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.
Our discussion and analysis below is focused on our financial results and liquidity and capital resources for the years ended December 31, 2019 and 2018, including year-over-year comparisons of our financial performance and condition for these years. Discussion and analysis of the year ended December 31, 2017 specifically, as well as the year-over-year comparison of our financial performance and condition for the years ended December 31, 2018 and 2017, are located in Part II, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 28, 2019.
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, immunology, 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.
How We Assess the Performance of Our Business
We are managed through two reportable segments, (i) Clinical Research and (ii) Data Solutions. Our chief operating decision maker uses segment 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, 2019 and 2018 were $3,024.0 million and $3,023.6 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, 2019 and 2018, we had $360.4 million and $378.8 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, 2019 and 2018 was $4.7 billion and $4.2 billion, respectively.
Industry Trends
ISR estimated in its 2019 Market Report that the size of the worldwide CRO market was approximately $39 billion in 2018 and will grow at a 7.5% CAGR to $56 billion in 2023. 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.
Sources of Revenue
Total revenue is comprised of revenue from the provision of our services, and revenue from reimbursable expenses and reimbursable investigator grants, that are incurred while providing our services. We do not have any material product revenue.
On January 1, 2018, we adopted ASC 606 “Revenue from Contracts with Customers,” or ASC 606, using the modified retrospective method for all contracts that were not completed as of January 1, 2018. Thus, in this Part II Item 7 and elsewhere in this report, we report 2019 and 2018 fiscal year revenue under the modified retrospective method of ASC 606, and continue to report comparative prior period information for the 2017 fiscal year under the accounting standards in effect for that period. See Note 3 to our audited consolidated financial statements found elsewhere in this Annual Report on Form 10-K for additional details regarding our sources of revenue.
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 monitor and measure costs as a percentage of revenue, excluding reimbursement revenue from reimbursable expenses, rather than total revenue, as we believe this is a more meaningful comparison and better reflects the operations of our business.
Direct Costs (Exclusive of Depreciation and Amortization)
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% and 96.0% for the years ended December 31, 2019 and 2018, respectively. The cost of labor procured through staffing agencies is included in these percentages and represents 3.1% and 4.5% of the Clinical Research segment's total direct costs for the years ended December 31, 2019 and 2018, 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% and 4.0% for the years ended December 31, 2019 and 2018, 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 73.3% and 73.0% for the years ended December 31, 2019 and 2018, respectively. Labor-related charges, such as salaries, benefits and incentive compensation for our employees, were 20.2% and 20.3% of the Data Solutions segment's total direct costs for the years ended December 31, 2019 and 2018, respectively. Our remaining direct costs are items such as travel, meals, and supplies and were 6.5% and 6.7% of the Data Solutions segment's total direct costs for the years ended December 31, 2019 and 2018, respectively.
Historically, direct costs have increased with an increase in revenue. The future relationship between direct costs and revenue may vary from historical relationships. Direct costs as a percentage of revenue were 50.2% and 52.2%, during the years ended December 31, 2019 and 2018, respectively. Several factors will cause direct costs to decrease as a percentage of revenue. Deployment of our billable staff in an optimally efficient manner has the greatest impact on our ratio of direct cost to 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 revenue: our staff are not fully deployed, as is the case when there are unforeseen cancellations or delays; our staff are accomplishing tasks at levels of effort that exceed budget, such as rework; and pricing pressure from increased competition.
Reimbursable Expenses
We incur out-of-pocket costs that are reimbursable by our customers. 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 do not pay independent physician investigators until funds are received from the applicable clients. We include these out-of-pocket costs and investigator fees as reimbursable expenses in our consolidated statements of operations. Reimbursable expenses are not included in our backlog because they are pass-through costs to our clients.
We believe that the fluctuations in reimbursable expenses are not meaningful to our economic performance given that such costs are passed through to the client. The reimbursable expenses are included in our measure of progress for our long-term contracts.
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 include fees associated with our secondary offerings, stock-based compensation expense related to the transfer restrictions on vested options, the amendment to our accounts receivable financing agreement, costs associated with acquisition related earn-out liabilities, and expenses associated with our acquisitions.
Loss on Modification or Extinguishment of Debt
Loss on modification or extinguishment of debt consists of costs incurred in connection with debt refinancing or incremental borrowings under our credit facilities and the write-off of previously unamortized debt financing costs that were expensed as a result of voluntary debt repayments.
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 four 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.
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 has enhanced 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 has allowed 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 5 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 enabled 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 the TDC joint venture. The TDC joint venture is based in Japan and is owned by us (50%) and Takeda (50%). On May 31, 2019, per the terms of the agreement, the TDC joint venture dissolved and the Company acquired Takeda's interest for $4.1 million.
