from
$1,375.8 million
during the year ended December 31, 2015 to
$1,580.0 million
during the year ended December 31, 2016. Service revenue for the year ended December 31, 2016 benefited from an increase in billable hours and an increase in the effective rate of the hours billed on our studies. The growth in service revenue and the increase in billable hours were due largely to the increase in our backlog as we entered the year, the type of services we are providing on our active studies, which was driven by the life cycles of projects that were active during the period, the growth in new business awards as a result of higher demand for our services across the industries we serve, and more effective sales efforts and the growth in the overall CRO market. New business awards arise when a client selects us to execute its trial. The number of awards can vary significantly from period to period and our studies have terms ranging from several months to several years. The increase in our effective rate of the hours billed on our studies is
attributable to the contract pricing terms on our current mix of active studies and the mix of clients and the services that we provide to those clients.
Gross profit increased by
$58.0 million
, or
11.9%
, from
$489.3 million
during the year ended December 31, 2015 to
$547.3 million
during the year ended December 31, 2016, primarily due to an increase in revenue. Gross profit as a percentage of revenue decreased from
35.6%
during the year ended December 31, 2015 to
34.6%
for the same period in 2016. Gross profit as a percentage of revenue decreased primarily due to the $8.3 million impact of R&D Credits recorded during the year ended December 31, 2015 that related to prior years. The R&D Credits are the result of a comprehensive analysis we have been performing across the organization to determine whether expenditures incurred qualify as research and development as defined by the respective jurisdiction.
Data Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
|
2017
|
|
2016
|
|
2015
|
|
2017 vs. 2016
|
|
2016 vs. 2015
|
(in thousands)
|
Service revenue
|
$
|
90,498
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
90,498
|
|
|
n/a
|
|
$
|
—
|
|
|
n/a
|
Gross profit
|
38,320
|
|
|
—
|
|
|
—
|
|
|
38,320
|
|
|
n/a
|
|
—
|
|
|
n/a
|
Gross profit %
|
42.3
|
%
|
|
—
|
|
|
—
|
|
|
n/a
|
|
|
|
|
n/a
|
|
|
|
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016 and Year Ended December 31, 2015
The Company acquired Symphony Health on September 6, 2017, in conjunction with the acquisition the Company expanded its reporting segments. The Company recognized
$90.5 million
of revenue and
$52.2 million
in direct costs during the period between September 6, 2017 and December 31, 2017 for our Data Solutions segment. See Note 4 to our consolidated financial statements found elsewhere in this Annual Report on Form 10-K for additional information about the acquisition.
Seasonality
Although our business is not generally seasonal, our Clinical Research segment typically experiences a slight decrease in its revenue growth rate during the fourth quarter due to holiday vacations and a similar decrease in new business awards in the first quarter due to our clients’ budgetary cycles and vacations during the year‑end holiday period. Our Data Solutions segment usually experiences an increase in revenue during the fourth quarter as many pharmaceutical companies use a portion of funds remaining in their annual budgets to purchase its data offerings.
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our principal source of liquidity is operating cash flows. As of
December 31, 2017
, we had approximately
$192.2 million
of cash and cash equivalents of which $63.6 million was held by our foreign subsidiaries. Our expected primary cash needs on both a short and long‑term basis are for capital expenditures, expansion of services, geographic expansion, debt repayments, and other general corporate purposes. We have historically funded our operations and growth, including acquisitions, with cash flow from operations, borrowings, and issuances of equity securities. We expect to continue expanding our operations through internal growth and strategic acquisitions and investments. We expect these activities will be funded from existing cash, cash flow from operations and, if necessary or appropriate, borrowings under our existing or future credit facilities. Our sources of liquidity could be affected by our dependence on a small number of industries and clients, compliance with regulations, international risks, and personal injury, environmental or other material litigation claims.
Cash Collections
Cash collections from accounts receivable were $2,495.5 million during the year ended
December 31, 2017
, including $257.1 million of funds received from customers to pay independent physician investigators, or investigators, as compared to $2,074.1 million during the year ended
December 31, 2016
, including $248.2 million of funds received from customers to pay investigators, $1,831.1 million during the year ended
December 31, 2015
, including $231.4 million of funds received from customers to pay investigators. The increase in cash collections is related to our increase in revenue, driven by an increase in new business awards and backlog.
Discussion of Cash Flows
Cash Flow from Operating Activities
Cash provided by operating activities increased by $60.4 million during the year ended
December 31, 2017
as compared to
2016
. The increase in operating cash flow reflects increased cash flows from our operating performance and a slight decrease in cash outflows primarily from working capital. Net income after non-cash adjustments increased $51.5 million as compared to the prior year and outflows from working capital decreased by $8.9 million. The decrease in working capital outflows was primarily driven by positive changes in operating assets and liabilities attributable to the timing and payment of invoices offset by an increase in our days sales outstanding during the year ended December 31, 2017.
Cash provided by operating activities increased by $7.6 million during the year ended December 31, 2016 as compared to 2015. The increase in operating cash flow reflects increased cash flows from our operating performance and a reduction in interest payments, which was partially offset by an increase in cash outflows primarily from working capital. The changes in working capital were driven by a $2.1 million decrease in accounts payable and accrued expenses during the year ended December 31, 2016 as compared to $21.3 million increase during the year ended December 31, 2015 and is attributable to the timing and payment of invoices. This is partially offset by a $9.1 million improvement in cash outflows from our accounts receivable, unbilled services, and advanced billings accounts, driven by a slower rate of increase in our days sales outstanding during the year ended December 31, 2016.
Cash Flow from Investing Activities
Net cash used in investing activities was $687.4 million during the year ended
December 31, 2017
, compared to $34.6 million for the same period of
2016
. The net cash outflows from acquisitions increased from $4.3 million during the year ended December 31, 2016 to $625.3 million during the same period in 2017. Additionally, capital expenditures increased by $28.2 million compared to the prior year, which is partially offset by $3.7 million received from the sale of our ownership stake in the WuXiPRA joint venture during the year ended December 31, 2016.
Net cash used in investing activities decreased by $37.1 million during the year ended December 31, 2016 as compared to 2015. The decrease in the cash outflows was primarily due to the $32.9 million payment for the termination of our interest rate swaps during 2015 and a $7.2 million change in cash flows related to our unconsolidated joint ventures. During the year ended December 31, 2015, we made $23.0 million in capital contributions to our unconsolidated joint ventures and received $19.5 million from the dissolution of our joint venture with KKR, and during the year ended December 31, 2016, we received $3.7 million from the sale of our ownership stake in our WuXiPRA joint venture.
Cash Flow from Financing Activities
Net cash provided by financing activities during the year ended
December 31, 2017
was $507.0 million compared to $101.6 million of net cash used in financing activities for the same period of
2016
. During the year ended December 31, 2017 our long-term debt balance, including borrowing under the revolving line of credit, increased by $516.0 million; these borrowings were used to fund the acquisition of Symphony Health. During the year ended December 31, 2016, our total debt decreased by $77.6 million due to voluntary principal payments on our long-term debt.
Net cash used in financing activities during the year ended December 31, 2016 was $101.6 million compared to $42.4 million for the same period of 2015. During the year ended December 31, 2016, we entered into an accounts receivable financing agreement and received proceeds of $120.0 million which was used to repay $133.6 million aggregate principal on our Senior Notes, as part of a cash tender offer. In addition, we voluntarily repaid $689.0 million in principal balance on the 2013 First Lien Term Loan and received $625.0 million in proceeds from the 2016 First Lien Term Loan. During 2016, we also paid $25.5 million in debt extinguishment and debt issuance costs. For the year ended December 31, 2015, we voluntarily repaid $40.0 million on our 2013 First Lien Term Loan.
Inflation
Our long‑term contracts, those in excess of one year, generally include an inflation or cost of living adjustment for the portion of the services to be performed beyond one year from the contract date. As a result, we expect that inflation generally will not have a material adverse effect on our operations or financial condition. Historically our projection of inflation contained within our contracts has not significantly impacted our operating income. Should inflation be in excess of the estimates within our contracts our operating margins would be negatively impacted if we were unable to negotiate contract modifications with our clients.
Indebtedness
2016 Credit Facilities
The 2016 Credit Facilities provide senior secured financing of up to $1,400.0 million, consisting of:
|
|
•
|
the 2016 First Lien Term Loan in an aggregate principal amount of up to $1,175.0 million; and
|
|
|
•
|
the 2016 Revolver in an aggregate principal amount of up to $225.0 million.
|
The above amounts reflect the $550.0 million Incremental Borrowing associated with the acquisition of Symphony Health and the $100.0 million new revolving credit commitment received as part of the 2017 Refinancing. Refer to Note 9 - Revolving credit facilities and long‑term debt for further information on those transactions.
The borrower of the 2016 First Lien Term Loan and the 2016 Revolver is Pharmaceutical Research Associates, Inc., a wholly-owned subsidiary of PRA Health Sciences, Inc. The 2016 Revolver includes borrowing capacity available for letters of credit up to $25.0 million and for up to $20.0 million of borrowings on same‑day notice, referred to as swingline loans.
The 2016 Credit Facilities provides that we have the right at any time to request incremental term loans and/or revolving commitments in an aggregate principal amount of up to (a) $275.0 million, plus (b) all voluntary prepayments and corresponding voluntary commitment reductions of the Senior Secured Credit Facilities, other than from proceeds of long-term indebtedness, prior to the date of any such incurrence, plus (c) an additional amount which, after giving effect to the incurrence of such amount, we would not exceed a consolidated net first lien secured leverage to consolidated EBITDA ratio of 3.0 to 1.0 pro forma for such incremental facilities, minus (d) the sum of (i) the aggregate principal amount of new term loan commitments and new revolving credit commitments incurred and (ii) the aggregate principal amount of certain other indebtedness incurred. The lenders under these facilities are not under any obligation to provide any such incremental commitments or loans, and any such addition of or increase in commitments or loans is subject to certain customary conditions precedent.
Interest Rate and Fees
Borrowings under the 2016 First Lien Term Loan and the 2016 Revolver bear interest at a rate equal to, at our option, either (a) London Interbank Offered Rate, or LIBOR, for the relevant interest period, plus an applicable margin; provided that solely with respect to the 2016 First Lien Term Loan LIBOR shall be deemed to be no less than 0.00% per annum or (b) an adjusted base rate, or the ABR, plus an applicable margin.
The applicable margin on our 2016 First Lien Term Loan is based on our ratio of total debt to EBITDA per the table below:
|
|
|
|
|
|
|
|
|
|
|
|
Pricing
Level
|
|
Total indebtedness
to EBITDA Ratio
|
|
Letter of
Credit
Fees
|
|
ABR Margin
Rate
|
|
Adjusted LIBOR
Margin Rate
|
|
Commitment
Fees
|
I
|
|
> 3.75x
|
|
2.00%
|
|
1.00%
|
|
2.00%
|
|
0.40%
|
II
|
|
< 3.75x but > 3.00x
|
|
1.75%
|
|
0.75%
|
|
1.75%
|
|
0.35%
|
III
|
|
< 3.00x but > 2.25x
|
|
1.50%
|
|
0.50%
|
|
1.50%
|
|
0.30%
|
IV
|
|
< 2.25x but > 1.50x
|
|
1.25%
|
|
0.25%
|
|
1.25%
|
|
0.25%
|
V
|
|
< 1.50x
|
|
1.00%
|
|
0.00%
|
|
1.00%
|
|
0.20%
|
In addition to paying interest on outstanding principal under the 2016 Revolver, the Company is required to pay a commitment fee to the lenders under the 2016 Revolver in respect of the unutilized commitments thereunder. The commitment fee rate will be based on the ratio of total indebtedness to EBITDA on a given date. We are also required to pay customary letter of credit fees.
As of
December 31, 2017
and 2016, the weighted average interest rate on the 2016 First Lien Term Loan was
3.45%
and 2.70%, respectively.
Prepayments
The 2016 Credit Facilities require us to prepay outstanding term loans, subject to certain exceptions, with:
|
|
•
|
100% of the net cash proceeds of the incurrence or issuance of certain debt; and
|
|
|
•
|
100% of the net cash proceeds of $5.0 million of certain non-ordinary course asset sales and casualty and condemnation events, subject to reinvestment rights and certain other exceptions.
|
The foregoing mandatory prepayments will be applied first to accrued interest and fees and second, to the scheduled installments of principal of the 2016 Credit Facilities in direct order of maturity.
We may voluntarily repay outstanding loans under the 2016 Credit Facilities at any time without premium or penalty, subject to reimbursements of the lenders’ redeployment costs actually incurred in the case of a prepayment of LIBOR borrowings other than on the last day of the relevant interest period.
Amortization and Final Maturity
The 2016 First Lien Term Loan, including the Incremental Borrowing and the 2017 Refinancing, is a floating rate term loan with scheduled, fixed quarterly principal payments of $7.2 million to be made quarterly until September 30, 2021, with the remaining $1,033.0 million principal payment due at December 6, 2021.
The Company has the option of 1, 2, 3 or 6-month borrowing terms under the 2016 Revolver. Principal amounts outstanding under the 2016 Revolver are due and payable in full at maturity, on or about December 6, 2021.
Guarantee and Security
All obligations of the borrower under the 2016 Credit Facilities are unconditionally guaranteed by us and all our material, wholly‑owned U.S. restricted subsidiaries, with customary exceptions including where providing such guarantees is not permitted by law, regulation or contract or would result in material adverse tax consequences.
All obligations of the borrower under the 2016 Credit Facilities, and the guarantees of such obligations, are secured, subject to permitted liens and other exceptions, by substantially all of the assets of the borrower and each guarantor, including but not limited to: (i) a perfected pledge of all of the capital stock issued by the borrower and each guarantor and (ii) perfected security interests in substantially all other tangible and intangible assets of the borrower and the guarantors (subject to certain exceptions and exclusions).
Certain Covenants and Events of Default
The 2016 Credit Facilities contain a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to:
|
|
•
|
make investments and acquisitions;
|
|
|
•
|
incur or guarantee additional indebtedness;
|
|
|
•
|
enter into mergers or consolidations and other fundamental changes;
|
|
|
•
|
conduct sales and other dispositions of property or assets;
|
|
|
•
|
enter into sale-leaseback transactions or hedge agreements;
|
|
|
•
|
prepay subordinated debt;
|
|
|
•
|
pay dividends or make other payments in respect of capital stock;
|
|
|
•
|
change the line of business;
|
|
|
•
|
enter into transactions with affiliates;
|
|
|
•
|
enter into burdensome agreements with negative pledge clauses and clauses restriction; and
|
|
|
•
|
subsidiary distributions.
|
Our 2016 Credit Facilities contain customary events of default (subject to exceptions, thresholds and grace periods), including, without limitation: (i) nonpayment of principal or interest; (ii) failure to perform or observe covenants; (iii) inaccuracy or breaches of representations and warranties; (iv) cross‑defaults with certain other indebtedness; (v) certain bankruptcy related events; (vi) impairment of certain security interests in collateral, guarantees or invalidity or unenforceability of certain 2016 Credit Facilities documents; (vii) monetary judgment defaults; (viii) certain ERISA matters; and (ix) certain change of control events.
The 2016 Credit Facilities requires us to maintain a consolidated total debt to consolidated EBITDA ratio of 4.25 to 1.0 and consolidated EBITDA to fixed charges no less than 3.0 to 1.0 for any four consecutive fiscal quarters for which financial statements have been provided to the administrative agent as required by the Senior Secured Credit Agreement. Following a qualified material acquisition, the 2016 Credit Facilities allows the Company to increase its Consolidated Total Debt to Consolidated EBITDA Ratio to 5.25 to 1.00; provided that (i) such ratio in respect of each quarter shall be reduced by 0.25 to 1.00, (ii) in no event shall such ratio be lower than 4.25 to 1.00 and (iii) such an increase pursuant to this shall be permitted no more than once during any period of 24 consecutive months.
The 2016 Credit Facilities also contain certain customary affirmative covenants and events of default, including a change of control.
Accounts Receivable Financing Agreement
We entered into an accounts receivable financing agreement with PNC Bank, National Association, as administrative agent and lender on March 22, 2016.
We may borrow up to $140.0 million from PNC, secured by liens on our accounts receivables and other assets. We are liable for customary representations, warranties, covenants and indemnities. In addition, we have guaranteed the performance of the obligations and will guarantee the obligations of any additional servicer that may become party to the accounts receivable financing agreement. As of
December 31, 2017
, the outstanding balance was $120.0 million.
The accounts receivable financing agreement terminates on March 22, 2019, unless terminated earlier pursuant to its term.
Interest Rate and Fees
Loans under the accounts receivable financing agreement will accrue interest at either a reserve-adjusted LIBOR or a base rate, plus 1.60%. As of
December 31, 2017
and 2016, the weighted average interest rate on the accounts receivable financing agreement was
2.96%
and 2.31%. We may prepay loans upon one business day prior notice and may terminate the accounts receivable financing agreement with 15 days’ prior notice.
Covenants and Events of Default
The accounts receivable financing agreement contains various customary representations and warranties and covenants, and default provisions which provide for the termination and acceleration of the commitments and loans under the accounts receivable financing agreement in circumstances including, but not limited to, failure to make payments when due, breach of representations, warranties or covenants, certain insolvency events or failure to maintain the security interest in the trade receivables, and defaults under other material indebtedness.
Senior Notes
On December 29, 2017, the Company redeemed the remaining $91.4 million aggregate principal amount of its Senior Notes. In accordance with the guidance in ASC 470-50, the debt redemption was accounted for as a debt extinguishment. The redemption resulted in a $11.3 million loss on extinguishment of debt, which consists of a $9.2 million early payment premium and $2.1 million write-off of unamortized debt issuance cost which is included in loss on modification or extinguishment of debt in the consolidated statement of operations during the year ended December 31, 2017.
Contractual Obligations and Commercial Commitments
The following table summarizes our future minimum payments for all contractual obligations and commercial commitments for years subsequent to the year ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Less than 1
year
|
|
1 - 3 years
|
|
3 - 5 years
|
|
More than 5
years
|
|
Total
|
|
(in thousands)
|
Principal payments on long-term debt (1)
|
$
|
120,289
|
|
|
$
|
177,578
|
|
|
$
|
1,054,560
|
|
|
$
|
—
|
|
|
$
|
1,352,427
|
|
Interest payments on long-term debt (1)
|
48,074
|
|
|
91,980
|
|
|
42,118
|
|
|
—
|
|
|
182,172
|
|
Service purchase commitments (2)
|
80,802
|
|
|
103,761
|
|
|
33,241
|
|
|
95
|
|
|
217,899
|
|
Operating leases
|
44,071
|
|
|
74,365
|
|
|
57,753
|
|
|
110,394
|
|
|
286,583
|
|
Less: sublease income
|
(181
|
)
|
|
(250
|
)
|
|
(165
|
)
|
|
—
|
|
|
(596
|
)
|
Uncertain income tax positions (3)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Contingent consideration on acquisition (4)
|
114,692
|
|
|
50,644
|
|
|
—
|
|
|
—
|
|
|
165,336
|
|
Total
|
$
|
407,747
|
|
|
$
|
498,078
|
|
|
$
|
1,187,507
|
|
|
$
|
110,489
|
|
|
$
|
2,203,821
|
|
|
|
(1)
|
Principal payments are based on the terms contained in our credit agreements. Principal payments include payments on 2017 First Lien Term Debt, accounts receivable financing agreement, and borrowings under our 2017 Revolver. Interest payments are based on the interest rate in effect on
December 31, 2017
.
|
|
|
(2)
|
Service purchase commitments are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased.
|
|
|
(3)
|
As of
December 31, 2017
, our liability related to uncertain income tax positions was approximately $7.9 million; the entire amount has been excluded from the table as we are unable to predict when these liabilities will be paid due to the uncertainties in timing of the settlement of the income tax positions.
|
|
|
(4)
|
Represents contingent payments associated with our acquisitions. These amounts are remeasured at fair value every reporting period with the change in fair value recorded in Transaction-related costs (see Note 2 to our consolidated financial statements). The actual amounts ultimately paid out may be different depending on the level of achievement of certain earnings milestones.
|
Off‑Balance Sheet Arrangements
We have no off‑balance sheet arrangements. The term “off‑balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
Recent Accounting Pronouncements
For information on new accounting pronouncements and the impact, if any, on our financial position or results of operations, see Note 2 to our audited consolidated financial statements found elsewhere in this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
In preparing our financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our actual results could differ from those estimates. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that affect our financial condition and results of operations. We have discussed the application of these critical accounting policies with our board of directors.
Revenue Recognition
The majority of our service revenue is recorded regionally on a proportional performance basis. Revenue for service is recognized only after persuasive evidence of an arrangement exists, the sales price is determinable and collectability is reasonably assured. To measure performance, we compare contract costs incurred to estimated total contract costs through completion. We believe this is the best indicator of the performance of the contract obligations because the costs relate to the amount of labor hours incurred to perform the service. Direct costs are primarily comprised of labor‑related charges associated with the delivery of services. Each month we accumulate costs on each project and compare them to the total current estimated costs to determine the proportional performance. We then multiply the proportion completed by the contract value to determine the amount of revenue that can be recognized. Each month we review the total current estimated costs on each project to determine if these estimates are still accurate and, if necessary, we adjust the total estimated costs for each project. During our monthly contract review process, we review each contract’s performance to date, current cost trends, and circumstances specific to each study. The original or current cost estimates are reviewed and if necessary the estimates are adjusted and refined to reflect any changes in the anticipated performance under the study. In the normal course of business, we conduct this review each month in all service delivery locations. As the work progresses, original estimates might be deemed incorrect due to, among other things, revisions in the scope of work or patient enrollment rate, and a contract modification might be negotiated with the customer to cover additional costs. If not, we bear the risk of costs exceeding our original estimates. Management assumes that actual costs incurred to date under the contract are a valid basis for estimating future costs. Should management’s assumption of future cost trends fluctuate significantly, future margins could be reduced. In the past, we have had to commit unanticipated resources to complete projects, resulting in lower margins on those projects. Should our actual costs exceed our estimates on fixed price contracts, future margins could be reduced, absent our ability to negotiate a contract modification. We accumulate information on each project to refine our bidding process. Historically, the majority of our estimates and assumptions have been materially correct, but these estimates might not continue to be accurate in the future.