See Note 4 and Note 5 to our audited consolidated financial statements found elsewhere in this Annual Report on Form 10-K for additional information with respect to joint ventures.
Exchange Rate Fluctuations
The majority of our foreign operations transact in the Euro, or EUR, or British pound, or GBP. As a result, our revenue and expenses are subject to exchange rate fluctuations with respect to these currencies. We have translated these currencies into U.S. dollars using the following average exchange rates:
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Years Ended December 31,
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2019
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2018
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2017
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U.S. dollars per:
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|
|
|
|
Euro
|
1.12
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|
|
1.18
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|
|
1.13
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British pound
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1.28
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|
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1.33
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1.29
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Results of Operations
Consolidated Results of Operations for the Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018
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Years Ended December 31,
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2019
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2018
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(in thousands)
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|
|
|
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Revenue
|
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$
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3,066,262
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|
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$
|
2,871,922
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|
Operating expenses:
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|
|
|
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Direct costs (exclusive of depreciation and amortization)
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1,539,541
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|
|
1,500,226
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Reimbursable expenses
|
|
650,080
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|
|
570,405
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|
Selling, general and administrative expenses
|
|
394,925
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|
|
371,795
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|
Transaction-related costs
|
|
1,835
|
|
|
35,817
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|
Depreciation and amortization expense
|
|
114,898
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|
|
112,247
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|
Loss on disposal of fixed assets
|
|
1,058
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|
|
120
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|
Income from operations
|
|
363,925
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|
|
281,312
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Interest expense, net
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|
(51,987
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)
|
|
(57,399
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)
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Loss on modification or extinguishment of debt
|
|
(3,928
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)
|
|
(952
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)
|
Foreign currency losses, net
|
|
(2,257
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)
|
|
(1,043
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)
|
Other income (expense), net
|
|
174
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|
|
(371
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)
|
Income before income taxes and equity in income of unconsolidated joint ventures
|
|
305,927
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|
|
221,547
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|
Provision for income taxes
|
|
62,808
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|
|
67,232
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|
Income before equity in income of unconsolidated joint ventures
|
|
243,119
|
|
|
154,315
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|
Equity in income of unconsolidated joint ventures, net of tax
|
|
—
|
|
|
143
|
|
Net income
|
|
243,119
|
|
|
154,458
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|
Net income attributable to noncontrolling interest
|
|
(99
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)
|
|
(553
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)
|
Net income attributable to PRA Health Sciences, Inc.
|
|
$
|
243,020
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|
|
$
|
153,905
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|
Revenue increased by $194.3 million, or 6.8%, from $2,871.9 million during the year ended December 31, 2018 to $3,066.3 million during the year ended December 31, 2019. Revenue for the year ended December 31, 2019 benefited from an increase in billable hours, an increase in the effective rate of hours billed on our studies, offset by an unfavorable impact of $30.9 million from foreign currency exchange rate fluctuations. The growth in 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, more effective sales efforts and the growth in the overall CRO market. The increase in our effective rate of 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 services that we provide to those clients.
Direct costs increased by $39.3 million, or 2.6%, from $1,500.2 million during the year ended December 31, 2018 to $1,539.5 million during the year ended December 31, 2019. Salaries and related benefits in our Clinical Research segment increased $69.2 million as we continue to hire billable staff to ensure appropriate staffing levels for our current studies and future growth and a favorable impact of $36.3 million from foreign currency exchange rate fluctuations. Direct costs as a percentage of revenue decreased from 52.2% during the year ended December 31, 2018 to 50.2% during the year ended December 31, 2019. The change in direct costs as a percentage of revenue was primarily due to the favorable impact of foreign currency exchange rate fluctuations and the increased utilization of our staff.
Reimbursable expenses increased by $79.7 million from $570.4 million during the year ended December 31, 2018 to $650.1 million during the year ended December 31, 2019. We believe that the fluctuations in reimbursable costs from period to period are not meaningful to our underlying performance over the full terms of the relevant contracts.
Selling, general and administrative expenses increased by $23.1 million, or 6.2%, from $371.8 million during the year ended December 31, 2018 to $394.9 million during the year ended December 31, 2019. The increase in selling, general and administrative expenses is primarily due to an increase in salaries and related benefits, including stock-based compensation expense, as we continue to hire staff. In addition, we continue to expand our infrastructure to support our growing business. Selling, general and administrative expenses as a percentage of revenue remained consistent at 12.9% during the years ended December 31, 2018 and December 31, 2019.