Allowance for Doubtful Accounts
Included in “Accounts receivable and unbilled services, net” on our consolidated balance sheets is an allowance for doubtful accounts. Generally, before we do business with a new client, we perform a credit check, as our allowance for doubtful accounts requires that we make an accurate assessment of our customers’ creditworthiness. Approximately
14%
of our client base is small- to mid-sized biotech companies, creating a heightened risk related to the creditworthiness for a portion of our client base. We manage and assess our exposure to bad debt on each of our contracts. We age our billed accounts receivable and assess exposure by client type, by aged category, and by specific identification. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Historically, we have not had any write‑offs in excess of our allowance. If, at
December 31, 2017
, our aged accounts receivable balance greater than 90 days were to increase by 10% (for the U.S. operations), no material adjustments to bad debt expense would be required.
Income Taxes
Changes in judgment as to recognition or measurement of tax positions can materially affect the estimate of our effective tax rate and, consequently, our operating results. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and may not accurately anticipate actual outcomes.
We have to use estimates and judgments in calculating certain tax liabilities and determining the recoverability of certain deferred tax assets, which arise from net operating losses, tax credit carry forwards and temporary differences between the tax and financial statement recognition of revenue and expense. We are also required to reduce our deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company has calculated our best estimate of the impact of the Act in our year end income tax provision in accordance with our understanding of the Act and guidance under SAB 118 available as of the date of this filing and as a result has recorded $0.2 million as additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount related to the remeasurement of certain deferred tax assets, deferred tax liabilities, and U.S. uncertain tax positions, based on the rates at which they are expected to reverse in the future, was a benefit of $41.7 million. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was $77.6 million based on cumulative foreign earnings of $392.5 million. The Company also recorded a
provisional tax benefit of $35.7 million related to the utilization of foreign tax credits against the one-time transition tax. In addition, the Company has recorded a valuation allowance against an estimated $12.8 million of excess foreign tax credits related to the transition tax inclusion. The Company is continuing to analyze the overall impact of the transition tax inclusion, including its foreign tax credit limitation position and will update the provisional estimate as it completes its analysis during the measurement period. Due to the complexity of the new law, the Company is still in the process of investigating the related accounting implications. Specifically, for the Global Intangible Low Tax Income (“GILTI”) tax the Company intends to make an accounting policy decision around whether to account for GILTI as a period cost in the relevant period, or to record deferred taxes related to the basis in the Company’s foreign subsidiaries once additional guidance is available for assessment.
In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence, including our past operating results, the existence of cumulative losses in the most recent fiscal years and our forecast of future taxable income on a jurisdiction‑by‑jurisdiction basis. In determining future taxable income, assumptions include the amount of state, federal and international pretax operating income, international transfer pricing policies, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage the underlying businesses. Based on our analysis of the above factors, we determined that a valuation allowance of $25.2 million was required as of
December 31, 2017
relating to the U.S. foreign tax credit carryforwards, state net operating loss carryforwards, foreign net operating loss carryforwards and state tax credit carryforwards. Changes in our assumptions could result in an adjustment to the valuation allowance, up or down, in the future.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions. We determine our liability for uncertain tax positions globally under the provisions in the FASB's Accounting Standards Codification, or ASC, 740, Income Taxes. As of
December 31, 2017
, we had recorded a liability for uncertain tax positions of $7.9 million. If events occur such that payment of these amounts ultimately proves to be unnecessary, the reversal of liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our calculation of liability related to uncertain tax positions proves to be more or less than the ultimate assessment, a tax expense or benefit to expense, respectively, would result. The total liability reversal that could affect the tax rate is $0.5 million.
Stock‑Based Compensation
In accordance with the ASC 718, Stock Compensation, as modified and supplemented, we estimate the value of employee stock options on the date of grant using either the Black‑Scholes model for all options with a service condition or a lattice model for options with market and performance conditions. The determination of fair value of stock‑based payment awards on the date of grant using an option‑pricing model is affected by the stock price of similar entities as well as assumptions regarding a number of highly complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The Black‑Scholes and lattice models require extensive actual employee exercise behavior data and the use of a number of complex assumptions including expected volatility, risk‑free interest rate, expected dividends, and expected life. In developing our assumption, we take into account the following:
|
|
•
|
We use the historical volatilities of a selected peer group as we do not have sufficient history to estimate the volatility of our common share price. We calculate expected volatility based on reported data for selected reasonably similar publicly traded companies for which the historical information is available. For the purpose of identifying peer companies, we consider characteristics such as industry, length of trading history, similar vesting terms and in‑the‑money option status. We plan to continue to use the guideline peer group volatility information until the historical volatility of our common shares is relevant to measure expected volatility for future award grants.
|
|
|
•
|
The risk‑free interest rate assumption is based upon observed interest rates appropriate for the term of our employee stock options.
|
|
|
•
|
The dividend yield assumption is based on the history and expectation of dividend payouts.
|
|
|
•
|
For those options valued using the Black-Scholes model, the expected life is based upon the guidance provided by the FASB. For those options with a market condition valued under the lattice model, the expected life varies depending on the target stock price that triggers vesting.
|
|
|
•
|
We account for forfeitures as they occur.
|
Due to the absence of an active market for our common stock prior to our IPO, the fair value of our common stock on the date of the grant was determined in good faith by our Board of Directors with the assistance of management, based on a number of factors consistent with the methodologies outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Subsequent to the IPO, the fair value of our common stock is based upon the market price of our common stock on the date of the grant as listed on the NASDAQ.
Long‑Lived Assets, Goodwill and Indefinite‑Lived Intangible Assets
As a result of our acquisitions we have recorded goodwill and other identifiable finite and indefinite‑lived acquired intangibles. The identification and valuation of these intangible assets at the time of acquisition require significant management judgment and estimates.
We review long‑lived asset groups for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group might not be recoverable. If indicators of impairment are present, we evaluate the carrying value of property and equipment in relation to estimates of future undiscounted cash flows. As a result of our acquisitions we have recorded goodwill and other identifiable finite and indefinite‑lived acquired intangibles. The identification and valuation of these intangible assets at the time of acquisition require significant management judgment and estimates. In connection with acquisitions, valuations were completed and value was assigned to identifiable finite‑lived and indefinite‑lived intangible assets and goodwill, based on the purchase price of the transactions.
We test goodwill for impairment on at least an annual basis by comparing the carrying value to the estimated fair value of our reporting units. On October 1, 2017, we reviewed goodwill for impairment and our analysis indicated that the fair value of goodwill exceeded the carrying value and, therefore, no impairment exists. When evaluating for impairment, we may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit or indefinite-lived intangible asset is impaired. If we do not perform a qualitative assessment, or if it determines that it is not more likely than not that the fair value of the reporting unit or indefinite-lived intangible asset exceeds its carrying amount, we will calculate the estimated fair value of the reporting unit’s or indefinite-lived intangible asset. Our decision to perform a qualitative impairment assessment for an individual reporting unit in a given year is influenced by a number of factors, inclusive of the size of the reporting unit's goodwill, the significance of the excess of the reporting unit's estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments and the date of acquisition. During
2017
, as part of our annual impairment analysis, we performed the qualitative assessment on each reporting unit comprising of our total goodwill balance of
$1,512.4 million
and for our indefinite-lived trade name intangible asset.
If we do not perform a qualitative assessment, goodwill impairment is determined by comparing the fair value of each reporting unit, determined using various valuation techniques, with the primary technique being a discounted cash flow analysis, to its carrying value. This process is inherently subjective and dependent upon the estimates and assumptions we make. In determining the expected future cash flows of our company, we assume that we will continue to enter into new contracts, execute the work on these contracts profitably, collect receivables from customers, and thus generate positive cash flows. In addition, our analysis could be impacted by future adverse change such as future declines in our operating results, a further significant slowdown in the worldwide economy or pharmaceutical and biotechnology industry or failure to meet the performance projections included in our forecast.
Fair Value Measurements
We record certain assets and liabilities at fair value. Fair value is defined as a price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three‑level hierarchy that prioritizes the inputs used to measure fair value is further described in Note 2 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10‑K.
Fair Value Measurements on a Recurring Basis
At
December 31, 2017
and
2016
, we used Level 3 inputs to measure liabilities totaling
$50.6 million
and
$2.8 million
, respectively. The liability at
December 31, 2017
relates to contingent consideration issued in connection with our acquisition of Symphony Health. The liability at
December 31, 2016
related to contingent consideration issued in connection with our acquisitions of Value Health Solutions Inc. and Nextrials, Inc.
All derivatives are measured at fair value and recognized as either assets or liabilities on the consolidated balance sheets. The fair value of our interest rate swaps, measured using Level 2 inputs, was an asset of
$0.4 million
and a liability of
$0.6 million
at
December 31, 2017
and
2016
, respectively.
All investments in marketable securities are measured at fair value using quoted market prices. At
December 31, 2017
, assets totaling
$0.4 million
were valued using Level 1 inputs. No other liabilities or assets are remeasured at fair value.
Dividend History
We have not declared or paid dividends during
2017
,
2016
and
2015
.
Item 8. Financial Statements and Supplementary Data
Management’s Report on Internal Control Over Financial Reporting
Management of PRA Health Sciences, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements in the consolidated financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2017
. In making these assessments, management used the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control — Integrated Framework (2013)
. Based on management’s assessment and the criteria in the COSO framework, management has concluded that the Company’s internal control over financial reporting as of
December 31, 2017
was effective.
Management excluded from its assessment of the Company’s internal control over financial reporting as of December 31, 2017, the internal control over financial reporting of Symphony Health Solutions Corporation, or Symphony Health, which was acquired on September 6, 2017. This exclusion is consistent with guidance issued by the SEC that an assessment of a recently acquired business may be omitted from the scope of management's report on internal control over financial reporting in the year of acquisition. Symphony Health, excluding acquired goodwill and intangible assets, represented 4% of our consolidated total assets and 5% of our consolidated service revenue as of and for the year ended December 31, 2017. See a discussion of this acquisition in Note 4, Business Combinations, of the Notes to the Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K.
The Company’s independent registered public accounting firm has issued a report on the Company’s internal control over financial reporting. This report appears on page 61 in this Annual Report on Form 10-K.
|
|
|
|
/s/ Colin Shannon
|
|
/s/ Linda Baddour
|
|
|
|
Colin Shannon
|
|
Linda Baddour
|
President, Chief Executive Officer and Chairman of the Board of Directors
|
|
Executive Vice President and Chief Financial Officer
|
(Principal Executive Officer)
|
|
(Principal Financial Officer)
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders
and the Board of Directors of PRA Health Sciences, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of PRA Health Sciences, Inc. and subsidiaries (the "Company") as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.
Adoption of new Accounting Standard
As discussed in Note 2 to the financial statements, the Company adopted ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” on January 1, 2017.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
February 22, 2018
We have served as the Company's auditor since 2013.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of PRA Health Sciences, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of PRA Health Sciences, Inc. and subsidiaries (the “Company”) as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017, of the Company and our report dated February 22, 2018 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.”
As described in “Management’s Report on Internal Control Over Financial Reporting,” management excluded from its assessment the internal control over financial reporting at Symphony Health Solutions Corporation, which was acquired on September 6, 2017 and whose financial statements constitute 4% of consolidated total assets (excluding acquired goodwill and intangible assets) and 5% of consolidated service revenue as of and for the year ended December 31, 2017. Accordingly, our audit did not include the internal control over financial reporting at Symphony Health Solutions Corporation.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
February 22, 2018
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
192,229
|
|
|
$
|
144,623
|
|
Restricted cash
|
661
|
|
|
4,715
|
|
Accounts receivable and unbilled services, net
|
627,003
|
|
|
439,053
|
|
Prepaid expenses and other current assets
|
55,580
|
|
|
35,367
|
|
Income taxes receivable
|
1,551
|
|
|
979
|
|
Total current assets
|
877,024
|
|
|
624,737
|
|
Fixed assets, net
|
143,070
|
|
|
87,577
|
|
Goodwill
|
1,512,424
|
|
|
971,980
|
|
Intangible assets, net
|
783,836
|
|
|
473,976
|
|
Deferred tax assets
|
8,939
|
|
|
6,568
|
|
Investment in unconsolidated joint ventures
|
407
|
|
|
284
|
|
Deferred financing fees
|
1,844
|
|
|
1,762
|
|
Other assets
|
30,502
|
|
|
23,507
|
|
Total assets
|
$
|
3,358,046
|
|
|
$
|
2,190,391
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Current portion of borrowings under credit facilities
|
$
|
91,500
|
|
|
$
|
—
|
|
Current portion of long-term debt
|
28,789
|
|
|
31,250
|
|
Accounts payable
|
64,635
|
|
|
51,335
|
|
Accrued expenses and other current liabilities
|
303,875
|
|
|
123,589
|
|
Income taxes payable
|
13,606
|
|
|
25,524
|
|
Advanced billings
|
469,211
|
|
|
332,501
|
|
Total current liabilities
|
971,616
|
|
|
564,199
|
|
Deferred tax liabilities
|
112,181
|
|
|
73,703
|
|
Long-term debt, net
|
1,225,397
|
|
|
797,052
|
|
Other long-term liabilities
|
112,371
|
|
|
26,185
|
|
Total liabilities
|
2,421,565
|
|
|
1,461,139
|
|
Commitments and contingencies (Note 13)
|
|
|
|
Stockholders' equity:
|
|
|
|
Preferred stock (100,000,000 authorized shares; $0.01 par value)
|
|
|
|
Issued and outstanding -- none
|
—
|
|
|
—
|
|
Common stock (1,000,000,000 authorized shares; $0.01 par value)
|
|
|
|
Issued and outstanding -- 63,623,950 and 61,597,705 at December 31, 2017 and 2016, respectively
|
636
|
|
|
616
|
|
Additional paid-in capital
|
905,423
|
|
|
879,067
|
|
Accumulated other comprehensive loss
|
(136,470
|
)
|
|
(224,686
|
)
|
Retained earnings
|
161,182
|
|
|
74,255
|
|
Equity attributable to PRA Health Sciences, Inc. stockholders
|
930,771
|
|
|
729,252
|
|
Noncontrolling interest
|
5,710
|
|
|
—
|
|
Total stockholders' equity
|
936,481
|
|
|
729,252
|
|
Total liabilities and stockholders' equity
|
$
|
3,358,046
|
|
|
$
|
2,190,391
|
|
The accompanying notes are an integral part of the consolidated financial statements.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Revenue:
|
|
|
|
|
|
Service revenue
|
$
|
1,948,374
|
|
|
$
|
1,580,023
|
|
|
$
|
1,375,847
|
|
Reimbursement revenue
|
311,015
|
|
|
231,688
|
|
|
238,036
|
|
Total revenue
|
2,259,389
|
|
|
1,811,711
|
|
|
1,613,883
|
|
Operating expenses:
|
|
|
|
|
|
Direct costs
|
1,283,868
|
|
|
1,032,688
|
|
|
886,528
|
|
Reimbursable out-of-pocket costs
|
311,015
|
|
|
231,688
|
|
|
238,036
|
|
Selling, general and administrative
|
321,987
|
|
|
269,893
|
|
|
246,417
|
|
Transaction-related costs
|
87,709
|
|
|
44,834
|
|
|
—
|
|
Depreciation and amortization
|
78,227
|
|
|
69,506
|
|
|
77,952
|
|
Loss on disposal of fixed assets
|
358
|
|
|
753
|
|
|
652
|
|
Income from operations
|
176,225
|
|
|
162,349
|
|
|
164,298
|
|
Interest expense, net
|
(46,729
|
)
|
|
(54,913
|
)
|
|
(61,747
|
)
|
Loss on modification or extinguishment of debt
|
(15,023
|
)
|
|
(38,178
|
)
|
|
—
|
|
Foreign currency (losses) gains, net
|
(39,622
|
)
|
|
24,029
|
|
|
14,048
|
|
Other (expense) income, net
|
(304
|
)
|
|
607
|
|
|
(1,434
|
)
|
Income before income taxes and equity in income (losses) of unconsolidated joint ventures
|
74,547
|
|
|
93,894
|
|
|
115,165
|
|
(Benefit from) provision for income taxes
|
(12,623
|
)
|
|
28,494
|
|
|
30,004
|
|
Income before equity in income (losses) of unconsolidated joint ventures
|
87,170
|
|
|
65,400
|
|
|
85,161
|
|
Equity in income (losses) of unconsolidated joint ventures, net of tax
|
123
|
|
|
2,775
|
|
|
(3,396
|
)
|
Net income
|
87,293
|
|
|
68,175
|
|
|
81,765
|
|
Net income attributable to noncontrolling interest
|
(366
|
)
|
|
—
|
|
|
—
|
|
Net income attributable to PRA Health Sciences, Inc.
|
$
|
86,927
|
|
|
$
|
68,175
|
|
|
$
|
81,765
|
|
Net income per share attributable to common stockholders:
|
|
|
|
|
|
Basic
|
$
|
1.39
|
|
|
$
|
1.12
|
|
|
$
|
1.36
|
|
Diluted
|
$
|
1.32
|
|
|
$
|
1.06
|
|
|
$
|
1.29
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
Basic
|
62,437
|
|
|
60,759
|
|
|
59,965
|
|
Diluted
|
65,773
|
|
|
64,452
|
|
|
63,207
|
|
The accompanying notes are an integral part of the consolidated financial statements.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Net income
|
$
|
87,293
|
|
|
$
|
68,175
|
|
|
$
|
81,765
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
Foreign currency translation adjustments
|
83,814
|
|
|
(95,019
|
)
|
|
(52,433
|
)
|
Unrealized gains (losses) on derivative instruments, net of income taxes of $96, $(622), and $(578)
|
149
|
|
|
(978
|
)
|
|
(11,273
|
)
|
Reclassification adjustments:
|
|
|
|
|
|
Losses on derivatives included in net income, net of income taxes, $2,699, $2,303, and $0
|
4,156
|
|
|
3,618
|
|
|
908
|
|
Comprehensive income (loss)
|
175,412
|
|
|
(24,204
|
)
|
|
18,967
|
|
Comprehensive income attributable to noncontrolling interest
|
(269
|
)
|
|
—
|
|
|
—
|
|
Comprehensive income (loss) attributable to PRA Health Sciences, Inc.
|
$
|
175,143
|
|
|
$
|
(24,204
|
)
|
|
$
|
18,967
|
|
The accompanying notes are an integral part of the consolidated financial statements.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other
Comprehensive
(Loss) Income
(Note 16)
|
|
Retained
Earnings
(Accumulated
Deficit)
|
|
Noncontrolling Interest
|
|
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
Total
|
Balance at December 31, 2014
|
59,814
|
|
|
$
|
598
|
|
|
$
|
821,411
|
|
|
$
|
(69,509
|
)
|
|
$
|
(75,685
|
)
|
|
$
|
—
|
|
|
$
|
676,815
|
|
Exercise of common stock options
|
257
|
|
|
3
|
|
|
78
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
81
|
|
Issuance of common stock
|
174
|
|
|
1
|
|
|
1,582
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,583
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
5,276
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,276
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
81,765
|
|
|
—
|
|
|
81,765
|
|
Other comprehensive loss, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
(62,798
|
)
|
|
—
|
|
|
—
|
|
|
(62,798
|
)
|
Balance at December 31, 2015
|
60,245
|
|
|
602
|
|
|
828,347
|
|
|
(132,307
|
)
|
|
6,080
|
|
|
—
|
|
|
702,722
|
|
Exercise of common stock options
|
1,303
|
|
|
13
|
|
|
642
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
655
|
|
Stock-based compensation
|
50
|
|
|
1
|
|
|
49,232
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
49,233
|
|
Income tax benefit from stock-based award activities
|
—
|
|
|
—
|
|
|
846
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
846
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
68,175
|
|
|
—
|
|
|
68,175
|
|
Other comprehensive loss, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
(92,379
|
)
|
|
—
|
|
|
—
|
|
|
(92,379
|
)
|
Balance at December 31, 2016
|
61,598
|
|
|
616
|
|
|
879,067
|
|
|
(224,686
|
)
|
|
74,255
|
|
|
—
|
|
|
729,252
|
|
Exercise of common stock options
|
1,904
|
|
|
19
|
|
|
8,072
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,091
|
|
Issuance of common stock
|
5
|
|
|
—
|
|
|
375
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
375
|
|
Stock-based compensation
|
117
|
|
|
1
|
|
|
17,909
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17,910
|
|
Non-controlling interest related to Takeda joint venture
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,441
|
|
|
5,441
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
86,927
|
|
|
366
|
|
|
87,293
|
|
Other comprehensive income, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
88,216
|
|
|
—
|
|
|
(97
|
)
|
|
88,119
|
|
Balance at December 31, 2017
|
63,624
|
|
|
$
|
636
|
|
|
$
|
905,423
|
|
|
$
|
(136,470
|
)
|
|
$
|
161,182
|
|
|
$
|
5,710
|
|
|
$
|
936,481
|
|
The accompanying notes are an integral part of the consolidated financial statements.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
$
|
87,293
|
|
|
$
|
68,175
|
|
|
$
|
81,765
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
78,227
|
|
|
69,506
|
|
|
77,952
|
|
Amortization of debt issuance costs and discount
|
2,108
|
|
|
4,433
|
|
|
5,983
|
|
Amortization of terminated interest rate swaps
|
6,684
|
|
|
4,961
|
|
|
731
|
|
Stock-based compensation expense
|
12,616
|
|
|
7,067
|
|
|
5,276
|
|
Non-cash transaction related stock-based compensation expense
|
5,294
|
|
|
42,166
|
|
|
—
|
|
Unrealized foreign currency losses (gains)
|
39,700
|
|
|
(24,499
|
)
|
|
(16,464
|
)
|
Loss on modification or extinguishment of debt
|
15,023
|
|
|
38,178
|
|
|
—
|
|
Loss on disposal of fixed assets
|
358
|
|
|
753
|
|
|
652
|
|
Change in acquisition-related contingent consideration
|
74,969
|
|
|
(527
|
)
|
|
89
|
|
Equity in (income) losses of unconsolidated joint ventures
|
(123
|
)
|
|
(2,775
|
)
|
|
3,396
|
|
Unrealized loss on derivatives
|
171
|
|
|
47
|
|
|
1,787
|
|
Excess tax benefit from stock-based compensation
|
—
|
|
|
(846
|
)
|
|
—
|
|
Deferred income taxes
|
(75,915
|
)
|
|
(10,469
|
)
|
|
(3,219
|
)
|
Other reconciling items
|
592
|
|
|
(652
|
)
|
|
443
|
|
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:
|
|
|
|
|
|
Accounts receivable and unbilled services
|
(136,330
|
)
|
|
(31,313
|
)
|
|
(83,211
|
)
|
Prepaid expenses and other assets
|
1,762
|
|
|
(10,071
|
)
|
|
(11,675
|
)
|
Accounts payable and other liabilities
|
35,792
|
|
|
(1,474
|
)
|
|
36,135
|
|
Income taxes
|
10,640
|
|
|
7,308
|
|
|
9,958
|
|
Advanced billings
|
61,547
|
|
|
79
|
|
|
42,830
|
|
Net cash provided by operating activities
|
220,408
|
|
|
160,047
|
|
|
152,428
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchase of fixed assets
|
(61,318
|
)
|
|
(33,143
|
)
|
|
(32,814
|
)
|
Proceeds from the sale of fixed assets
|
56
|
|
|
10
|
|
|
44
|
|
Cash paid for interest on interest rate swap
|
(874
|
)
|
|
(913
|
)
|
|
(302
|
)
|
Cash paid to terminate interest rate swaps
|
—
|
|
|
—
|
|
|
(32,907
|
)
|
Acquisition of Symphony Health Solutions Corporation, net of cash acquired
|
(521,182
|
)
|
|
—
|
|
|
—
|
|
Payment of Symphony Health Solutions Corporation contingent consideration
|
(67,781
|
)
|
|
—
|
|
|
—
|
|
Acquisition of Parallel 6, Inc., net of cash acquired
|
(38,859
|
)
|
|
—
|
|
|
—
|
|
Acquisition of Takeda PRA Development Center KK, net of cash acquired
|
2,680
|
|
|
—
|
|
|
—
|
|
Acquisition of Takeda Pharmaceutical Data Services, Ltd., net of cash acquired
|
(142
|
)
|
|
—
|
|
|
—
|
|
Acquisition of Nextrials, Inc., net of cash acquired
|
—
|
|
|
(4,268
|
)
|
|
—
|
|
Acquisition of Value Health Solutions, Inc., net of cash acquired
|
|
|
|
—
|
|
|
(543
|
)
|
Payment of ClinStar, LLC working capital settlement
|
—
|
|
|
—
|
|
|
(1,693
|
)
|
Distributions from unconsolidated joint ventures
|
—
|
|
|
3,700
|
|
|
19,529
|
|
Contributions to unconsolidated joint ventures
|
—
|
|
|
—
|
|
|
(23,000
|
)
|
Net cash used in investing activities
|
(687,420
|
)
|
|
(34,614
|
)
|
|
(71,686
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
550,000
|
|
|
625,000
|
|
|
—
|
|
Repayment of long-term debt
|
(125,513
|
)
|
|
(822,559
|
)
|
|
(40,000
|
)
|
Proceeds from accounts receivable financing agreement
|
20,000
|
|
|
120,000
|
|
|
—
|
|
Repayment on accounts receivable financing agreement
|
(20,000
|
)
|
|
—
|
|
|
—
|
|
Borrowings on line of credit
|
121,500
|
|
|
110,000
|
|
|
90,000
|
|
Repayments of line of credit
|
(30,000
|
)
|
|
(110,000
|
)
|
|
(90,000
|
)
|
Payment of debt prepayment and debt extinguishment costs
|
(9,226
|
)
|
|
(17,824
|
)
|
|
—
|
|
Payment for debt issuance costs
|
(6,588
|
)
|
|
(7,713
|
)
|
|
—
|
|
Payment of common stock issuance costs
|
—
|
|
|
—
|
|
|
(525
|
)
|
Excess tax benefit from stock-based compensation
|
—
|
|
|
846
|
|
|
—
|
|
Proceeds from stock option exercises
|
7,236
|
|
|
655
|
|
|
81
|
|
Payment of acquisition-related contingent consideration
|
(400
|
)
|
|
—
|
|
|
(2,000
|
)
|
Net cash provided by (used in) financing activities
|
507,009
|
|
|
(101,595
|
)
|
|
(42,444
|
)
|
Effects of foreign exchange changes on cash, cash equivalents, and restricted cash
|
3,555
|
|
|
(625
|
)
|
|
(3,702
|
)
|
Change in cash, cash equivalents, and restricted cash
|
43,552
|
|
|
23,213
|
|
|
34,596
|
|
Cash, cash equivalents, and restricted cash, beginning of year
|
149,338
|
|
|
126,125
|
|
|
91,529
|
|
Cash, cash equivalents, and restricted cash, end of year
|
$
|
192,890
|
|
|
$
|
149,338
|
|
|
$
|
126,125
|
|
The accompanying notes are an integral part of the consolidated financial statements.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
Description of Business
PRA Health Sciences, Inc. and its subsidiaries (collectively, the Company) is a full‑service global contract research organization providing a broad range of product development services for pharmaceutical and biotechnology companies around the world. The Company’s integrated services include data management, statistical analysis, clinical trial management, and regulatory and drug development consulting.
In September 2017, the Company completed the acquisition of Symphony Health Solutions Corporation, or Symphony Health, to better serve clients across their entire product lifecycle by (i) improving clinical trial design, recruitment, and execution; (ii) creating real-world data solutions based on the use of medicines by actual patients in normal situations; and (iii) increasing the efficiency of healthcare companies' commercial organizations through enhanced analytics and outsourcing services. The acquisition of Symphony Health was accounted for as a business combination and the acquired results of operations are included in the Company's consolidated financial information since the date of the acquisition. See Note 4 for additional information regarding the acquisition of Symphony Health.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP.
Secondary Offerings
During
2017
and 2016, Kohlberg Kravis Roberts & Co. L.P., or KKR, and certain executive officers of the Company sold a total of
10,000,000
and
17,500,000
shares, respectively, of the Company’s common stock as part of secondary offerings. The Company incurred professional fees in connection with the secondary offerings of
$1.0 million
and
$1.3 million
during years ended
December 31, 2017
and 2016, respectively. The fees are included in transaction-related costs in the accompanying consolidated statement of operations. As of
December 31, 2017
, KKR owned
20.7%
of the Company’s outstanding common stock.
(2) Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts and operations of the Company, its subsidiaries and investments in which the Company has control. Amounts pertaining to the non-controlling ownership interests held by third parties in the operating results and financial position of the Company’s majority-owned subsidiaries are reported as non-controlling interests. Intercompany accounts and transactions have been eliminated in consolidation.
Variable Interest Entities
Financial Accounting Standards Board’s, or FASB, accounting guidance concerning variable interest entities, or VIE, addresses the consolidation of business enterprise to which the usual condition of consolidation (ownership of a majority voting interest) does not apply. This guidance focuses on controlling financial interests that may be achieved through arrangements that do not involve voting interests. The guidance requires an assessment of who the primary beneficiary is and whether the primary beneficiary should consolidate the VIE. The primary beneficiary is identified as the variable interest holder that has both the power to direct the activities of the variable interest entity that most significantly impacts the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. Application of the VIE consolidation requirements may require the exercise of significant judgment by management.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Takeda PRA Development Center KK
The Company entered into a joint venture with Takeda Pharmaceutical Company Ltd. during 2017. For further discussion on the joint venture, refer to Note 4, Business Combinations.
Accounts Receivable Financing Agreement
On March 22, 2016, the Company entered into a
three
-year accounts receivable financing agreement and related arrangements to securitize certain of its accounts receivable. Under the accounts receivable financing agreement, certain of the Company’s U.S. accounts receivable and unbilled services balances are sold by certain of its consolidated subsidiaries to another of its consolidated subsidiaries, a wholly-owned bankruptcy-remote special purpose entity, or SPE. The SPE in turn may borrow up to
$140.0 million
from a third party lender, secured by liens on the receivables and other assets of the SPE.
The Company retains the servicing of the securitized accounts receivable portfolio and has a variable interest in the SPE by holding the residual equity. The Company determined that the SPE is a VIE and it is the primary beneficiary because (i) the Company’s servicing responsibilities for the securitized portfolio gives it the power to direct the activities that most significantly impact the performance of the VIE and (ii) its variable interest in the VIE gives it the obligation to absorb losses and the right to receive residual returns that could potentially be significant. As a result, the Company has consolidated the VIE within its financial statements.
Refer to Note 9, Revolving Credit Facilities and Long-Term Debt, for additional information regarding the accounts receivable financing agreement.
Risks and Other Factors
The Company’s revenues are dependent on research and development expenditures of the pharmaceutical and biotechnology industries. Any significant reduction in research and development expenditures by the pharmaceutical and biotechnology industries could have a material adverse effect on the Company and its results of operations.
Clients of the Company generally may terminate contracts without cause upon
30
to
60
days’ notice. While the Company generally negotiates deposit payments and early termination fees up front, such terminations could significantly impact the future level of staff utilization and have a material adverse effect on the Company and the results of future operations.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In particular, the Company’s primary method of revenue recognition requires estimates of costs to be incurred to fulfill existing long-term contract obligations. Actual results could differ from those estimates. Estimates are also used when accounting for certain items such as allowance for doubtful accounts, depreciation and amortization, asset impairment, certain acquisition-related assets and liabilities including contingent consideration, income taxes, fair market value determinations, and contingencies.
Reportable Segments
In conjunction with the acquisition of Symphony Health, the Company expanded its reporting segments. The Company is now managed through
two
reportable segments, Clinical Research and Data Solutions. Clinical Research, which primarily serves biopharmaceutical clients, provides outsourced clinical research and clinical trial related services. Data Solutions provides data and analytics, technology solutions and real-world insights and services to companies in the pharmaceutical industry.
The Clinical Research segment is solely focused on the execution of clinical trials on a global basis. The Company has considered whether the delivery of the different types of capabilities in various stages of clinical development constitute separate products or lines of service in accordance with Accounting Standards Codification, or ASC, 280, “Segment Reporting,” or ASC 280, and has concluded that there are substantial similarities and overlaps in the capabilities delivered at
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
each stage of clinical development, with the primary differences between the Early Development Services, or EDS, compared to the Product Registration, or PR, and Strategic Solutions, or SS, relating to the points during the life cycle of a clinical trial at which such capabilities are delivered. After review and analysis of the operating characteristics of each service offering and using the aggregation characteristics under ASC 280, the Company has concluded that the services provided are similar across most characteristics.
The Company's operations consist of two reportable segments, which represents management's view of the Company's operations based on its management and internal reporting structure. The Company considered the guidance in ASC 350, “Intangibles—Goodwill and Other,” which notes that a reporting unit is an operating segment or one level below an operating segment. PR, EDS, and SS are the business units that are one level below the Company’s Clinical Research operating segment and the Company determined that they meet the definition of “components,” as discrete financial information exists and this information is regularly reviewed by management. The Data Solutions operating segment does not have any material components.
Business Combinations
Business combinations are accounted for using the acquisition method and, accordingly, the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree are recorded at their estimated fair values on the date of the acquisition. 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.
Contingent Liabilities
The Company provides for contingent liabilities when (1) it is probable that an asset has been impaired or a liability has been incurred at the date of the consolidated financial statements and (2) the amount of the loss can be reasonably estimated. Disclosure in the notes to the consolidated financial statements is required for loss contingencies that do not meet both these conditions if there is a reasonable possibility that a loss may have been incurred. The Company expenses as incurred the costs of defending legal claims against the Company.
Cash Equivalents
The Company considers all highly-liquid investments purchased with an original maturity of three months or less to be cash equivalents. As of
December 31, 2017
and
2016
, substantially all of the Company’s cash and cash equivalents were held in or invested with large financial institutions. Certain bank deposits may at times be in excess of the Federal Deposit Insurance Corporation insurance limits.
Restricted cash
The Company receives cash advances from its customers to be used for the payment of investigator costs and other pass-through expenses. The terms of certain customer contracts require that such advances be maintained in separate escrow accounts; these accounts are not commingled with the Company’s cash and cash equivalents and are presented separately in the consolidated balance sheets as restricted cash.
Additionally, as part of the acquisition of Nextrials, Inc., or Nextrials, the Company was required to transfer
$0.5 million
to an escrow account held by a subsidiary. These funds were distributed in 2017.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statements of cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
|
2015
|
Cash and cash equivalents
|
$
|
192,229
|
|
|
$
|
144,623
|
|
|
$
|
121,065
|
|
Restricted cash
|
661
|
|
|
4,715
|
|
|
5,060
|
|
Total cash, cash equivalents, and restricted cash
|
$
|
192,890
|
|
|
$
|
149,338
|
|
|
$
|
126,125
|
|
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accounts Receivable and Unbilled Services
Accounts receivable represent amounts for which invoices have been sent to clients based upon contract terms. Unbilled services represent amounts earned for services that have been rendered but for which clients have not been billed and include reimbursement revenue. Unbilled services are generally billable upon submission of appropriate billing information, achievement of contract milestones or contract completion.
Allowances for Doubtful Accounts
The Company maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. The Company performs credit reviews of each customer, monitors collections and payments from customers, and determines the allowance based upon historical experience and specific customer collection issues. The Company ages billed accounts receivable and assesses exposure by customer type, by aged category, and by specific identification. After all attempts to collect a receivable have failed, the receivable is written off against the allowance or, to the extent unreserved, to bad debt expense.
Advanced Billings
Advanced billings represent amounts associated with services, reimbursement revenue and investigator fees that have been received but have not yet been earned or paid.
Fixed Assets
Fixed assets and software purchased or developed for internal use are recorded at cost and are depreciated on a straight-line basis over the following estimated useful lives:
|
|
|
Furniture, fixtures and equipment
|
5-7 years
|
Computer hardware and software
|
3-7 years
|
Leasehold improvements
|
Lesser of the life of the lease or useful life of the improvements
|
Internal Use Software
The Company accounts for internal use software in accordance with the guidance in ASC 350‑40, “Internal-Use Software," which require certain direct costs and interest costs incurred during the application stage of development to be capitalized and amortized over the useful life of the software.
Derivative Financial Instruments
The Company utilizes interest rate swaps to manage changes in market conditions related to debt obligations. All derivatives are measured at fair value and recognized as either assets or liabilities on the consolidated balance sheets. Derivatives that are not determined to be effective hedges are adjusted to fair value with a corresponding effect on earnings. Changes in the fair value of derivatives that are designated and determined to be effective as part of a hedge transaction have no immediate effect on earnings and depending on the type of hedge, are recorded either as part of other comprehensive loss and will be included in earnings in the period in which earnings are affected by the hedged item, or are included in earnings as an offset to the earnings impact of the hedged item. Any ineffective portion of hedges is reported in earnings as it occurs. Amounts previously recorded in accumulated other comprehensive loss related to these interest rate swaps will be reclassified into earnings over the term of the previously hedged borrowing using the swaplet method. The Company has elected the accounting policy that cash flows associated with interest rate derivative contracts are classified as cash flows from investing activities.
Contingent Consideration
The consideration for the Company’s acquisitions may include potential future earn-out payments that are contingent upon the occurrence of particular events. These payments might be based on the achievement of future revenue or earnings milestones. The Company records a contingent consideration obligation for such contingent payments at fair value on the
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
acquisition date. The Company estimates the fair value of contingent consideration obligations through valuation models designed to estimate the probability of such contingent payments based on various assumptions and incorporating estimated success rates. Estimated payments are discounted using present value techniques to arrive at an estimated fair value at the balance sheet date. Changes in the fair value of the contingent consideration obligations, excluding adjustments that qualify as measurement period adjustments, are recognized within the Company’s consolidated statements of operations. Changes in the fair value of the contingent consideration obligations can result from changes to one or multiple inputs, including adjustments to the discount rates, changes in the amount or probability of achieving certain revenue or earnings targets. These fair value measurements are based on significant inputs not observable in the market. Substantial judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, changes in assumptions or actual results could have a material impact on the amount of contingent consideration expense the Company records in any given period.
During the fourth quarter of 2017, the Company made an accounting policy election to present changes in the fair value of contingent consideration as part of income from operations within transaction-related costs on the consolidated statements of operations. The change in fair value of contingent consideration for the years ended December 31, 2015 and 2016, totaled
$0.1 million
and
$0.5 million
, respectively, and were included in other (expense) income, net on the consolidated statements of operations. Due to the immaterial nature of the prior year balances, they were not reclassified to match the current year presentation.
Fair Value Measurements
The Company records certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. 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—Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
|
|
|
•
|
Level 3—Unobservable inputs that are supported by little or no market activity. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
|
The carrying amount of financial instruments, including cash and cash equivalents, accounts receivable, unbilled services, accounts payable and advanced billings, approximate fair value due to the short maturities of these instruments.
Recurring Fair Value Measurements
The following table summarizes the fair value of the Company’s financial assets and liabilities that are measured on a recurring basis as of
December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
—
|
|
|
$
|
428
|
|
|
$
|
—
|
|
|
$
|
428
|
|
Marketable securities
|
393
|
|
|
—
|
|
|
—
|
|
|
393
|
|
Total
|
$
|
393
|
|
|
$
|
428
|
|
|
$
|
—
|
|
|
$
|
821
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
50,644
|
|
|
$
|
50,644
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
50,644
|
|
|
$
|
50,644
|
|
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the fair value of the Company’s financial assets and liabilities that are measured on a recurring basis as of
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Liabilities:
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
—
|
|
|
$
|
590
|
|
|
$
|
—
|
|
|
$
|
590
|
|
Contingent consideration
|
—
|
|
|
—
|
|
|
2,754
|
|
|
2,754
|
|
Total
|
$
|
—
|
|
|
$
|
590
|
|
|
$
|
2,754
|
|
|
$
|
3,344
|
|
The Company values contingent consideration using models that include significant unobservable Level 3 inputs, such as projected financial performance over the earn-out period along with estimates for market volatility and the discount rate applicable to potential cash payments. Interest rate swaps are measured at fair value using a market approach valuation technique. The valuation is based on an estimate of net present value of the expected cash flows using relevant mid-market observable data inputs and based on the assumption of no unusual market conditions or forced liquidation.
The following table summarizes the changes in Level 3 financial liabilities measured on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration - Accrued expenses and other current liabilities
|
|
Contingent consideration - Other long-term liabilities
|
Balance at December 31, 2015
|
|
$
|
999
|
|
|
$
|
—
|
|
Initial estimate of Nextrials contingent consideration
|
|
—
|
|
|
2,282
|
|
Revaluations included in earnings
|
|
—
|
|
|
(527
|
)
|
Reclassification adjustment
|
|
736
|
|
|
(736
|
)
|
Balance at December 31, 2016
|
|
1,735
|
|
|
1,019
|
|
Initial estimate of Symphony Health contingent consideration
|
|
90,394
|
|
|
18,390
|
|
Initial estimate of Parallel 6, Inc. contingent consideration
|
|
—
|
|
|
8,350
|
|
Payments on Nextrials contingent consideration
|
|
(400
|
)
|
|
—
|
|
Payments on Symphony Health contingent consideration
|
|
(67,788
|
)
|
|
—
|
|
Measurement period adjustments
|
|
24,388
|
|
|
14,279
|
|
Changes in fair value included in earnings
|
|
66,363
|
|
|
8,606
|
|
Transfer out
|
|
(114,692
|
)
|
|
—
|
|
Balance at December 31, 2017
|
|
$
|
—
|
|
|
$
|
50,644
|
|
The
$114.7 million
transfer out represents the year-end 2017 earn-out payment to the sellers of Symphony Health that was calculated using observable inputs at December 31, 2017. The remaining
$50.6 million
balance at December 31, 2017, which was valued using a Monte Carlo simulation, relates to the 2018 earn-out payment to Symphony Health and is based on its future adjusted earnings before interest, taxes, depreciation and amortization, or Adjusted EBITDA. Key assumptions include (1) a discount rate of
8%
, (2) a volatility rate of
32%
, and (3) probability adjusted level of Adjusted EBITDA of
$56.5 million
for the year ended December 31, 2018. Refer to Note 4 for additional discussion of the Symphony Health acquisition.
Non-recurring Fair Value Measurements
Certain assets and liabilities are carried on the accompanying consolidated balance sheets at cost and are not remeasured to fair value on a recurring basis. These assets include finite-lived intangible assets which are tested when a triggering event occurs and goodwill and identifiable indefinite-lived intangible assets which are tested for impairment annually on October 1 or when a triggering event occurs.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of
December 31, 2017
, assets carried on the balance sheet and not remeasured to fair value on a recurring basis totaling approximately
$2,296.3 million
were identified as Level 3. These assets are comprised of goodwill of
$1,512.4 million
and identifiable intangible assets, net of
$783.8 million
.
Refer to Note 9, Revolving Credit Facilities and Long-Term Debt, for additional information regarding the fair value of long-term debt balances.
Impairment of Long-Lived Assets
The Company reviews the recoverability of its long-lived asset groups, including furniture and equipment, computer hardware and software, leasehold improvements, and other finite-lived intangibles, when events or changes in circumstances occur that indicate the carrying value of the asset group may not be recoverable. The assessment of possible impairment is based on the Company’s ability to recover the carrying value of the asset group from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. The Company’s primary measure of fair value is based on discounted cash flows. The measurement of impairment requires the Company to make estimates of these cash flows related to long-lived assets, as well as other fair value determinations.
Goodwill and Other Intangibles
Goodwill and indefinite-lived intangible assets are tested for impairment annually or more frequently if an event or circumstance indicates that an impairment loss may have been incurred. Separate intangible assets that have finite useful lives are amortized over their estimated useful lives or over the period in which economic benefit is received. The Company’s primary finite-lived intangibles are customer relationships, customer backlog, and acquired databases, which are amortized on an accelerated basis, which coincides with the period of economic benefit received by the Company.
The Company reviews the carrying value of goodwill to determine whether impairment may exist on an annual basis or whenever it has reason to believe goodwill may not be recoverable. The annual impairment test of goodwill is performed during the fourth quarter of each fiscal year. The Company did not have an impairment for any of the years presented.
When evaluating for impairment, the Company may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit or indefinite-lived intangible asset is impaired. If the Company does not perform a qualitative assessment, or if it determines that it is not more likely than not that the fair value of the reporting unit or indefinite-lived intangible asset exceeds its carrying amount, the Company will calculate the estimated fair value of the reporting unit or indefinite-lived intangible asset. The Company’s decision to perform a qualitative impairment assessment for an individual reporting unit in a given year is influenced by a number of factors, inclusive of the size of the reporting unit's goodwill, the significance of the excess of the reporting unit's estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments and the date of acquisition. During
2017
, as part of the Company’s annual impairment analysis, the Company performed the qualitative assessment for all of its goodwill and indefinite-lived trade name intangible asset balances.
If the Company does not perform a qualitative assessment, goodwill impairment is determined by the Company using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of each reporting unit, determined using various valuation techniques, with the primary technique being a discounted cash flow analysis, to its carrying value. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized.
Revenue Recognition
The Company generally enters into contracts with customers to provide services with payments based on either fixed-fee, time and materials, or fee-for-service arrangements. Revenue for services is recognized only after persuasive evidence of an arrangement exists, the sales price is determinable, services have been rendered, and collectability is reasonably assured.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Once these criteria have been met, the Company recognizes revenue for the services provided on fixed-fee contracts in the Clinical Research segment based on the proportional performance methodology, which determines the proportion of outputs or performance obligations which have been completed or delivered compared to the total contractual outputs or performance obligations. To measure performance, the Company compares the contract costs incurred to estimated total contract costs through completion. As part of the client proposal and contract negotiation process, the Company develops a detailed project budget for the direct costs based on the scope of the work, the complexity of the study, the geographical location involved and the Company’s historical experience. The Company then establishes the individual contract pricing based on the Company’s internal pricing guidelines, discount agreements, if any, and negotiations with the client. The estimated total contract costs are reviewed and revised periodically throughout the lives of the contracts, with adjustments to revenue resulting from such revisions being recorded on a cumulative basis in the period in which the revisions are first identified. Contract costs consist primarily of direct labor and other project-related costs. The Company recognizes revenue for services provided on fixed-fee contracts in the Data Solutions segment either ratably as earned over the contract period, for subscription-based services, or upon delivery, for one-time delivery of data solutions or reports. Revenue from time and materials contracts is recognized as hours are incurred. Revenues and the related costs of fee-for-service contracts are recognized in the period in which services are performed.
In the Clinical Research segment, a majority of contracts undergo modifications over the contract period and the Company’s contracts provide for these modifications. During the modification process, the Company recognizes revenue to the extent it incurs costs, provided client acceptance and payment is deemed reasonably assured.
Volume discounts are offered to certain 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.
Most contracts in the Clinical Research segment can be terminated by the client either immediately or after a specified period following notice. These contracts require the client to pay the Company the fees earned through the termination date, the fees and expenses to wind down the study, and, in some cases, a termination fee or some portion of the fees or profit that the Company could have earned under the contract if it had not been terminated early. Therefore, revenue recognized prior to cancellation generally does not require a significant adjustment upon cancellation.
The Company's Data Solutions segment enters into contracts with some of its larger data suppliers that involve non-monetary terms. The Company will issue purchase credits to be used toward the data supplier's purchase of the Company's products, services or consulting. In exchange the Company receives monetary discounts on the data received from the data suppliers. The fair value of the revenue earned from the customer purchases is determined based on similar product offerings to other customers. At the end of the contract year, any unused purchase credits will be forfeited or carried over to the next contract year based on the terms of the data supplier contract. For the year ended
December 31, 2017
, the Company recognized service in kind revenue of
$5.8 million
from these transactions, which is included in service revenue in the accompanying consolidated statements of operations.
Reimbursement Revenue and Reimbursable Out-of-Pocket Costs
The Company incurs out-of-pocket costs, in excess of contract amounts, which are reimbursable by its customers. The Company includes out-of-pocket costs both as reimbursement revenue and as reimbursable out-of-pocket costs in the consolidated statements of operations.
As is customary in the industry, the Company routinely enters into separate agreements on behalf of its clients with independent physician investigators in connection with clinical trials. The funds received for investigator fees are netted against the related cost because such fees are the obligation of the Company’s clients, without risk or reward to the Company. The Company is not obligated either to perform the service or to pay the investigator in the event of default by the client. In addition, the Company does not pay the independent physician investigator until funds are received from the client. Total payments to investigators were
$250.9 million
,
$249.6 million
, and
$208.0 million
and for the years ended
December 31, 2017
,
2016
, and
2015
, respectively.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents, accounts receivable, and unbilled services. As of
December 31, 2017
, substantially all of the Company’s cash and cash equivalents were held in or invested with large financial institutions. Accounts receivable include amounts due from pharmaceutical and biotechnology companies. The Company establishes an allowance for potentially uncollectible receivables. In management’s opinion, there is no additional material credit risk beyond amounts provided for such losses.
Service revenue from individual customers greater than 10% of consolidated service revenue in the respective periods was as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Customer A
|
10.3
|
%
|
|
11.0
|
%
|
|
—
|
|
Customer B
|
—
|
|
|
10.4
|
%
|
|
10.7
|
%
|
Accounts receivable and unbilled receivables from individual customers that were equal to or greater than 10% of consolidated accounts receivable and unbilled receivables at the respective dates were as follows:
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Customer A
|
11.5
|
%
|
|
12.0
|
%
|
Foreign Currency
The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars at exchange rates in effect as of the end of the period. Equity activities are translated at the spot rate effective at the date of the transaction. Revenue and expense accounts and cash flows of these operations are translated at average exchange rates prevailing during the period the transactions occurred. Translation gains and losses are included as an adjustment to the accumulated other comprehensive loss account in stockholders’ equity.
Translation gains and losses from foreign currency transactions, such as those resulting from the settlement and revaluation of foreign receivables and payables, are included in the determination of net income. These amounts are included in foreign currency (losses) gains, net in the consolidated statements of operations. In addition, gains or losses related to the Company’s intercompany loans payable and receivable denominated in a foreign currency other than the subsidiary’s functional currency that are deemed to be of a long-term investment nature are remeasured to cumulative translation and recorded in accumulated other comprehensive loss in the consolidated balance sheets.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized for future deductible temporary differences, along with net operating loss carryforwards and credit carryforwards, if it is more likely than not that the tax benefits will be realized. To the extent a deferred tax asset cannot be recognized under the preceding criteria, a valuation allowance is established to reduce the deferred tax asset to the amount that is more likely than not to be realized. Deferred tax liabilities are recognized for future taxable temporary differences. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which the Company transacts business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to, or further interpretations of, regulations. Income tax expense is adjusted in the period in which these events occur, and these adjustments are included in the Company’s consolidated statement of operations. If such changes take place, there is a risk that the Company’s effective tax rate may increase or decrease in any period. A company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
Stock-Based Compensation
The primary type of stock-based compensation utilized by the Company is stock options. Stock options are awards which allow the employee to purchase shares of the Company’s stock at a fixed price. The Company measures compensation cost at the grant date, based on fair value of the award, and recognizes it as expense over the employees’ requisite service period.
The fair value of each option issued during these periods was estimated on the date of grant using the Black-Scholes option pricing model for service condition awards with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Risk-free interest rate
|
1.9
|
%
|
|
1.5
|
%
|
|
1.7
|
%
|
Expected life, in years
|
6.3
|
|
|
6.3
|
|
|
6.3
|
|
Dividend yield
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Volatility
|
29.7
|
%
|
|
31.2
|
%
|
|
34.4
|
%
|
The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of the grant. The expected life represents the period of time the grants are expected to be outstanding. The Company uses the historical volatilities of a selected peer group as it does not have sufficient history to estimate the volatility of its common share price. The Company calculates expected volatility based on reported data for selected reasonably similar publicly traded companies for which the historical information is available. For the purpose of identifying peer companies, the Company considers characteristics such as industry, length of trading history, similar vesting terms and in-the-money option status.
Due to the absence of an active market for the Company’s common shares prior to the Company’s IPO, the fair value of the Company's common shares for purposes of determining the exercise price for award grants was determined in good faith by the Company’s Board of Directors, or Board, with the assistance and upon the recommendation of management based on a number of market factors, including: the common shares underlying the award involved illiquid securities in a private company; results of operations and financial position; and the market performance of publicly traded companies compared to the Company.
The Company accounts for its stock-based compensation for restricted share awards and restricted share units, or collectively, RSAs/RSUs, based on the closing market price of the Company’s common stock on the trading day immediately prior to the grant date, and recognizes it as expense over the employees’ requisite service period.
Net Income Per Share
The calculation of net income per share, or EPS, is based on the weighted average number of common shares or common stock equivalents outstanding during the applicable period. The dilutive effect of common stock equivalents is excluded from basic earnings per share and is included in the calculation of diluted earnings per share, unless the effect of inclusion would be anti-dilutive.
Debt Issuance Costs
Debt issuance costs relating to the Company’s long-term debt are recorded as a direct reduction of long-term debt; these costs are deferred and amortized to interest expense using the effective interest method, over the respective terms of the related debt. Debt issuance costs relating to the Company’s revolving credit facilities are recorded as an asset; these costs are deferred and amortized to interest expense using the straight-line method.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Compensated Absences
The Company accrues for the costs of compensated absences to the extent that the employee’s right to receive payment relates to service already rendered, the obligation vests or accumulates, payment is probable and the amount can be reasonably estimated. The Company’s policies related to compensated absences vary by jurisdiction and obligations are recorded net of estimated forfeiture due to turnover when reasonably predictable.
Operating Leases
The Company records rent expense for operating leases, some of which have escalating rent over the term of the lease, on a straight-line basis over the initial effective lease term. The Company begins depreciation on the date of initial possession, which is generally when the Company enters the space and begins to make improvements in preparation for its intended use. Some of the Company’s facility leases provide for concessions by the landlords, including payments for leasehold improvements considered tenant assets, free rent periods, and other lease inducements. The Company reflects these concessions as deferred rent in the accompanying consolidated financial statements. The Company accounts for the difference between rent expense and rent paid as deferred rent. For tenant allowances for improvements considered to be tenant assets, rent holidays and other lease incentives, the Company records a deferred rent liability at the inception of the lease term and amortizes the deferred rent over the term of the lease as a reduction to rent expense. For tenant allowances considered to be property owner assets, the payment is treated as a reimbursement for the cost of the lessor asset.
Transaction-related Cost
Transaction-related costs consist primarily of: (1) the change in the fair value of acquisition-related contingent consideration; (2) costs incurred in connection with due diligence performed in connection with acquisitions; (3) costs associated with the accounts receivable financing agreement; and (4) secondary offering costs, which consist of stock-based compensation expense related to the release of the transfer restrictions on vested options and third-party fees incurred in connection with the offerings.
Recently Implemented Accounting Standards
In March 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This update includes provisions intended to simplify various aspects of accounting for share-based compensation. In addition, ASU No. 2016-09 went into effect for public companies for annual periods beginning after December 15, 2016. The Company adopted this ASU beginning with the first quarter of 2017. The adoption of this ASU had the following effects on the consolidated financial statements:
Income taxes - The standard requires excess tax benefits and tax deficiencies to be recorded as income tax benefit or expense in the statement of operations. The Company applied the modified retrospective adoption approach beginning in 2017 and recorded a cumulative-effect adjustment to retained earnings and reduced its deferred tax liabilities by
$12.6 million
with an offsetting increase to the valuation allowance of
$12.6 million
. As such, the net impact to retained earnings was
zero
. This adjustment relates to tax assets that had previously arisen from tax deductions for equity compensation expenses that were greater than the compensation recognized for financial reporting. During the year ended December 31, 2017, the Company recorded
$33.7 million
in 2017 excess tax benefits associated with equity awards within (benefit from) provision for income taxes on the consolidated statement of operations.
Forfeitures – The standard provides an accounting policy election to account for forfeitures as they occur. The Company made this accounting policy election and the modified retrospective adoption for this component of the standard did not have a material impact on its financial statements.
Statements of Cash Flows - Cash flows related to excess tax benefits are no longer separately classified as a financing activity apart from other income tax cash flows. The Company adopted this component of the standard on a prospective basis.
Earnings Per Share - The Company uses the treasury stock method to compute diluted earnings per share, unless the effect would be anti-dilutive. Under this method, the Company is no longer required to estimate the tax rate and apply it to the
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
dilutive share calculation for determining the dilutive earnings per share. The Company adopted this component of the standard on a prospective basis.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers” (ASC 606). The new revenue standard establishes a single revenue recognition model for recognizing contracts from customers. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.
The standard permits the use of either the retrospective or modified retrospective (cumulative effect) transition method. The Company will adopt the new standard effective January 1, 2018 using the modified retrospective transition method. Under this approach, the cumulative earnings effect of adoption of ASC 606 applied to all open contracts will be recorded as an adjustment to opening retained earnings as of January 1, 2018.
For the Clinical Research segment, the identification of the number of performance obligations implicit within an arrangement is critical to the application of ASC 606. Currently, the Company considers investigator fees and reimbursable out-of-pocket costs distinct from the service portion of the arrangements. Investigator fees have historically been netted against the related costs and out-of-pocket costs are recognized as revenue and expense to the extent incurred. With the adoption of ASC 606, the Company’s long-term arrangements currently accounted for using the proportional performance method will be considered a single performance obligation which requires the inclusion of investigator fees and out-of-pocket costs in both the contract revenue value and in the cost used to measure performance.
Upon adoption of ASC 606, total revenue will be presented as one line item in the consolidated statements of operations. Total revenue will now include service revenue, out-of-pocket costs, and investigator fees that were previously recorded net of the associated cost. As a result of the change in presentation for investigator fees, total revenue and total costs will materially increase.
The inclusion of investigator fees and out-of-pocket costs in the measurement of progress under these contracts as part of one performance obligation may create a timing difference between amounts the Company is entitled to receive in reimbursement for costs incurred and the amount of revenue recognized related to such costs on individual projects. This represents a change from current accounting treatment. The magnitude of this timing item compared to current accounting is dependent on the relative size and progress of the direct service portion of the arrangement compared to the progress of the investigator fees and reimbursable out-of-pocket costs relative to their respective forecasted costs over the life of the project. The Company is finalizing its assessment of the cumulative impact but anticipates a material deferral of revenue to be recorded as a cumulative adjustment upon adoption.
The accounting for contracts within the Data Solutions segment and for short-term contracts within the Clinical Research segment is expected to remain materially consistent with the current accounting treatment.
In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which revises the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. The provisions of ASU No. 2016-02 are effective for fiscal years beginning after December 15, 2018 and should be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. The Company has established an implementation team to assist with the adoption of the new standard. The evaluation and implementation process is ongoing and is expected to continue through 2018 as the Company performs an analysis of its lease portfolio to identify potential differences from its current accounting policies, and as it reviews the business processes, systems and controls required to support recognition and disclosure under the new standard. The Company expects to recognize substantially all of its leases on the balance sheet by recording a right-to-use asset and a corresponding lease liability.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations: Clarifying the Definition of a business,” which clarifies that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, it should be treated as an acquisition or disposal of an asset. The amendments to ASU No. 2017-01 are effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The adoption of ASU No. 2017-01 is not expected to have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment,” in order to simplify the subsequent measurement of goodwill by eliminating the Step 2 goodwill impairment test. Under the amendments in this ASU, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will then recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments to ASU No. 2017-04 are effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The adoption of ASU No. 2017-04 is not expected to have a material impact on the Company's consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation: Scope of Modification Accounting,” which provides guidance about what changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC Topic 718, “Stock Compensation.” The amendments to ASU No. 2017-09 are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The adoption of ASU No. 2017-09 is not expected to have a material impact on the Company's consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," in order to simplify certain aspects of hedge accounting and improve disclosures of hedging arrangements. ASU No. 2017-12 eliminates the need to separately measure and report hedge ineffectiveness and generally requires the entire change in fair value of a hedging instrument to be presented in the same income statement line as the hedged item. Entities must apply the amendments to cash flow and net investment hedge relationships that exist on the date of adoption using a modified retrospective approach. The presentation and disclosure requirements must be applied prospectively. The amendments to ASU No. 2017-12 are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The adoption of ASU No. 2017-12 is not expected to have a material impact on the Company's consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendments in this update also require entities to disclose their accounting policy for releasing income tax effects from accumulated other comprehensive income. The Amendment to ASU No. 2018-02 are effective for the reporting period beginning after December 15, 2018, and interim periods therein. Early adoption is permitted. The Company is currently assessing the potential impact of ASU No. 2018-02 on the Company's consolidated financial statements.
(3) Joint Ventures
The Company entered into a joint venture with Takeda Pharmaceutical Company Ltd. during 2017. For further discussion on the joint venture, refer to Note 4, Business Combinations.
On May 6, 2016, the Company and WuXi AppTec (Shanghai) Co., Ltd., or WuXi, finalized an agreement to dissolve the WuXiPRA joint venture. Under the agreement, the Company sold its
49%
portion of the joint venture located in mainland China for
$4.0 million
, which subsequently became a wholly owned subsidiary of WuXi. The portion of the joint venture located in Hong Kong became a wholly owned subsidiary of the Company and was acquired for
$0.3 million
. As a result of the transaction, the Company recognized a
$3.3 million
gain on the sale, which is recorded in the equity in income (losses) of unconsolidated joint ventures in the accompanying consolidated statement of operations.
During April 2015, prior to the dissolution of the WuXiPRA joint venture, both the Company and WuXi made a
$3.0 million
contribution to WuXiPRA to fund the joint venture’s working capital needs. The Company’s interest in WuXiPRA remained at
49%
after the capital contribution. The Company recorded reductions to the investment balance of
$0.7 million
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(excluding the gain on the sale) and
$2.9 million
during the years ended
December 31, 2016
and
2015
, respectively, for the Company's equity in the venture’s net loss for the period, which is recorded in the equity in income (losses) of unconsolidated joint ventures, net of tax in the consolidated statement of operations. The investment was adjusted for the Company's equity in the venture’s net income (loss), cash contributions, distributions, and other adjustments required by the equity method of accounting.
The Company entered into a joint venture agreement with A2 Healthcare Corporation (formerly part of Asklep, Inc.). The joint venture provides research and development outsourcing solutions in Japan to the biopharmaceutical and medical device industries. This joint venture is based in Tokyo, Japan and is owned by the Company (
49%
) and Asklep (
51%
). On October 17, 2014, the joint venture changed its name from RPS Asklep, Inc. to A2PRA Corporation, or A2PRA. The Company recorded changes to the investment balance totaling
$0.1 million
,
$0.1 million
, and
$0.0 million
during the years ended
December 31, 2017
,
2016
, and
2015
, respectively, for the Company’s equity in the venture’s net income (loss) for the period, which is recorded in the equity in income (losses) of unconsolidated joint venture, net of tax in the Company's consolidated statement of operations. The investment will be adjusted for the Company’s equity in the venture’s net income (loss), cash contributions, distributions, and other adjustments required by the equity method of accounting. The investment in A2PRA totaled
$0.4 million
and
$0.3 million
at
December 31, 2017
and
2016
, respectively.
In August 2015, the Company and an affiliate of KKR entered into a joint venture. The joint venture was dissolved in December 2015. The purpose of the joint venture included, among other things, the evaluation of investments or acquisitions to enhance the strategic objectives of the Company. The joint venture was jointly owned by the Company (
11%
) and KKR (
89%
). The Company contributed
$20.0 million
to the joint venture in August 2015 and received
$19.5 million
in December 2015 when the joint venture was dissolved. The Company recorded the
$0.5 million
reduction to the investment balance in equity in income (losses) of unconsolidated joint ventures, net of tax in the consolidated statement of operations. The investment in the joint venture was adjusted for the Company’s equity in the venture’s net income (loss), cash contributions, distributions, and other adjustments required by the equity method of accounting.
(4) Business Combinations
Symphony Health Solutions, Inc.
On September 6, 2017, the Company acquired all of the outstanding equity interest of Symphony Health, a provider of data and analytics to help professionals understand the full market lifecycle of products offered for sale by companies in the pharmaceutical industry, for
$539.4 million
in cash and contingent consideration, which was not capped, in the form of potential earn-out payments based on a multiple of future earnings for the twelve-month periods ending December 2017 and December 2018. With this acquisition, the Company expects to enhance its ability to serve customers throughout the clinical research process with technologies that provide data and analytics.
The liability associated with the expected payment of the earn-out was preliminarily valued at
$108.8 million
at the acquisition date. During the fourth quarter of 2017, the Company recorded a measurement period adjustment to increase the fair value of the contingent consideration at the acquisition date to
$147.5 million
based on the Company's finalized assessment of earnings forecasts as of the acquisition date. This measurement period adjustment was reflected as a corresponding increase to goodwill as of the acquisition date. The fair value of the contingent consideration was determined by using a Monte Carlo simulation that includes significant unobservable inputs such as a risk-adjusted discount rate and projected future earnings over the earn-out periods. As the fair value was based on significant inputs not observed in the market and thus represented a Level 3 measurement.
The Company reassesses the fair value of expected contingent consideration and the corresponding liability each reporting period using a Monte Carlo simulation, which is consistent with the initial measurement of the expected liability. Changes in the fair value of the contingent consideration subsequent to the acquisition date, excluding adjustments that qualify as measurement period adjustments, are recognized in earnings in the period of such change. The Company recorded
$85.7 million
to transaction-related costs in the consolidated statements of operations during the year ended
December 31, 2017
, associated with changes in the fair value of the earn-out. The Company made a preliminary 2017 earn-out payment, totaling
$67.8 million
, to the former owners of Symphony Health during the fourth quarter of 2017. As of
December 31, 2017
, the earn-out liability totaled
$165.3 million
;
$114.7 million
is included in accrued expenses and other current liabilities and
$50.6 million
is included in other long-term liabilities in the consolidated balance sheet. During February 2018, the Company made
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the year-end 2017 earn-out payment, which totaled
$114.7 million
. The 2018 earn-out payment, which is based on 2018 earnings and is payable in the first quarter of 2019, could range from
$0
to approximately
$110.8 million
.
The acquisition of Symphony Health was accounted for as a business combination and, accordingly, the assets acquired and the liabilities assumed have been recorded at their respective fair values as of the acquisition date. In connection with the acquisition, the Company recorded approximately
$476.0 million
of goodwill, which was assigned to the Data Solutions segment and is not deductible for income tax purposes. The goodwill is attributable to the workforce of the acquired business and expected synergies with the Company’s existing operations. The Company incurred
$6.4 million
in acquisition related costs that are included in transaction-related costs in the consolidated statements of operations.
Due to the timing of the acquisition, the valuation of net assets acquired has not been finalized and is expected to be completed by the end of March 2018, and in any case, no later than one year from the acquisition date in accordance with GAAP.
The Company’s preliminary estimate of the purchase price allocation is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Purchase Price Allocation
|
|
Weighted Amortization Period
|
Cash and cash equivalents
|
|
$
|
26,297
|
|
|
|
Accounts receivable and unbilled services
|
|
39,132
|
|
|
|
Other current assets
|
|
23,726
|
|
|
|
Fixed assets
|
|
12,340
|
|
|
|
Customer relationships
|
|
190,100
|
|
|
10 years
|
Database
|
|
137,100
|
|
|
3 years
|
Tradename
|
|
2,000
|
|
|
2 years
|
Accounts payable and accrued expenses
|
|
(42,222
|
)
|
|
|
Advanced billings
|
|
(65,968
|
)
|
|
|
Deferred tax liabilities
|
|
(104,869
|
)
|
|
|
Other long-term liabilities
|
|
(6,740
|
)
|
|
|
Estimated fair value of net assets acquired
|
|
210,896
|
|
|
|
Purchase price, including contingent consideration and working capital adjustment
|
|
686,877
|
|
|
|
Total goodwill
|
|
$
|
475,981
|
|
|
|
The results of operations for Symphony Health are included in the consolidated financial statements of the Company from the date of acquisition. During this period, Symphony Health's service revenues and net income totaled
$90.5 million
and
$6.3 million
, respectively.
Since the acquisition date, goodwill decreased by
$24.5 million
. The change is primarily related to a
$90.6 million
increase in the allocation of the purchase price to acquired finite-lived intangible assets, offset by a
$38.7 million
measurement period adjustment to increase the fair value of the contingent consideration and a
$29.8 million
adjustment to the acquired income tax balances.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following unaudited pro-forma information assumes the acquisition of Symphony Health occurred as of the beginning of 2016. This pro-forma financial information is not necessarily indicative of operating results if the acquisition had been completed at the date indicated, nor is it necessarily an indication of future operating results.
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands, except per share amounts)
|
2017
|
|
2016
|
Total revenue
|
$
|
2,408,770
|
|
|
$
|
2,011,544
|
|
Net income attributable to PRA Health Sciences, Inc.
|
104,700
|
|
|
45,836
|
|
Net income per share:
|
|
|
|
Basic
|
$
|
1.68
|
|
|
$
|
0.75
|
|
Diluted
|
$
|
1.59
|
|
|
$
|
0.71
|
|
The unaudited pro-forma financial information for the year ended December 31, 2017 includes the following non-recurring adjustments:
|
|
•
|
a
$6.4 million
increase to transaction-related costs incurred by the Company during the year ended December 31, 2017 attributable to the transaction, with a corresponding
$2.5 million
increase to the benefit from income taxes.
|
|
|
•
|
a
$3.1 million
increase to loss on the modification or extinguishment of long-term debt incurred by the Company during the year ended December 31, 2017 attributable to the above transaction, with a corresponding
$1.2 million
increase to the benefit from income taxes.
|
Takeda Transactions
On June 1, 2017, the Company acquired all of the outstanding shares of Takeda Pharmaceutical Data Services, Ltd., or TDS, from Takeda Pharmaceutical Company Ltd., or Takeda, for
$0.7 million
in cash. The Company recorded approximately
$1.0 million
of goodwill, which is assigned to the Clinical Research segment and is not deductible for income tax purposes. Pro-forma results of operations and a complete purchase price allocation have not been presented because the results of this acquisition did not have a material effect on the Company's consolidated financial statements.
On June 1, 2017, the Company and Takeda also closed on a joint venture transaction that enables the Company to provide clinical trial delivery and pharmacovigilance services as a strategic partner of Takeda in Japan. The joint venture transaction was effectuated through the creation of a new legal entity, Takeda PRA Development Center KK, or the TDC joint venture. The Company paid
$5.4 million
for a
50%
equity interest in the TDC joint venture, which represents
50%
of the fair value of the net assets and workforce that Takeda contributed to the joint venture. The joint venture provides services including clinical trial monitoring, project management, regulatory strategy and submissions, data management, biostatistics, drug safety reporting, and medical monitoring. The Company is required to buy-out Takeda’s
50%
interest in the TDC joint venture in
two
years. The Company also has an early buy-out option of Takeda’s
50%
interest in December 2018, if both parties agree.
The Company determined that the TDC joint venture is a VIE in which the Company is the primary beneficiary. Accordingly, the Company accounted for the
$5.4 million
contribution to the TDC joint venture as a business combination and consolidated the VIE in its financial statements with a noncontrolling interest for the
50%
portion owned by Takeda. The assets acquired and the liabilities assumed have been recorded at their respective estimated fair values as of June 1, 2017. The Company recorded approximately
$2.7 million
of goodwill, which is assigned to the Clinical Research segment and is not deductible for income tax purposes. The goodwill is primarily attributable to the assembled workforce. The Company incurred
$0.6 million
in acquisition related costs that are included in selling, general and administrative expenses in the consolidated statements of operations.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s fair value of the net assets acquired as part of the TDC joint venture transaction at the closing date of the business combination is as follows (in thousands):
|
|
|
|
|
|
|
|
Purchase Price Allocation
|
Cash and cash equivalents
|
|
$
|
8,120
|
|
Other current assets
|
|
1,671
|
|
Other non-current assets
|
|
799
|
|
Accounts payable and accrued expenses
|
|
(2,380
|
)
|
Estimated fair value of net assets acquired
|
|
8,210
|
|
PRA purchase price
|
|
5,440
|
|
Fair value of Takeda's noncontrolling interest
|
|
5,440
|
|
Total goodwill
|
|
$
|
2,670
|
|
The Company has not disclosed post-acquisition or pro-forma revenue and earnings attributable to the TDC joint venture as they did not have a material effect on the Company’s consolidated financial statements.
Parallel 6, Inc.
On May 10, 2017, the Company acquired all of the outstanding equity interest of Parallel 6, Inc., or Parallel 6, a developer of technologies for improving patient enrollment, engagement, and management of clinical trials, for
$39.0 million
in cash and contingent consideration in the form of a potential earn-out payment of up to
$10.0 million
. The earn-out payment is contingent upon the achievement of certain external software sales targets during the
18
-month period following closing. With this acquisition, the Company expects to enhance its ability to serve customers throughout the clinical research process with technologies that provide improved efficiencies by reducing study durations and costs through integrated operational management.
The fair value of the earn-out as of the acquisition date was
$8.4 million
, which was determined by using a Monte Carlo simulation that includes significant unobservable inputs such as a risk-adjusted discount rate and projected external software sales of Parallel 6 over the earn-out period. As the fair value was based on significant inputs not observed in the market and thus represented a Level 3 measurement. During the fourth quarter of 2017, the Company determined that the external software sales targets likely would not be met; therefore the Company released the
$8.4 million
contingent consideration liability, which is recorded within transaction-related costs in the consolidation statements of operations.
The acquisition of Parallel 6 was accounted for as a business combination and, accordingly, the assets acquired and the liabilities assumed have been recorded at their respective fair values as of the acquisition date. In connection with the acquisition, the Company recorded approximately
$32.5 million
of goodwill, which was assigned to the Clinical Research segment and is not deductible for income tax purposes. The goodwill is attributable to the workforce of the acquired business and expected synergies with the Company’s existing information technology operations. The Company incurred
$1.3 million
in acquisition related costs that are included in selling, general and administrative expenses in the consolidated statements of operations.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s purchase price allocation is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Purchase Price Allocation
|
|
Weighted Amortization Period
|
Cash and cash equivalents
|
|
$
|
132
|
|
|
|
Accounts receivable and unbilled services
|
|
929
|
|
|
|
Other current assets
|
|
26
|
|
|
|
Software intangible
|
|
15,500
|
|
|
5 years
|
Other intangibles
|
|
920
|
|
|
5 years
|
Accounts payable and accrued expenses
|
|
(780
|
)
|
|
|
Advanced billings
|
|
(692
|
)
|
|
|
Other long-term liabilities
|
|
(1,148
|
)
|
|
|
Estimated fair value of net assets acquired
|
|
14,887
|
|
|
|
Purchase price, including contingent consideration
|
|
47,339
|
|
|
|
Total goodwill
|
|
$
|
32,452
|
|
|
|
Since the acquisition date, goodwill decreased by
$1.2 million
, primarily as a result of adjustments to acquired balances. The Company has not disclosed post-acquisition or pro-forma revenue and earnings attributable to Parallel 6 as they did not have a material effect on the Company’s consolidated financial statements.
Acquisition of Nextrials
On March 18, 2016, the Company acquired all of the outstanding shares of Nextrials, Inc., or Nextrials, a developer of web-based software which integrates electronic health records with clinical trials, for
$4.8 million
in cash and contingent consideration in the form of potential earn-out payments of up to
$3.0 million
. Earn-out payments of
$2.0 million
and
$1.0 million
were contingent upon the achievement of project milestones and certain external software sales targets, respectively, during the
30
-month period following closing. The Company recognized a liability of approximately
$2.3 million
as the estimated acquisition date fair value of the earn-out. The fair value was based on significant inputs not observed in the market and thus represented a Level 3 measurement. Changes in the fair value of the earn-out subsequent to the acquisition date were recognized in earnings in the period of the change. The Company made a payment of
$0.4 million
during the year ended
December 31, 2017
as a result of the achievements of certain project milestones. During the fourth quarter of 2017, the Company determined that the remaining project milestone and external software sales targets likely would not be met; therefore, the Company released the remaining
$1.4 million
contingent consideration liability, which is recorded within transaction-related costs in the consolidated statements of operations. With this acquisition, the Company expects to enhance its ability to serve customers throughout the clinical research process with technologies that include improved efficiencies by reducing study durations and costs through integrated operational management.
The acquisition of Nextrials was accounted for as a business combination and, accordingly, the assets acquired and the liabilities assumed have been recorded at their respective fair values as of the acquisition date. In connection with the acquisition, the Company recorded approximately
$4.3 million
of goodwill, which is not deductible for income tax purposes. The goodwill is attributable to the workforce of the acquired business and expected synergies with the Company’s existing information technology operations.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s purchase price allocation is as follows (in thousands):
|
|
|
|
|
|
|
|
Purchase
Price
Allocation
|
|
Weighted
Amortization
Period
|
Cash and cash equivalents
|
$
|
94
|
|
|
|
Accounts receivable and unbilled services
|
211
|
|
|
|
Other current assets
|
96
|
|
|
|
Property, plant and equipment
|
111
|
|
|
|
Software intangible
|
5,574
|
|
|
5 years
|
Accounts payable and accrued expenses
|
(1,585
|
)
|
|
|
Other long-term liabilities
|
(1,663
|
)
|
|
|
Estimated fair value of net assets acquired
|
2,838
|
|
|
|
Purchase price, including contingent consideration
|
7,145
|
|
|
|
Total goodwill
|
$
|
4,307
|
|
|
|
Since the acquisition date, goodwill increased by
$2.0 million
, primarily as a result of adjustments to the acquired income tax balances. Pro forma information is not provided as the acquisition did not have a material effect on the Company’s consolidated results.
Acquisition of
WuXiPRA’s Hong Kong Operations
As noted in Note 3, the Company acquired WuXiPRA’s Hong Kong operations for
$0.3 million
when the joint venture was dissolved on May 6, 2016. The acquisition was accounted for as a business combination and, accordingly, the assets acquired and the liabilities assumed were recorded at their respective fair values as of the acquisition date. In connection with the acquisition, the Company recorded approximately
$0.6 million
of goodwill, which is attributable to the workforce of the acquired business. Pro forma information is not provided as the acquisition did not have a material effect on the Company’s consolidated results.
Acquisition of VHS
On June 8, 2015, the Company purchased the assets of Value Health Solutions Inc., or VHS, a software development firm, for
$0.5 million
in cash and
47,598
unregistered shares of the Company’s common stock with a fair market value of
$1.6 million
. In June 2017 an additional
4,998
shares of the Company's common stock with a fair market value of
$0.4
million were issued to VHS in accordance with the asset purchase agreement. The asset purchase agreement also includes contingent consideration in the form of potential earn-out payments of up to
$16.0 million
. Earn-out payments of
$1.0 million
and
$15.0 million
are contingent upon the achievement of project milestones and certain external software sales targets, respectively, during the
48
-month period following closing. The Company recognized a liability of approximately
$1.0 million
as the estimated acquisition date fair value of the earn-out; this amount is included in the accrued expenses and other current liabilities in the consolidated balance sheet as of December 31, 2016. The fair value of the contingent consideration was based on significant inputs not observed in the market and thus represented a Level 3 measurement. Changes in the fair value of the contingent consideration subsequent to the acquisition date were recognized in earnings in the period of the change. During the year ended December 31, 2017, the Company released the remaining
$1.0 million
contingent consideration liability, which is recorded within transaction-related costs in the consolidation statements of operations as the earn-out targets were not met. With this acquisition, the Company expects to enhance its ability to serve customers throughout the clinical research process with technologies that include improved efficiencies by reducing study durations and costs through integrated operational management.
The acquisition of VHS was accounted for as a business combination and, accordingly, the assets acquired and the liabilities assumed have been recorded at their respective fair values as of the acquisition date. In connection with the acquisition, the Company recorded approximately
$1.0 million
of goodwill, which is deductible for income tax purposes. The goodwill is attributable to the workforce of the acquired business and expected synergies with the Company’s existing information technology operations.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s purchase price allocation is as follows (in thousands):
|
|
|
|
|
|
|
|
Purchase
Price
Allocation
|
|
Weighted
Amortization
Period
|
Software intangible
|
$
|
2,500
|
|
|
5 years
|
Property, plant and equipment
|
43
|
|
|
|
Estimated fair value of net assets acquired
|
2,543
|
|
|
|
Purchase price, including contingent consideration
|
3,499
|
|
|
|
Total goodwill
|
$
|
956
|
|
|
|
Pro forma information is not provided as the acquisition did not have a material effect on the Company’s consolidated results.
(5) Accounts Receivable and Unbilled Services
Accounts receivable and unbilled services include service revenue, reimbursement revenue, and amounts associated with work performed by investigators. Accounts receivable and unbilled services were (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Accounts receivable
|
$
|
457,676
|
|
|
$
|
284,647
|
|
Unbilled services
|
170,760
|
|
|
155,609
|
|
Total accounts receivable and unbilled services
|
628,436
|
|
|
440,256
|
|
Less allowance for doubtful accounts
|
(1,433
|
)
|
|
(1,203
|
)
|
Total accounts receivable and unbilled services, net
|
$
|
627,003
|
|
|
$
|
439,053
|
|
A rollforward of the allowance for doubtful accounts is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Beginning balance
|
$
|
1,203
|
|
|
$
|
2,641
|
|
|
$
|
1,819
|
|
Charged (credited) to income from operations
|
255
|
|
|
(652
|
)
|
|
443
|
|
Write-offs, recoveries and the effects of foreign currency exchange
|
(25
|
)
|
|
(786
|
)
|
|
379
|
|
Ending balance
|
$
|
1,433
|
|
|
$
|
1,203
|
|
|
$
|
2,641
|
|
(6) Fixed Assets
The carrying amount of fixed assets is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Leasehold improvements
|
$
|
49,548
|
|
|
$
|
25,083
|
|
Computer hardware and software
|
139,861
|
|
|
92,095
|
|
Furniture and equipment
|
44,325
|
|
|
33,751
|
|
Total fixed assets
|
233,734
|
|
|
150,929
|
|
Accumulated depreciation
|
(90,664
|
)
|
|
(63,352
|
)
|
Total fixed assets, net
|
$
|
143,070
|
|
|
$
|
87,577
|
|
All fixed assets are included as collateral for the payment and performance in full of the term loans pledged by the Company and its subsidiaries.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Depreciation expense was
$29.0 million
,
$24.1 million
, and
$21.2 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
(7) Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical Research
|
|
Data Solutions
|
|
Consolidated
|
Balance at December 31, 2015
|
$
|
1,014,798
|
|
|
$
|
—
|
|
|
$
|
1,014,798
|
|
Acquisition of Nextrials
|
4,307
|
|
|
—
|
|
|
4,307
|
|
Acquisition of the WuXiPRA joint venture’s Hong Kong operations
|
570
|
|
|
—
|
|
|
570
|
|
Currency translation
|
(47,695
|
)
|
|
—
|
|
|
(47,695
|
)
|
Balance at December 31, 2016
|
971,980
|
|
|
—
|
|
|
971,980
|
|
Acquisition of Symphony Health
|
—
|
|
|
475,981
|
|
|
475,981
|
|
Acquisition of Parallel 6
|
32,452
|
|
|
—
|
|
|
32,452
|
|
Acquisition of TDC joint venture
|
2,670
|
|
|
—
|
|
|
2,670
|
|
Acquisition of TDS
|
966
|
|
|
—
|
|
|
966
|
|
Currency translation
|
28,375
|
|
|
—
|
|
|
28,375
|
|
Balance at December 31, 2017
|
$
|
1,036,443
|
|
|
$
|
475,981
|
|
|
$
|
1,512,424
|
|
There are
no
accumulated impairment charges as of
December 31, 2017
and
2016
.
Intangible Assets
Intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Gross Amount
|
|
Accumulated Amortization
|
|
Net Amount
|
|
Gross Amount
|
|
Accumulated Amortization
|
|
Net Amount
|
Customer relationships
|
$
|
565,638
|
|
|
$
|
(72,133
|
)
|
|
$
|
493,505
|
|
|
$
|
360,328
|
|
|
$
|
(44,886
|
)
|
|
$
|
315,442
|
|
Customer backlog
|
123,746
|
|
|
(120,583
|
)
|
|
3,163
|
|
|
119,223
|
|
|
(108,847
|
)
|
|
10,376
|
|
Trade names (finite-lived)
|
28,558
|
|
|
(9,265
|
)
|
|
19,293
|
|
|
25,740
|
|
|
(6,544
|
)
|
|
19,196
|
|
Patient list and other intangibles
|
44,474
|
|
|
(24,226
|
)
|
|
20,248
|
|
|
28,974
|
|
|
(18,442
|
)
|
|
10,532
|
|
Database
|
137,100
|
|
|
(7,544
|
)
|
|
129,556
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Non-competition agreements
|
2,767
|
|
|
(2,706
|
)
|
|
61
|
|
|
2,737
|
|
|
(2,317
|
)
|
|
420
|
|
Total finite-lived intangible assets
|
902,283
|
|
|
(236,457
|
)
|
|
665,826
|
|
|
537,002
|
|
|
(181,036
|
)
|
|
355,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names (indefinite-lived)
|
118,010
|
|
|
—
|
|
|
118,010
|
|
|
118,010
|
|
|
—
|
|
|
118,010
|
|
Total intangible assets
|
$
|
1,020,293
|
|
|
$
|
(236,457
|
)
|
|
$
|
783,836
|
|
|
$
|
655,012
|
|
|
$
|
(181,036
|
)
|
|
$
|
473,976
|
|
The Company conducts its annual impairment test of indefinite‑lived intangibles during the fourth quarter of the fiscal year. For the periods ended
December 31, 2017
,
2016
and
2015
, the Company concluded that the fair value of indefinite‑lived intangibles exceeded the carrying value and, therefore,
no
impairment exists. Amortization expense was
$49.2 million
,
$45.4 million
and
$56.7 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Estimated amortization expense related to finite‑lived intangible assets for the next five years and thereafter is as follows (in thousands):
|
|
|
|
|
2018
|
$
|
71,773
|
|
2019
|
69,130
|
|
2020
|
69,502
|
|
2021
|
64,380
|
|
2022
|
49,980
|
|
2023 and thereafter
|
341,061
|
|
Total
|
$
|
665,826
|
|
(8) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Compensation, including bonuses, fringe benefits and payroll taxes
|
$
|
125,658
|
|
|
$
|
86,160
|
|
Acquisition-related contingent considerations
|
114,692
|
|
|
1,735
|
|
Accrued data costs
|
15,669
|
|
|
—
|
|
Other
|
44,591
|
|
|
32,078
|
|
Interest
|
3,265
|
|
|
3,616
|
|
Total accrued expenses and other current liabilities
|
$
|
303,875
|
|
|
$
|
123,589
|
|
(9) Revolving Credit Facilities and Long‑Term Debt
Long‑term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Term loans, first lien
|
$
|
1,140,927
|
|
|
$
|
625,000
|
|
Senior notes
|
—
|
|
|
91,441
|
|
Accounts receivable financing agreement
|
120,000
|
|
|
120,000
|
|
Total debt
|
1,260,927
|
|
|
836,441
|
|
Less current portion of long-term debt
|
(28,789
|
)
|
|
(31,250
|
)
|
Total long-term debt
|
1,232,138
|
|
|
805,191
|
|
Less debt issuance costs and discount
|
(6,741
|
)
|
|
(8,139
|
)
|
Total long-term debt, net
|
$
|
1,225,397
|
|
|
$
|
797,052
|
|
Principal payments on long‑term debt are due as follows (in thousands):
|
|
|
|
|
Current maturities of long-term debt:
|
|
2018
|
$
|
28,789
|
|
2019
|
148,789
|
|
2020
|
28,789
|
|
2021
|
1,054,560
|
|
Total
|
$
|
1,260,927
|
|
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2016 Credit Facilities
On December 6, 2016, the Company through its wholly-owned subsidiary, Pharmaceutical Research Associates, Inc., entered into a credit agreement providing for senior secured credit facilities, or the 2016 Credit Facilities, totaling
$750.0 million
. The 2016 Credit Facilities were comprised of a
$625.0 million
first lien term loan due 2021, or the 2016 First Lien Term Loan, and a
five
-year
$125.0 million
revolving line of credit, or the 2016 Revolver.
The proceeds from the 2016 Credit Facilities were used to repay the then outstanding 2013 First Lien Term Loan (defined below). In accordance with the guidance in ASC 470‑50, “Debt—Modifications and Extinguishments,” the debt repayment was accounted for as a partial debt extinguishment. The repayment resulted in a
$16.7 million
loss on extinguishment of debt, consisting of
$15.8 million
write-off of unamortized debt issuance costs and
$0.9 million
of fees associated with the transaction, which is included in loss on modification or extinguishment of debt in the consolidated statements of operations for the year ended
December 31, 2016
.
On September 6, 2017, the Company borrowed
$550.0 million
, or the Incremental Borrowing, pursuant to an incremental amendment to the credit agreement governing the 2016 Credit Facilities. The incremental borrowing provisions of the credit agreement allow for, among other things, additional borrowings in the event of a material acquisition by the Company. The proceeds of the Incremental Borrowing were primarily used to fund the acquisition of Symphony Health. In accordance with the guidance in FASB’s ASC 470-50, the Incremental Borrowing was accounted for as a debt modification. The Incremental Borrowing resulted in a
$3.1 million
loss on modification of debt, which consists of fees associated with the transaction for the year ended
December 31, 2017
.
On December 28, 2017, the Company amended the credit agreement governing the 2016 Credit Facilities, or the 2017 Refinancing, to refinance the 2016 First Lien Term Loan which reduced the interest rate margin and amended the payment schedule applicable to the 2016 First Lien Term Loan. The 2017 Refinancing also increased the Company's borrowing capacity under the 2016 Revolver from
$125.0 million
to
$225.0 million
and modified the definition of permitted investments and refreshed the capacity for incremental credit facilities under the Credit Agreement. In accordance with the guidance in ASC 470-50, the 2017 Refinancing was accounted for as a debt modification. As a result of the debt modification, the Company recognized a loss of modification of debt totaling
$0.6 million
, which was recorded during the year ended December 31, 2017.
As collateral for borrowings under the 2016 Credit Facilities, the Company granted a pledge on primarily all of its assets, and the stock of wholly‑owned U.S. restricted subsidiaries. The Company is also subject to certain financial covenants, which require the Company to maintain certain debt‑to‑EBITDA and interest expense-to-EBITDA ratios. The 2016 Credit Facilities also contain covenants that, among other things, restrict the Company’s ability to create liens, make investments and acquisitions, incur or guarantee additional indebtedness,
enter into mergers or consolidations and other fundamental changes, conduct sales and other dispositions of property or assets, enter into sale-leaseback transactions or hedge agreements, prepay subordinated debt, pay dividends or make other payments in respect of capital stock, change the line of business, enter into transactions with affiliates, enter into burdensome agreements with negative pledge clauses, and make subsidiary distributions. After giving effect to the applicable restrictions on the payment of dividends under the 2016 Credit Facilities, subject to compliance with applicable law, as of
December 31, 2017
and December 31, 2016, all amounts in retained earnings were free of restriction and were available for the payment of dividends. The Company does not expect to pay dividends in the foreseeable future. The Company does not expect these covenants to restrict its liquidity, financial condition or access to capital resources in the foreseeable future. The 2016 Credit Facilities also contains customary representations, warranties, affirmative covenants, and events of default.
2016 First Lien Term Loan
The 2016 First Lien Term Loan, including the Incremental Borrowing and as modified by the 2017 Refinancing, is a floating rate term loan with scheduled, fixed quarterly principal payments of
$7.2 million
to be made quarterly until September 30, 2021, with the remaining
$1,033.0 million
principal payment due at December 6, 2021.
The variable interest rate is a rate equal to the London Interbank Offered Rate, or LIBOR, or the adjusted base rate, or ABR, at the election of the Company, plus a margin based on the ratio of total indebtedness to EBITDA. The margin ranges from
1.00%
to
2.00%
, in the case of LIBOR loans, and
0.00%
to
1.00%
, in the case of
ABR
loans. The Company has the option of
1
,
2
,
3
or
6
month base interest rates. As of
December 31, 2017
and 2016, the weighted average interest rate on the first lien term loan was
3.45%
and
2.70%
, respectively. There are
no
prepayment penalties.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2016 Revolver
The Company’s 2016 Revolver, as modified by the 2017 Refinancing, provides for
$225.0 million
of potential borrowings and expires on December 6, 2021. The interest rate on the 2016 Revolver is based on the LIBOR with a
0%
LIBOR
floor or
ABR
, at the election of the Company, plus an applicable margin based on the leverage ratio of the Company. The Company, at its discretion, may elect interest periods of
1
,
2
,
3
or
6
months. The Company is required to pay to the lenders a commitment fee for unused commitments of
0.2%
to
0.4%
based on the Company’s debt-to-EBITDA ratio. At December 31, 2017, the Company had
$91.5 million
in outstanding borrowings under the 2016 Revolver at a weighted average interest rate of
3.56%
; there were
no
outstanding borrowings under the 2016 Revolver at December 31, 2016. In the next twelve months, the Company has the ability and intends to repay the outstanding line of credit obligations; therefore, borrowings under the line of credit have been classified as a current liability. In addition, at
December 31, 2017
and 2016, the Company had
$4.9 million
and
$7.0 million
, respectively, in letters of credit outstanding, which are secured by the 2016 Revolver.
2013 Credit Facilities
In September 2013, the Company entered into senior secured credit facilities, or the 2013 Credit Facilities, for an aggregate principal amount of
$825.0 million
of first lien term loan, or 2013 First Lien Term Loan, and a
$125.0 million
revolving line of credit, or 2013 Revolver. In September 2013, the Company also issued
$375.0 million
in senior notes, or Senior Notes. The proceeds from the 2013 Credit Facilities and the Senior Notes issuances were used in conjunction with the acquisition by KKR, to fund the acquisition of RPS, repay existing debt, and pay for fees and expenses related to the aforementioned events.
As collateral for borrowings under the 2013 Credit Facilities, the Company granted a pledge on primarily all of its assets, and the stock of designated subsidiaries. The Company was subject to certain financial covenants, which required the Company to maintain certain debt‑to‑EBITDA ratios. The 2013 Credit Facilities also contained covenants that, among other things, restricted the Company’s ability to incur additional indebtedness, grant liens, make investments, loans, guarantees or advances, make restricted junior payments, including dividends, redemptions of capital stock and voluntary prepayments or repurchase of certain other indebtedness, engage in mergers, acquisitions or sales of assets, enter into sale and leaseback transactions or engage in certain transactions with affiliates and otherwise restrict certain corporate activities.
2013 First Lien Term Loan
The 2013 First Lien Term Loan was a floating rate term loan with scheduled, fixed quarterly principal payments of
0.25%
of the original principal balance through September 2020. The voluntary prepayments made during 2014, using proceeds from the IPO, fully satisfied all required quarterly principal payments through maturity. The variable interest rate was based on the
LIBOR
, with a
1.0%
LIBOR floor, plus an applicable margin of
3.5%
. The applicable margin was dependent upon the Company’s debt to consolidated EBITDA ratio as defined in the 2013 Credit Facilities. The 2013 Credit Facilities required the Company to prepay outstanding term loans, subject to certain exceptions, with
50%
of the Company's annual Excess Cash Flow, which percentage would be reduced to
25%
if PRA achieves a debt‑to‑EBITDA ratio of less than or equal to
3.75
to 1.0, but greater than
3.25
to 1.0 on the date of prepayment for the most recent test period and no prepayment would be required if PRA achieves a debt‑to‑EBITDA ratio of less than or equal to
3.25
to 1.0 on the date of prepayment for the most recent test period, commencing in 2014. The Company had the option of
1
,
2
,
3
or
6
month base interest rates. There were
no
prepayment penalties.
2013 Revolver
The Company’s 2013 Revolver provided for
$125.0 million
of potential borrowings and would have expired on September 23, 2018. The interest rate on the 2013 Revolver was based on the
LIBOR
plus an applicable rate, based on the leverage ratio of the Company. The Company, at its discretion, may have chosen interest periods of
1
,
2
,
3
or
6
months. In addition, the Company was required to pay to the lenders a commitment fee of
0.5%
quarterly for unused commitments on the revolver, subject to a step‑down to
0.375%
based upon achievement of a certain leverage ratio.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Senior Notes
In September 2013, the Company issued
$375 million
of Senior Notes at a rate of
9.50%
per year payable on April 1, and October 1 of each year, beginning April 1, 2014. The Senior Notes did not require principal payments and were set to mature on October 1, 2023.
The Company could redeem the Senior Notes, in whole or in part, at any time prior to October 1, 2018 subject to a prepayment premium calculated in accordance with the Senior Notes indenture. From October 1, 2018 through October 1, 2019, the prepayment premium was
4.75%
declining ratably to
0%
beginning on October 1, 2021. In the event of a change in control, the Company could have been required to offer to repurchase the Senior Notes at a price equal to the outstanding principal balance and a
1%
prepayment premium plus accrued and unpaid interest.
The Senior Notes included covenants which place limitations on incurring additional indebtedness, selling certain assets, and making certain distributions.
On March 17, 2016, the Company repurchased
$133.6 million
aggregate principal amount of its Senior Notes as part of a cash tender offer. In accordance with the guidance in ASC 470-50, the debt repurchase was accounted for as a partial debt extinguishment. The repurchase resulted in a
$21.5 million
loss on extinguishment of debt, which consists of a
$17.4 million
early tender premium, a
$3.7 million
write-off of unamortized debt issuance cost and
$0.4 million
of fees associated with the transaction which is included in loss on modification or extinguishment of debt in the consolidated statement of operations during the year ended
December 31, 2016
.
On December 29, 2017, the Company redeemed the remaining
$91.4 million
aggregate principal amount of its Senior Notes. In accordance with the guidance in ASC 470-50, the debt redemption was accounted for as a debt extinguishment. The redemption resulted in an
$11.3 million
loss on extinguishment of debt, which consisted of a
$9.2 million
early payment premium and
$2.1 million
write-off of unamortized debt issuance cost which is included in loss on modification or extinguishment of debt in the consolidated statement of operations during the year ended December 31, 2017.
Accounts Receivable Financing Agreement
In March 2016, the Company entered into a
$140.0 million
accounts receivable financing agreement, of which
$120.0 million
was outstanding as of
December 31, 2017
. The initial borrowings in 2016 were used to repay amounts outstanding on the Company’s revolving credit facility that were used to fund the cash tender offer for the Senior Notes.
Loans under the accounts receivable financing agreement accrue interest at either a reserve-adjusted
LIBOR
or a
base rate
, plus
1.6%
. The Company may prepay loans upon
one
business day prior notice and may terminate the accounts receivable financing agreement with
15
days’ prior notice. As of
December 31, 2017
and 2016, the weighted average interest rate on the accounts receivable financing agreement was
2.96%
and 2.31%, respectively.
The accounts receivable financing agreement contains various customary representations and warranties and covenants, and default provisions which provide for the termination and acceleration of the commitments and loans under the agreement in circumstances including, but not limited to, failure to make payments when due, breach of representations, warranties or covenants, certain insolvency events or failure to maintain the security interest in the trade receivables, and defaults under other material indebtedness.
The accounts receivable financing agreement terminates on March 22, 2019, unless terminated earlier pursuant to its terms. At
December 31, 2017
, there was
$20.0 million
of remaining capacity available under the accounts receivable financing agreement.
Fair Value of Debt
The estimated fair value of the Company’s debt and outstanding borrowings under its revolving credit facilities was
$1,352.4 million
and
$844.2 million
at
December 31, 2017
and 2016, respectively. The fair value of the term loans, borrowings under credit facilities, and accounts receivable financing agreement which totaled
$1,352.4 million
and
$678.7 million
at
December 31, 2017
and 2016, respectively, was determined based on Level 3 inputs, which is primarily based on rates at which the debt is traded among financial institutions adjusted for the Company’s credit standing. The fair value of the Senior Notes
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
totaled
$99.2 million
at December 31, 2016, was determined based on Level 2 inputs using the market approach, which is primarily based on rates at which the debt is traded among financial institutions.
(10) Stockholders’ Equity
Authorized Shares
The Company is authorized to issue up to
one billion
shares of common stock, with a par value of
$0.01
. The Company is authorized to issue up to
one hundred million
shares of preferred stock, with a par value of
$0.01
.
(11) Stock-Based Compensation
On September 23, 2013 and in connection with the acquisition of the Company by KKR, the Board of Directors approved the formation of the 2013 Stock Incentive Plan for Key Employees of Pinnacle Holdco Parent, Inc. and its subsidiaries, or the Plan. The Plan allowed for the issuance of stock options and other stock-based awards as permitted by applicable laws. The number of shares available for grant under the Plan is
12.5%
of the outstanding shares at closing on a fully diluted basis. The Company rolled over
2,052,909
stock options under the Plan. The fair value of the options that were rolled over equaled the fair value of the options in the Predecessor Company and, therefore, there was no additional stock-based compensation expense recorded.
All stock options granted under the Plan are subject to transfer restrictions of the stock option’s underlying shares once vested and exercised. This lack of marketability was included as a discount, calculated using the Finnerty Model, when determining the grant date value of these options. In conjunction with the secondary offerings during 2017 and 2016, the transfer restrictions on a portion of such shares issuable upon exercise of vested options granted under the Plan were released. The release of the transfer restrictions is considered a modification under ASC 718, “Stock Compensation.” As a result of these modifications, the Company incurred approximately
$3.7 million
and
$10.1 million
of incremental compensation expense associated with service-based options during the years ended
December 31, 2017
and
2016
, respectively, which is included in transaction-related costs in the accompanying consolidated statements of operations.
On November 23, 2014 and in connection with the Company’s IPO, the Board of Directors approved the formation of the 2014 Omnibus Plan for Key Employees, or the 2014 Omnibus Plan. The 2014 Omnibus Plan allows for the issuance of stock options, stock appreciation rights, restricted shares and restricted stock units, other stock-based awards, and performance compensation awards as permitted by applicable laws. The number of shares available for grant under the 2014 Omnibus Plan is
3,200,000
.
Generally, the Company grants stock options with exercise prices greater than or equal to the fair market value of the Company’s common stock on the date of grant. The stock option compensation cost calculated under the fair value approach is recognized on a pro-rata basis over the vesting period of the stock options (usually
five
years under the Plan and
four
years under the 2014 Omnibus Plan). Most stock option grants are subject to graded vesting as services are rendered and have a contractual life of
ten
years. The Board and the Compensation Committee have the discretion to determine different vesting schedules.
In December 2013, the Company granted certain employees market-based options under the Plan that vest only upon the achievement of a specified internal rate of return from a liquidity event (“2.0x Options” and “2.5x Options”). At the time of grant,
no
compensation expense was recorded as the 2.0x Options and 2.5x Options vest upon a liquidity event, which is not considered probable until the date it occurs. On January 20, 2016, the Compensation Committee of the Board of Directors adopted a resolution to adjust the vesting criteria for all 2.0x Options granted and still outstanding on such date. Under the revised vesting criteria, the 2.0x Options vest upon the announcement of a secondary offering. The Company did not record compensation expense on the January 20, 2016 modification date as the Company determined the modification resulted in Type IV Improbable-to-Improbable modification as the secondary offering was deemed improbable since the event was outside of the Company’s control and could not be considered probable until the date it occurred. On March 2, 2016, the Company announced a secondary offering of shares by KKR and certain management stockholders, and it became probable that the 2.0x Options would vest. Due to the modification of the terms of the 2.0x Options, the Company calculated the fair value of these options using the Black-Scholes option pricing model with the following assumptions: expected life of
2.92
years; risk-free rate of
1.04%
; volatility of
45%
; dividend yield of
0%
; and a Finnerty discount of approximately
16%
. In total,
835,551
2.0x Options held by current employees were modified. As a result of this modification, and the modifications associated with the transfer
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
restrictions releases noted above, the Company incurred approximately
$0.8 million
and
$25.7 million
of incremental compensation expense associated with the 2.0x Options during the years ended
December 31, 2017
and 2016, respectively, which is included in transaction-related costs in the accompanying consolidated statements of operations.
On November 16, 2016, the 2.5x Options vested upon the achievement of a specified internal rate of return and multiple on invested capital in connection with the closing of a secondary offering of shares by KKR. In total,
809,755
2.5x Options held by current employees vested. The Company incurred approximately
$0.8 million
and
$6.4 million
of incremental compensation expense associated with the vesting and transfer restriction release of the 2.5x Options during the years ended
December 31, 2017
and 2016, respectively, which is included in transaction-related costs in the accompanying consolidated statements of operations.
As of
December 31, 2017
, there was
$59.4 million
of unrecognized compensation cost related to unvested stock-based compensation, which is expected to be recognized over a weighted average period of
2
years. The total fair value of options vested during the years ended
December 31, 2017
,
2016
and
2015
was
$5.2 million
,
$27.3 million
and
$3.1 million
, respectively.
Aggregated information regarding the Company’s option plans is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Wtd. Average
Exercise Price
|
|
Wtd. Average
Remaining
Contractual Life
|
|
Intrinsic Value
(in millions)
|
Outstanding at December 31, 2016
|
5,507,347
|
|
|
$
|
15.38
|
|
|
6.7
|
|
$
|
218.9
|
|
Granted
|
1,921,000
|
|
|
75.21
|
|
|
|
|
|
Exercised
(1)
|
(2,094,886
|
)
|
|
10.19
|
|
|
|
|
|
Expired/forfeited
|
(87,836
|
)
|
|
28.47
|
|
|
|
|
|
Outstanding at December 31, 2017
|
5,245,625
|
|
|
$
|
39.14
|
|
|
7.6
|
|
$
|
272.4
|
|
Exercisable at December 31, 2017
|
2,247,920
|
|
|
$
|
14.12
|
|
|
6.0
|
|
$
|
173.0
|
|
(1) During the year ended December 31, 2017, of the
2,094,886
shares exercised,
190,683
were withheld from the option holders to cover the exercise price of the options being exercised.
The weighted average fair value of service-based options granted was
$25.24
,
$15.57
and
$10.87
during the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Selected information regarding the Company’s stock options as of
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Exercise Price
|
|
Number of
Options
|
|
Wtd Average
Remaining Life
(in Years)
|
|
Wtd. Average
Exercise Price
|
|
Number of
Options
|
|
Wtd. Average
Remaining Life
(in Years)
|
|
Wtd. Average
Exercise Price
|
$
|
2.94
|
|
|
27,304
|
|
|
5.0
|
|
$
|
2.94
|
|
|
27,304
|
|
|
5.0
|
|
$
|
2.94
|
|
$
|
11.73 - 16.42
|
|
|
2,441,121
|
|
|
5.9
|
|
$
|
11.89
|
|
|
1,971,291
|
|
|
5.9
|
|
$
|
11.82
|
|
$
|
25.35 - 74.13
|
|
|
1,058,700
|
|
|
8.1
|
|
$
|
42.93
|
|
|
249,325
|
|
|
7.4
|
|
$
|
33.51
|
|
$
|
75.01 - 83.37
|
|
|
1,718,500
|
|
|
9.7
|
|
$
|
76.08
|
|
|
—
|
|
|
—
|
|
$
|
—
|
|
The Company recorded a receivable of
$2.7 million
from the Company's brokerage services provider associated with certain stock option exercises, which was included in the "Prepaid expenses and other current assets" line item on the accompanying consolidated balance sheets as of December 31, 2017. The full amount was received in January 2018.
Restricted Stock Awards and Units
The Company’s RSAs/RSUs will settle in shares of the Company’s common stock on the applicable vesting date. RSAs/RSUs granted to employees vest
100%
on the third anniversary of the date of grant. RSAs/RSUs granted to the Company's non-employee directors vest
50%
on the first anniversary of the date of grant and
50%
on the second anniversary of the date of grant.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Activity related to the Company’s RSAs/RSUs in
2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards
|
|
Wtd. Average
Grant-Date
Fair Value
|
|
Intrinsic
Value
(millions)
|
Unvested at December 31, 2016
|
188,590
|
|
|
$
|
32.63
|
|
|
$
|
10.4
|
|
Granted
|
140,044
|
|
|
64.18
|
|
|
|
Expired/Forfeited
|
(12,000
|
)
|
|
32.81
|
|
|
Vested
|
(7,096
|
)
|
|
38.80
|
|
|
|
Unvested at December 31, 2017
|
309,538
|
|
|
$
|
46.76
|
|
|
$
|
28.2
|
|
Stock-based compensation expense related to employee stock options and RSAs/RSUs is summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Direct costs
|
$
|
3,552
|
|
|
$
|
1,813
|
|
|
$
|
1,218
|
|
Selling, general and administrative
|
9,064
|
|
|
5,254
|
|
|
4,058
|
|
Transaction-related costs
|
5,294
|
|
|
42,166
|
|
|
—
|
|
Total stock-based compensation expense
|
$
|
17,910
|
|
|
$
|
49,233
|
|
|
$
|
5,276
|
|
Employee Stock Purchase Plan
In April 2017, the Board of Directors approved the PRA Health Sciences, Inc. 2017 Employee Stock Purchase Plan, or ESPP, which was approved by the Company’s shareholders on June 1, 2017. The ESPP allows eligible employees to authorize payroll deductions of up to
15%
of their base salary or wages to be applied toward the purchase of shares of the Company’s common stock on the last trading day of the offering period. Participating employees will purchase shares of the Company's common stock at a discount of up to
15%
on the lesser of the closing price of the Company's common stock on the NASDAQ Global Select Market (i) on the first trading day of the offering period or (ii) the last day of any offering period. The aggregate number of shares of the Company’s common stock that may be issued under the ESPP may not exceed
three million
shares and no one employee may purchase any shares under the ESPP having a collective fair market value greater than
$25,000
in any one calendar year. Offering periods under the ESPP will generally be in six month increments, commencing on January 1 and July 1 of each calendar year with the compensation committee having the right to establish different offering periods. The Company's first offering period will commence on January 1, 2018.
(12) Income Taxes
The components of income before income taxes and equity in income (losses) of unconsolidated joint ventures are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Domestic
|
$
|
(52,083
|
)
|
|
$
|
(61,226
|
)
|
|
$
|
(23,400
|
)
|
Foreign
|
126,630
|
|
|
155,120
|
|
|
138,565
|
|
|
$
|
74,547
|
|
|
$
|
93,894
|
|
|
$
|
115,165
|
|
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of the (benefit from) provision for income taxes were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
Federal
|
$
|
30,084
|
|
|
$
|
151
|
|
|
$
|
1,132
|
|
State
|
2,607
|
|
|
1,842
|
|
|
1,507
|
|
Foreign
|
30,601
|
|
|
36,970
|
|
|
30,584
|
|
Total current income tax expense
|
63,292
|
|
|
38,963
|
|
|
33,223
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(70,041
|
)
|
|
(2,230
|
)
|
|
(1,349
|
)
|
State
|
(1,203
|
)
|
|
(451
|
)
|
|
1,564
|
|
Foreign
|
(4,671
|
)
|
|
(7,788
|
)
|
|
(3,434
|
)
|
Total deferred income tax benefit
|
(75,915
|
)
|
|
(10,469
|
)
|
|
(3,219
|
)
|
Total income tax expense (benefit)
|
$
|
(12,623
|
)
|
|
$
|
28,494
|
|
|
$
|
30,004
|
|
Income taxes computed at the statutory U.S. federal income tax rate of 35.0% are reconciled to the benefit from income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Statutory federal income tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Federal tax rate change
|
(56.0
|
)%
|
|
—
|
%
|
|
—
|
%
|
State income taxes, net of federal benefit
|
(5.5
|
)%
|
|
0.3
|
%
|
|
2.0
|
%
|
Tax on foreign earnings:
|
|
|
|
|
|
Foreign rate differential
|
(20.3
|
)%
|
|
(17.7
|
)%
|
|
(13.6
|
)%
|
Foreign earnings taxed in the U.S.
|
60.7
|
%
|
|
17.5
|
%
|
|
7.3
|
%
|
Foreign dividends
|
5.2
|
%
|
|
—
|
%
|
|
—
|
%
|
Non-U.S. research and development credits
|
(3.3
|
)%
|
|
(3.9
|
)%
|
|
(4.4
|
)%
|
Stock-based compensation
|
(39.9
|
)%
|
|
1.9
|
%
|
|
0.2
|
%
|
Nondeductible contingent consideration
|
35.4
|
%
|
|
—
|
%
|
|
—
|
%
|
Valuation allowance
|
(28.0
|
)%
|
|
—
|
%
|
|
—
|
%
|
Change in liability for uncertain tax positions
|
(3.2
|
)%
|
|
—
|
%
|
|
(0.6
|
)%
|
Nondeductible expenses
|
2.2
|
%
|
|
0.1
|
%
|
|
0.3
|
%
|
Other
|
0.8
|
%
|
|
(2.9
|
)%
|
|
(0.1
|
)%
|
Effective income tax rate
|
(16.9
|
)%
|
|
30.3
|
%
|
|
26.1
|
%
|
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Components of the deferred tax assets and liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Net operating loss carryforwards
|
$
|
48,603
|
|
|
$
|
29,470
|
|
Accruals and reserves
|
15,943
|
|
|
12,986
|
|
Equity based compensation
|
7,447
|
|
|
17,392
|
|
Prepaid expenses and other
|
13,492
|
|
|
25,232
|
|
Deferred and unbilled revenue
|
24,937
|
|
|
25,718
|
|
Tax credits
|
15,111
|
|
|
5,295
|
|
|
125,533
|
|
|
116,093
|
|
Valuation allowance
|
(25,226
|
)
|
|
(21,689
|
)
|
Total deferred tax assets (net of valuation allowance)
|
100,307
|
|
|
94,404
|
|
Identified intangibles
|
(190,115
|
)
|
|
(148,576
|
)
|
Depreciable, amortizable and other property
|
(13,434
|
)
|
|
(12,963
|
)
|
Deferred tax liabilities
|
(203,549
|
)
|
|
(161,539
|
)
|
Net deferred tax liability
|
$
|
(103,242
|
)
|
|
$
|
(67,135
|
)
|
Long-term deferred tax asset
|
$
|
8,939
|
|
|
$
|
6,568
|
|
Long-term deferred tax liability
|
$
|
(112,181
|
)
|
|
$
|
(73,703
|
)
|
The Company’s foreign subsidiaries are taxed separately in their respective jurisdictions. As of
December 31, 2017
, the Company has cumulative foreign net operating loss carryforwards of approximately
$7.4 million
. In addition, the Company has federal net operating loss carryforwards of approximately
$165.6 million
and state net operating loss carryforwards of approximately
$506.8 million
.
The carryforward periods for the Company’s net operating losses vary from
five
years to an indefinite number of years depending on the jurisdiction. The Company’s ability to offset future taxable income with net operating loss carryforwards may be limited in certain instances, including changes in ownership.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company has calculated our best estimate of the impact of the Act in our year end income tax provision in accordance with our understanding of the Act and guidance under SAB 118 available as of the date of this filing and as a result has recorded
$0.2 million
as additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount related to the remeasurement of certain deferred tax assets, deferred tax liabilities, and U.S. uncertain tax positions, based on the rates at which they are expected to reverse in the future, was a benefit of
$41.7 million
. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was
$77.6 million
based on cumulative foreign earnings of
$392.5 million
. The Company also recorded a provisional tax benefit of
$35.7 million
related to the utilization of foreign tax credits against the one-time transition tax. In addition, the Company has recorded a valuation allowance against an estimated
$12.8 million
of excess foreign tax credits related to the transition tax inclusion. The Company is continuing to analyze the overall impact of the transition tax inclusion, including its foreign tax credit limitation position and will update the provisional estimate as it completes its analysis during the measurement period. Due to the complexity of the new law, the Company is still in the process of investigating the related accounting implications. Specifically, for the Global Intangible Low Tax Income (“GILTI”) tax the Company intends to make an accounting policy decision around whether to account for GILTI as a period cost in the relevant period, or to record deferred taxes related to the basis in the Company’s foreign subsidiaries once additional guidance is available for assessment.
The Company also has federal and state income tax credit carryforwards available to potentially offset future federal and state income tax of
$12.8 million
and
$1.9 million
, respectively. The federal credits expiring in ten years. The state credits begin expiring in
2022
. The Company has provided a full valuation allowance against the benefits of these credits.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In determining the extent to which a valuation allowance for deferred tax assets is required, the Company evaluates all available evidence including projections of future taxable income, carry back opportunities, reversal of certain deferred tax liabilities, and other tax‑planning strategies. The valuation allowance at
December 31, 2017
relates to the U.S. foreign tax credit carryforwards, certain foreign net operating losses, state net operating losses and state tax credit carryforwards. As of December 31, 2017, the Company has a U.S. net federal deferred tax liability. The Company has concluded that it no longer requires a valuation allowance that existed at the beginning of the year on its net federal deferred tax assets. As such, the valuation allowance of
$21.2 million
has been released during the year ended December 31, 2017.
A reconciliation of the beginning and ending amount of gross unrecognized income tax benefits is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Beginning balance
|
$
|
12,432
|
|
|
$
|
11,729
|
|
|
$
|
16,207
|
|
Additions based on tax positions related to current year
|
1,641
|
|
|
1,196
|
|
|
1,333
|
|
Additions for income tax positions of prior years
|
400
|
|
|
542
|
|
|
95
|
|
Impact of changes in exchange rates
|
427
|
|
|
(127
|
)
|
|
(594
|
)
|
Impact of change in federal tax rate
|
(3,536
|
)
|
|
—
|
|
|
—
|
|
Settlements with tax authorities
|
(108
|
)
|
|
(559
|
)
|
|
—
|
|
Reductions for income tax positions for prior years
|
(3,174
|
)
|
|
(349
|
)
|
|
(4,308
|
)
|
Reductions due to lapse of applicable statute of limitations
|
(171
|
)
|
|
—
|
|
|
(1,004
|
)
|
Ending balance
|
$
|
7,911
|
|
|
$
|
12,432
|
|
|
$
|
11,729
|
|
As of
December 31, 2017
,
2016
, and
2015
, the total gross unrecognized tax benefits were
$7.9 million
,
$12.4 million
, and
$11.7 million
, respectively. As of
December 31, 2017
, the total amount of gross unrecognized tax benefits which, if recognized, would impact the Company’s effective tax rate is
$7.9 million
. The Company anticipates changes in total unrecognized tax benefits due to the expiration of statute of limitations within the next 12 months and an income tax audit resolution. Specifically, adjustments related to transfer pricing and foreign tax exposures are expected to be resolved in various jurisdictions. A reasonable estimate of the change in the total gross unrecognized tax benefit expected to be recognized as a result is
$0.5 million
as of the balance sheet date.
The Company’s policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of income tax expense. The Company recorded a decrease of
$0.8 million
, an increase of
$0.1 million
, and a decrease of
$0.1 million
during the years ended
December 31, 2017
, 2016 and 2015, respectively. As of
December 31, 2017
, the Company has a total of
$1.6 million
recognized on uncertain tax positions. To the extent interest and penalties are not incurred with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction in income tax expense.
The Company has analyzed filing positions in all of the significant federal, state and foreign jurisdictions where the Company is required to file income tax returns. The only periods subject to examination by the major tax jurisdictions where the Company does business are the 2009 through 2016 tax years.
As of December 31, 2017, there are no untaxed undistributed earnings of its foreign subsidiaries. This is due to the U.S. Tax Cuts and Jobs Act enacted December 22, 2017 that requires all untaxed foreign earnings to be currently taxed in the 2017 U.S. federal income tax return. With respect to the previously taxed income, as of December 31, 2017, an asset of
$1.0 million
was recorded for the effect of repatriating a portion of those foreign earnings. Aside from the portion expected to be actually repatriated in future years the Company has not provided for U.S. federal and foreign withholding taxes on those previously taxed earnings of its foreign subsidiaries. The Company is in the process of evaluating the impact of the new U.S. tax law on its permanent reinvestment assertion. No additional U.S. federal income taxes or foreign withholding taxes have been provided on accumulated earnings of foreign subsidiaries deemed to have been repatriated as part of the one-time transition tax. The Company's evaluation of the impact of the new U.S. tax law on its permanent reinvestment assertion is expected to be completed within the one-year measurement period as allowed by SAB 118.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A rollforward of the deferred tax asset valuation allowance accounts is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Beginning balance
|
$
|
21,689
|
|
|
$
|
23,205
|
|
|
$
|
16,142
|
|
Additions - excess benefit offset to NOL change
|
12,623
|
|
|
—
|
|
|
—
|
|
Additions - purchase accounting
|
219
|
|
|
—
|
|
|
—
|
|
Additions - other comprehensive income
|
—
|
|
|
—
|
|
|
3,892
|
|
Additions - charged to expense
|
12,863
|
|
|
3,421
|
|
|
3,770
|
|
Additions - U.S. federal tax rate change
|
1,330
|
|
|
—
|
|
|
—
|
|
Deductions - charged to expense (including translation adjustments)
|
(23,498
|
)
|
|
(4,937
|
)
|
|
(599
|
)
|
Ending balance
|
$
|
25,226
|
|
|
$
|
21,689
|
|
|
$
|
23,205
|
|
The valuation allowance at December 31, 2017 is primarily related to U.S. foreign tax credit carryforwards, state loss carryforwards, state credit carryforwards, and loss carryforwards in various foreign jurisdictions.
(13) Commitments and Contingencies
Operating Leases
The Company leases office space under operating lease agreements expiring at various times through 2036. The Company has sublease agreements for certain facilities to reduce rent expense and accommodate expansion needs. The subleases expire at various times through 2022. The Company also leases certain office equipment under the terms of operating leases expiring at various times through 2023.
Rent expense under operating leases, net of sublease rental income, was
$37.0 million
,
$31.9 million
and
$30.1 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Future minimum lease commitments on non‑cancelable operating leases are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
Leases
|
|
Sublease
Rental
Income
|
|
Net Total
|
2018
|
$
|
44,071
|
|
|
$
|
(181
|
)
|
|
$
|
43,890
|
|
2019
|
38,871
|
|
|
(125
|
)
|
|
38,746
|
|
2020
|
35,494
|
|
|
(125
|
)
|
|
35,369
|
|
2021
|
31,783
|
|
|
(124
|
)
|
|
31,659
|
|
2022
|
25,970
|
|
|
(41
|
)
|
|
25,929
|
|
2022 and thereafter
|
110,394
|
|
|
—
|
|
|
110,394
|
|
Total
|
$
|
286,583
|
|
|
$
|
(596
|
)
|
|
$
|
285,987
|
|
Employment Agreements
The Company has entered into employment and non‑compete agreements with certain management employees. In the event of termination of employment for certain instances, employees will receive severance payments for base salary and benefits for a specified period (
six
months for vice presidents,
nine
months for senior vice presidents and
twelve
months for executive vice presidents, the president and chief executive officer). Each employment agreement also contains provisions that restrict the employee’s ability to compete directly with the Company for a comparable period after employment terminates. In addition, stock option grant agreements for these employees provide the Company with the right to repurchase from the employee, or the employee with the right to sell to the Company, stock owned by the employee in certain limited instances of termination.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Legal Proceedings
The Company is involved in legal proceedings from time to time in the ordinary course of its business, including employment claims and claims related to other business transactions. Although the outcome of such claims is uncertain, management believes that these legal proceedings will not have a material adverse effect on the financial condition or results of future operations of the Company.
The Company is currently a party to litigation with the City of Sao Paulo, Brazil. The dispute relates to whether the export of services provided by the Company is subject to a local tax on services. The Company has not recorded a liability associated with the claim, which totaled
$5.2 million
at
December 31, 2017
, given that it is not deemed probable the Company will incur a loss related to this case. However, a deposit totaling
$5.2 million
has been made to the Brazilian court in order to annul the potential tax obligation and to avoid the accrual of additional interest and penalties. This balance is recorded in other assets on the consolidated balance sheets. In June 2015, the Judiciary Court of Justice of the State of Sao Paulo ruled in the favor of the Company, however, the judgment was appealed by the City of Sao Paulo. The Company expects to recover the full amount of the deposit when the case is settled. In September 2017, a judge from the Superior Court of Justice of Brazil denied relief to the City of Sao Paulo's appeal and upheld the lower court's ruling in the favor of the Company for the years 2005 to 2012, and in the period from January to October 2013. The judge from the Superior Court of Justice of Brazil also ruled that the Company must appeal the lower court's verdict for October 2013 and the subsequent periods as the Judiciary Court of Justice of the State of Sao Paulo only reviewed the facts that pertained to the period before October 2013.
Insurance
The Company currently maintains insurance for risks associated with the operation of its business, provision of professional services, and ownership of property. These policies provide coverage for a variety of potential losses, including, without limitation, loss or damage to property, bodily injury, general commercial liability, professional errors and omissions, and medical malpractice.
The Company’s retentions and deductibles associated with these insurance policies range up to a maximum of
$0.5 million
.
Employee Health Insurance
The Company is self‑insured for health insurance for employees within the United States. The Company maintains stop‑loss insurance on a “claims made” basis for expenses in excess of
$0.3 million
per member per year. As of
December 31, 2017
and
2016
, the Company maintained a reserve of approximately
$5.0 million
and
$4.1 million
, respectively, included in accrued expense and other current liabilities on the consolidated balance sheets, to cover open claims and estimated claims incurred but not reported.
(14) Employee Benefit Plans
Defined contribution or profit sharing style plans are offered in Australia, Belgium, Germany, Hong Kong, India, Israel, Japan, the Netherlands, New Zealand, the Philippines, South Africa, Spain, Sweden, Thailand, and the United Kingdom. In some cases these plans are required by local laws or regulations.
The Company maintains 401(k) plans in the United States, which cover substantially all employees of its U.S. subsidiaries. The Company matches participant's contributions at varying amounts, subject to a maximum contribution of
6%
of the participant's compensation. The employer contributions to the 401(k) plans were approximately
$11.9 million
,
$9.9 million
and
$6.6 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
As a result of the Takeda transactions during 2017, the Company maintains defined benefit pension plans sponsored by certain TDC and TDS subsidiaries in Japan and Germany. The funded status of the defined benefit pension plans, which represents the difference between the projected benefit obligation and the fair value of plan assets, is calculated on a plan-by-plan basis. The funded status of the plan in Japan, which covers approximately 130 employees, totaled
$0.8 million
at December 31, 2017 and was recorded in other assets on the consolidated balance sheets. The unfunded status of the plan in Germany, which covers eight employees, totaled
$0.7 million
at December 31, 2017 and was recorded in other long-term
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
liabilities on the consolidated balance sheets. Additional disclosures regarding these defined benefit pension plans have been excluded due to their immateriality. The Company did not have defined benefit pension plans prior to 2017.
(15) Derivatives
The Company is exposed to certain risks relating to its ongoing business operations. The primary risk that the Company seeks to manage by using derivative instruments is interest rate risk. Accordingly, the Company has instituted interest rate hedging programs that are accounted for in accordance with ASC 815, “Derivatives and Hedging.” The interest rate hedging program is a cash flow hedge program designed to minimize interest rate volatility. The Company swaps the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount, at specified intervals. The Company also employed an interest rate cap that would have compensated the Company if variable interest rates had risen above a pre-determined rate. The Company’s interest rate contracts are designated as hedging instruments.
On October 2, 2013, the Company entered into interest rate swap agreements with an aggregate notional principal amount of
$620.0 million
, or the 2013 Swaps. The interest rate swaps were set to begin on September 23, 2015. The interest rate swaps were to be used to hedge the Company’s variable rate debt. The interest rate swaps had maturity dates ranging from
one
to
five
years. During the third quarter of 2015, the Company paid
$32.9 million
to terminate the 2013 Swaps. Amounts previously recorded in accumulated other comprehensive loss related to these interest rate swaps, totaling
$29.6 million
, are being reclassified into earnings over the term of the previously hedged borrowing using the swaplet method. For the terminated swaps, the Company reclassified
$6.3 million
,
$4.7 million
and
$0.7
previously recorded in accumulated other comprehensive loss into interest expense during the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Subsequent to the termination of all existing interest rate swaps, the Company entered into a new interest rate swap agreement with a notional principal amount of
$250.0 million
and a fixed
three month LIBOR
of
1.48%
, or the 2015 Swap. The interest rate swap began on
September 23, 2015
and will mature on
September 23, 2018
. The interest rate swap is being used to hedge the Company’s variable rate debt.
In conjunction with the closing of the 2016 Credit Facilities in December 2016, the 2015 Swap was amended to modify the fixed rate, repricing dates and embedded floor, or the Modified 2015 Swap. The Company re-designated the Modified 2015 Swap against the refinanced debt under the 2016 Credit Facilities. As a result of the re-designation, all amounts previously recorded in accumulated other comprehensive loss related to the 2015 Swap, totaling
$0.8 million
, were frozen and are being amortized into earnings over the term of the previously hedged borrowing using the swaplet method. The Company reclassified
$0.4 million
previously recorded in accumulated other comprehensive loss into interest expense associated with the 2015 Swap during the year ended
December 31, 2017
. The closing of the 2016 Credit Facilities did not impact the amortization of the losses frozen in accumulated other comprehensive loss associated with the 2013 Swaps.
The following table presents the notional amounts and fair values (determined using level 2 inputs) of the Company’s derivatives as of
December 31, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Classification
|
|
December 31, 2017
|
|
December 31, 2016
|
|
|
Notional amount
|
|
Asset/(Liability)
|
|
Notional amount
|
|
Asset/(Liability)
|
Derivatives in an asset position:
|
Other current assets
|
|
$
|
250,000
|
|
|
$
|
428
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in a liability position:
|
Other long-term liabilities
|
|
—
|
|
|
—
|
|
|
250,000
|
|
|
(590
|
)
|
The Company records the effective portion of any change in the fair value of derivatives designated as hedging instruments under ASC 815 to other accumulated comprehensive loss in the consolidated balance sheets, net of deferred taxes, and will later reclassify into earnings when the hedged item affects earnings or is no longer expected to occur. Gains and losses from the ineffective portion of any hedge are recognized in earnings immediately. For other derivative contracts that do not qualify or no longer qualify for hedge accounting, changes in the fair value of the derivatives are recognized in earnings each period.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below presents the effect of the Company's derivatives on the consolidated statements of operations and comprehensive (loss) income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
Derivatives in Cash Flow Hedging Relationships (Interest Rate Contracts)
|
2017
|
|
2016
|
|
2015
|
Amount of pre-tax gain (loss) recognized in other comprehensive income (loss) on derivatives
|
$
|
245
|
|
|
$
|
(1,600
|
)
|
|
$
|
(11,851
|
)
|
Amount of loss recognized in other (expense) income, net on derivatives (ineffective portion)
|
—
|
|
|
1
|
|
|
(444
|
)
|
Amount of loss recognized in other (expense) income, net on derivatives (no longer qualify for hedge accounting)
|
—
|
|
|
—
|
|
|
(1,137
|
)
|
Amount of loss reclassified from accumulated other comprehensive loss into interest expense, net on derivatives
|
(6,855
|
)
|
|
(5,921
|
)
|
|
(908
|
)
|
The Company expects that
$6.3 million
of unrealized losses will be reclassified out of accumulated other comprehensive loss and into interest expense, net over the next
12
months.
In January 2018, the Company entered into two new interest rate derivative agreements. Refer to Note 22 for further details.
(16) Accumulated Other Comprehensive (Loss) Income
Below is a summary of the components of accumulated other comprehensive (loss) income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
|
|
Derivative
Instruments
|
|
Total
|
Balance at December 31, 2014
|
$
|
(53,639
|
)
|
|
$
|
(15,870
|
)
|
|
$
|
(69,509
|
)
|
Other comprehensive loss before reclassifications, net of tax
|
(52,433
|
)
|
|
(11,273
|
)
|
|
(63,706
|
)
|
Reclassification adjustments, net of tax
|
—
|
|
|
908
|
|
|
908
|
|
Balance at December 31, 2015
|
(106,072
|
)
|
|
(26,235
|
)
|
|
(132,307
|
)
|
Other comprehensive loss before reclassifications, net of tax
|
(95,019
|
)
|
|
(978
|
)
|
|
(95,997
|
)
|
Reclassification adjustments, net of tax
|
—
|
|
|
3,618
|
|
|
3,618
|
|
Balance at December 31, 2016
|
(201,091
|
)
|
|
(23,595
|
)
|
|
(224,686
|
)
|
Other comprehensive income before reclassifications, net of tax
|
83,911
|
|
|
149
|
|
|
84,060
|
|
Reclassification adjustments, net of tax
|
—
|
|
|
4,156
|
|
|
4,156
|
|
Balance at December 31, 2017
|
$
|
(117,180
|
)
|
|
$
|
(19,290
|
)
|
|
$
|
(136,470
|
)
|
Foreign Currency Translation
The change in the foreign currency translation adjustment during the year ended
December 31, 2017
was primarily due to the movements in the British pound, or GBP, Euro, or EUR, Canadian dollar, or CAD, and Russian ruble, or RUB, exchange rates against the U.S. dollar, or USD. The USD depreciated by
9.3%
,
13.7%
,
7.1%
and
6.2%
versus the GBP, EUR, CAD and RUB respectively, during the year ended
December 31, 2017
. The movement in the GBP, EUR, CAD and RUB represented
$46.0 million
,
$31.0 million
,
$3.5 million
and
$1.9 million
, respectively, of the
$83.9 million
income recorded to accumulated other comprehensive loss during the year ended
December 31, 2017
.
The change in the foreign currency translation adjustment during the year ended
December 31, 2016
was primarily due to the movements in the GBP, EUR, CAD, and RUB, exchange rates against the USD. The USD strengthened by
16.7%
and
3.6%
versus the GBP and EUR, respectively, during the year ended
December 31, 2016
, and the USD depreciated by
3.1%
and
19.5%
against the CAD and RUB, respectively, during the same period. The movement in the GBP and EUR represented
$90.2 million
and
$8.4 million
, respectively, of the
$95.0 million
loss recorded to accumulated other comprehensive loss during the year ended
December 31, 2016
. The overall change was partially offset by gains in the CAD and RUB, representing
$1.1 million
and
$4.0 million
of the adjustment, respectively.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The change in the foreign currency translation adjustment during the year ended
December 31, 2015
was primarily due to the movements in the GBP, EUR, and CAD exchange rates against the USD. The USD strengthened by
4.6%
,
10.1%
, and
16.1%
against the GBP, EUR, and CAD, respectively. The movement of the GBP, EUR, and CAD represented
$25.8 million
,
$16.4 million
, and
$7.1 million
, respectively, of the
$52.4 million
loss recorded to accumulated other comprehensive loss during the year ended
December 31, 2015
.
Derivative Instruments
See Note 15 for further information on changes to accumulated other comprehensive income related to the derivative instruments.
(17) Net Income Per Share
Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding for the applicable period. Diluted net income per share is calculated after adjusting the denominator of the basic net income per share calculation for the effect of all potentially dilutive common shares, which in the Company’s case, includes shares issuable under the stock option and incentive award plan.
The following table reconciles the basic to diluted weighted average shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Basic weighted average common shares outstanding
|
62,437
|
|
|
60,759
|
|
|
59,965
|
|
Effect of dilutive stock options and RSAs/RSUs
|
3,336
|
|
|
3,693
|
|
|
3,242
|
|
Diluted weighted average common shares outstanding
|
65,773
|
|
|
64,452
|
|
|
63,207
|
|
Anti-dilutive shares
|
741
|
|
|
305
|
|
|
115
|
|
The anti-dilutive shares disclosed above were calculated using the treasury stock method. The treasury stock method calculates dilution assuming the exercise of all in-the-money options and vesting of RSAs/RSUs, reduced by the repurchase of shares with the proceeds from the assumed exercises, and unrecognized compensation expense for outstanding awards.
(18) Related Party Transactions
The Company entered into a joint venture with an affiliate of KKR during 2015. The joint venture was dissolved during the same year. For further discussion on the related party transaction, refer to Note 3.
(19) Supplemental Cash Flow Information
The following table presents the Company’s supplemental cash flow information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Cash paid during the period for:
|
|
|
|
|
|
Income taxes, net of refunds
|
$
|
47,829
|
|
|
$
|
27,644
|
|
|
$
|
17,148
|
|
Interest
|
48,330
|
|
|
48,156
|
|
|
54,632
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
Issuance of common stock for the acquisition of Value Health Solutions, Inc.
|
369
|
|
|
—
|
|
|
1,582
|
|
Accrued fixed assets purchases
|
3,962
|
|
|
2,644
|
|
|
2,733
|
|
Cashless exercises of stock options
|
13,252
|
|
|
9,456
|
|
|
1,672
|
|
Additionally, the acquisition date fair value of contingent consideration liabilities recorded during the year ended December 31, 2017 totaled
$155.8 million
. Refer to Note 2 - Significant Accounting Polices and Note 4 - Business Combinations for further information.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(20) Operations by Geographic Area
The table below presents certain enterprise‑wide information about the Company’s operations by geographic area for the years ended
December 31, 2017
,
2016
and
2015
. The Company attributes revenues to geographical locations based upon where the services are performed.
The Company’s operations within each geographical region are further broken down to show each country which accounts for 10% or more of the totals (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Service revenue:
|
|
|
|
|
|
Americas:
|
|
|
|
|
|
United States
|
$
|
1,310,772
|
|
|
$
|
1,063,625
|
|
|
$
|
898,637
|
|
Other
|
42,227
|
|
|
33,320
|
|
|
32,802
|
|
Americas
|
1,352,999
|
|
|
1,096,945
|
|
|
931,439
|
|
Europe, Africa, and Asia-Pacific
|
|
|
|
|
|
United Kingdom
|
479,623
|
|
|
394,363
|
|
|
364,476
|
|
Netherlands
|
79,555
|
|
|
68,118
|
|
|
57,739
|
|
Other
|
36,197
|
|
|
20,597
|
|
|
22,193
|
|
Europe, Africa, and Asia-Pacific
|
595,375
|
|
|
483,078
|
|
|
444,408
|
|
Total service revenue
|
1,948,374
|
|
|
1,580,023
|
|
|
1,375,847
|
|
Reimbursement revenues
|
311,015
|
|
|
231,688
|
|
|
238,036
|
|
Total revenue
|
$
|
2,259,389
|
|
|
$
|
1,811,711
|
|
|
$
|
1,613,883
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Long-lived assets:
|
|
|
|
Americas:
|
|
|
|
United States
|
$
|
107,952
|
|
|
$
|
60,462
|
|
Other
|
1,714
|
|
|
802
|
|
Americas
|
109,666
|
|
|
61,264
|
|
Europe, Africa, and Asia-Pacific
|
|
|
|
United Kingdom
|
4,182
|
|
|
3,569
|
|
Netherlands
|
15,876
|
|
|
13,313
|
|
Other
|
13,346
|
|
|
9,431
|
|
Europe, Africa, and Asia-Pacific
|
33,404
|
|
|
26,313
|
|
Total long-lived assets
|
$
|
143,070
|
|
|
$
|
87,577
|
|
(21) Segments
Historically, the Company has had
one
reportable segment. In conjunction with the acquisition of Symphony Health, the Company expanded its reporting segments. The Company is now managed through
two
reportable segments, (i) Clinical Research and (ii) Data Solutions. In accordance with the provisions of ASC 280, "Segment Reporting", the Company's chief operating decision-maker has been identified as the Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire company.
|
|
•
|
Clinical Research Segment
: The Clinical Research segment, which primarily serves biopharmaceutical clients, provides outsourced clinical research and clinical trial related services.
|
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
•
|
Data Solutions Segment
: The Data Solutions segment provides data and analytics, technology solutions and real-world insights and services primarily to the Company’s life science clients.
|
The Company's chief operating decision maker uses gross profit as the primary measure of each segment's operating results in order to allocate resources and in assessing the Company's performance. Reimbursement revenue and reimbursable out-of-pocket costs are not allocated to the Company's segments. Asset information by segment is not presented, as this measure is not used by the chief operating decision maker to assess the Company's performance. The Company’s reportable segment information is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Service revenue:
|
|
|
|
|
|
Clinical Research
|
$
|
1,857,876
|
|
|
$
|
1,580,023
|
|
|
$
|
1,375,847
|
|
Data Solutions
|
90,498
|
|
|
—
|
|
|
—
|
|
Total service revenue
|
1,948,374
|
|
|
1,580,023
|
|
|
1,375,847
|
|
Direct costs:
|
|
|
|
|
|
Clinical Research
|
1,231,690
|
|
|
1,032,688
|
|
|
886,528
|
|
Data Solutions
|
52,178
|
|
|
—
|
|
|
—
|
|
Total direct costs
|
1,283,868
|
|
|
1,032,688
|
|
|
886,528
|
|
Gross profit:
|
|
|
|
|
|
Clinical Research
|
626,186
|
|
|
547,335
|
|
|
489,319
|
|
Data Solutions
|
38,320
|
|
|
—
|
|
|
—
|
|
Total gross profit
|
$
|
664,506
|
|
|
$
|
547,335
|
|
|
$
|
489,319
|
|
Less expenses not allocated to segments:
|
|
|
|
|
|
Selling, general and administrative
|
321,987
|
|
|
269,893
|
|
|
246,417
|
|
Transaction-related costs
|
87,709
|
|
|
44,834
|
|
|
—
|
|
Depreciation and amortization
|
78,227
|
|
|
69,506
|
|
|
77,952
|
|
Loss on disposal of fixed assets, net
|
358
|
|
|
753
|
|
|
652
|
|
Consolidated income from operations
|
176,225
|
|
|
162,349
|
|
|
164,298
|
|
Interest expense, net
|
(46,729
|
)
|
|
(54,913
|
)
|
|
(61,747
|
)
|
Loss on modification or extinguishment of debt
|
(15,023
|
)
|
|
(38,178
|
)
|
|
—
|
|
Foreign currency (losses) gains, net
|
(39,622
|
)
|
|
24,029
|
|
|
14,048
|
|
Other (expense) income, net
|
(304
|
)
|
|
607
|
|
|
(1,434
|
)
|
Consolidated income before income taxes and equity in income (losses) of unconsolidated joint ventures
|
$
|
74,547
|
|
|
$
|
93,894
|
|
|
$
|
115,165
|
|
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(22) Quarterly Financial Data (unaudited)
The following table summarizes the Company’s unaudited quarterly results of operations (in thousands, except per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Service revenue
|
$
|
427,080
|
|
|
$
|
457,942
|
|
|
$
|
494,550
|
|
|
$
|
568,802
|
|
Reimbursement revenue
|
60,680
|
|
|
75,782
|
|
|
87,459
|
|
|
87,094
|
|
Total revenue
|
487,760
|
|
|
533,724
|
|
|
582,009
|
|
|
655,896
|
|
Income from operations
(1)
|
49,986
|
|
|
64,850
|
|
|
57,776
|
|
|
3,613
|
|
Provision for (benefit from) income taxes
(2)
|
7,883
|
|
|
10,193
|
|
|
(18,241
|
)
|
|
(12,458
|
)
|
Income (loss) before equity in gains of unconsolidated joint ventures
(3)
|
25,182
|
|
|
29,632
|
|
|
48,582
|
|
|
(16,226
|
)
|
Equity in gains of unconsolidated joint ventures
|
42
|
|
|
26
|
|
|
24
|
|
|
31
|
|
Net income (loss)
|
25,224
|
|
|
29,658
|
|
|
48,606
|
|
|
(16,195
|
)
|
Net (income) loss attributable to non-controlling interests
|
—
|
|
|
(112
|
)
|
|
(401
|
)
|
|
147
|
|
Net income (loss) attributable to PRA Health Sciences, Inc.
|
25,224
|
|
|
29,546
|
|
|
48,205
|
|
|
(16,048
|
)
|
Comprehensive income (loss)
|
42,552
|
|
|
63,892
|
|
|
75,348
|
|
|
(6,380
|
)
|
Comprehensive income (loss) attributable to noncontrolling interest
|
—
|
|
|
(50
|
)
|
|
(373
|
)
|
|
154
|
|
Comprehensive income (loss) attributable to PRA Health Sciences, Inc.
|
$
|
42,552
|
|
|
$
|
63,842
|
|
|
$
|
74,975
|
|
|
$
|
(6,226
|
)
|
Basic earnings (loss) per share
(4)
|
$
|
0.41
|
|
|
$
|
0.47
|
|
|
$
|
0.77
|
|
|
$
|
(0.25
|
)
|
Diluted earnings (loss) per share
(4)
|
$
|
0.39
|
|
|
$
|
0.45
|
|
|
$
|
0.73
|
|
|
$
|
(0.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Service revenue
|
$
|
372,320
|
|
|
$
|
394,249
|
|
|
$
|
399,841
|
|
|
$
|
413,613
|
|
Reimbursement revenue
|
57,903
|
|
|
61,598
|
|
|
53,414
|
|
|
58,773
|
|
Total revenue
|
430,223
|
|
|
455,847
|
|
|
453,255
|
|
|
472,386
|
|
Income from operations
(5)
|
18,946
|
|
|
50,348
|
|
|
54,814
|
|
|
38,241
|
|
(Benefit from) provision for income taxes
|
(5,264
|
)
|
|
12,312
|
|
|
10,821
|
|
|
10,625
|
|
(Losses) income before equity in (losses) gains of unconsolidated joint ventures
(6)
|
(15,431
|
)
|
|
35,423
|
|
|
31,416
|
|
|
13,992
|
|
Equity in (losses) gains of unconsolidated joint ventures
|
(538
|
)
|
|
3,247
|
|
|
33
|
|
|
33
|
|
Net (loss) income
|
(15,969
|
)
|
|
38,670
|
|
|
31,449
|
|
|
14,025
|
|
Comprehensive (loss) income
|
$
|
(22,251
|
)
|
|
$
|
567
|
|
|
$
|
21,982
|
|
|
$
|
(24,502
|
)
|
Basic (losses) earnings per share
(4)
|
$
|
(0.27
|
)
|
|
$
|
0.64
|
|
|
$
|
0.52
|
|
|
$
|
0.23
|
|
Diluted (losses) earnings per share
(4)
|
$
|
(0.27
|
)
|
|
$
|
0.60
|
|
|
$
|
0.49
|
|
|
$
|
0.22
|
|
|
|
(1)
|
During the three months ended December 31, 2017, the Company recorded
$75.0 million
of transaction-related costs associated with the change in fair value of contingent consideration. During the three months ended September 30, 2017, transaction-related costs consisted of
$6.4 million
of fees incurred in connection with the acquisition of Symphony Health,
$5.3 million
of stock-based compensation expense related to the release of the transfer restrictions on vested options, and
$1.0 million
of third-party fees incurred in connection with the August 2017 secondary offering; these amounts were offset by a
$1.0 million
adjustment to the change in fair value of contingent consideration.
|
As discussed in Note 2 - Significant Accounting Policies, the Company made an accounting policy election to present changes in the fair value of contingent consideration as part of income from operations during the fourth quarter of 2017. As a result, the Company reclassified
$0.1 million
of costs in both the three months ended March 31, 2017 and June 30, 2017, as well as a
$1.0 million
benefit during the three month ended September 30, 2017, into income from operations.
|
|
(2)
|
During the three months ended September 30, 2017 and December 31, 2017, the Company recorded a benefit from income taxes of
$18.2 million
and
$12.5 million
, respectively. The benefit was due primarily to (i) the benefit realized from the tax deduction of stock awards in excess of the amount recognized in the financial statements per guidance under ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”, (ii) the release of the valuation allowance
|
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
against the federal net deferred tax assets, and additionally during the three months ended December 31, 2017 (iii) the U.S. federal rate decrease effect on an overall net deferred tax liability due to the recent law changes in the Tax Cuts and Jobs Act.
|
|
(3)
|
During the three months ended September 30, 2017 and December 31, 2017, the Company recorded a loss on extinguishment of debt of
$3.1 million
and
$11.9 million
, respectively. The loss on extinguishment of debt recorded during the three months ended September 30, 2017 related to the Incremental Borrowings on the Company’s term debt. The loss on extinguishment of debt recorded during the three months ended December 31, 2017 related to the refinancing of the Company’s 2016 Credit Facilities and the redemption of the Company's Senior Notes. Refer to Note 9, Current Borrowings and Long-Term Debt, for additional information regarding the items noted above.
|
|
|
(4)
|
The sum of the quarterly per share amounts may not equal per share amounts reported for year‑to‑date periods. This is due to changes in the number of weighted average shares outstanding and the effects of rounding for each period.
|
|
|
(5)
|
Transaction-related costs for the three months ended March 31, 2016, June 30, 2016 and December 31, 2016 were
$28.9 million
,
$2.9 million
and
$13.0 million
, respectively. There were
no
transaction-related costs for the three months ended September 30, 2016. Transaction-related costs primarily relate to costs incurred in connection with the March, May and November 2016 secondary offerings and receivables financing agreement. These costs include
$42.2 million
of non-cash stock-based compensation expense and
$2.7 million
of third-party fees.
|
|
|
(6)
|
During the three months ended March 31, 2016 and December 31, 2016, the Company recorded a loss on extinguishment of debt of
$21.5 million
and
$16.7 million
, respectively. The loss on extinguishment of debt recorded during the three months ended March 31, 2016 related to the cash tender offer on the Company’s Senior Notes. The loss on extinguishment of debt recorded during the three months ended December 31, 2016 related to the refinancing of the Company’s 2013 Credit Facilities. Refer to Note 9, Current Borrowings and Long-Term Debt, for additional information regarding the cash tender on the Senior Notes and the 2013 Credit Facilities refinancing.
|
(23) Subsequent Events
On January 5, 2018, the Company entered into two new interest rate swaps in order to minimize its exposure to variable rate debt and also to replace interest rate swaps maturing in September 2018. The first interest rate swap has an aggregate notional amount of
$375.0 million
, an effective date of January 8, 2018, and a maturity date of December 6, 2020. The second interest rate swap has an aggregate notional amount of
$250.0 million
, an effective date of September 6, 2018, and a maturity date of September 6, 2020.
In February 2018, the Company made an earn-out payment of
$114.7 million
to the former shareholders of Symphony Health. For further discussion of the earn-out liability, refer to Note 4 - Business Combinations.