During the year ended December 31, 2019, we incurred transaction-related expenses of $1.8 million. These costs consist of $0.6 million of third-party costs incurred in connection with our September 2019 secondary offering and $1.3 million of expenses related to the acquisition of Care Innovations, Inc., which closed on January 7, 2020. During the year ended December 31, 2018, we incurred transaction-related expenses of $35.8 million. These costs consisted of $32.6 million for changes in the estimated fair value of contingent consideration related to our prior acquisitions, $1.4 million related to Symphony Health retention bonuses that were reimbursed by the seller, $0.5 million of third-party costs incurred in connection with our August 2018 secondary offering, $0.8 million of stock-based compensation expense related to the release of a portion of the transfer restrictions on vested options, and $0.5 million of third-party fees associated with the amendment to our accounts receivable financing agreement.
Depreciation and amortization expense increased by $2.7 million, or 2.4%, from $112.2 million during the year ended December 31, 2018 to $114.9 million during the year ended December 31, 2019. Depreciation and amortization expense as a percentage of revenue was 3.9% during the year ended December 31, 2018 and 3.7% during the year ended December 31, 2019. The increase in depreciation and amortization expense is primarily due to increased depreciation expense related to an increase in fixed assets, offset by a decrease in the amortization expense of our intangible assets.
Interest expense, net decreased by $5.4 million from $57.4 million during the year ended December 31, 2018 to $52.0 million during the year ended December 31, 2019. Interest expense on borrowings under our Senior Secured Credit Facility decreased by $6.2 million, which is primarily due to a decrease in the weighted average principal balance outstanding during the year ended December 31, 2019 as well as lower interest rates during the year. Additionally, there was a decrease of $0.9 million related to the amortization of terminated interest rate swaps and amortization of debt issuance costs. This was offset by interest expense on borrowings under our accounts receivable financing agreement, which increased by $1.6 million, primarily due to an increase in the weighted average balance principal balance.
Loss on modification or extinguishment of debt was $3.9 million during the year ended December 31, 2019 compared to $1.0 million during the year ended December 31, 2018. The loss on modification or extinguishment of debt during the year ended December 31, 2019 is related to previously capitalized unamortized debt financing costs as well as new fees incurred that were expensed as a result of the refinancing of our credit facilities during the year. The loss on modification or extinguishment of debt during the year ended December 31, 2018 is related to previously capitalized unamortized debt financing costs that were expensed as a result of voluntary debt repayments made during the year.
Foreign currency losses, net changed by $1.2 million from $1.0 million during the year ended December 31, 2018 to $2.3 million during the year ended December 31, 2019. 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. The increase in foreign currency losses, net during the year ended December 31, 2019 is primarily due to movement of the U.S. dollar versus the British pound and the Euro.
Provision for income taxes decreased by $4.4 million from $67.2 million during the year ended December 31, 2018 to $62.8 million during the year ended December 31, 2019. Our effective tax rate was 20.5% for the year ended December 31, 2019 compared to 30.3% during the year ended December 31, 2018. The decrease in our effective tax rate was primarily attributable to us updating our analysis of Base Erosion and Anti-abuse Tax, which reflects revisions to contractual arrangements.
Segment Results of Operations for the Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018
Clinical Research
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|
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Years Ended December 31,
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2019
|
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2018
|
(in thousands)
|
Revenue
|
$
|
2,812,969
|
|
|
$
|
2,622,409
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|
Segment profit
|
796,823
|
|
|
717,201
|
|
Segment profit %
|
28.3
|
%
|
|
27.3
|
%
|
Revenue increased by $190.6 million, or 7.3%, from $2,622.4 million during the year ended December 31, 2018 to $2,813.0 million during the year ended December 31, 2019. Revenue for the year ended December 31, 2019 benefited from an increase in billable hours and an increase in the effective rate of hours billed on our studies. The growth in 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. 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 services that we provide to those clients.
Segment profit increased by $79.6 million, or 11.1%, from $717.2 million during the year ended December 31, 2018 to $796.8 million during the year ended December 31, 2019 primarily due to an increase in revenue. Segment profit as a percentage of revenue increased from 27.3% during the year ended December 31, 2018 to 28.3% for the same period in 2019. The increase in segment profit is primarily due to the favorable impact of foreign currency exchange rate fluctuations and the increased utilization of our staff.
Data Solutions
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
(in thousands)
|
|
|
|
Revenue
|
$
|
253,293
|
|
|
$
|
249,513
|
|
Segment profit
|
79,818
|
|
|
84,090
|
|
Segment profit %
|
31.5
|
%
|
|
33.7
|
%
|
Revenue increased by $3.8 million, or 1.5%, from $249.5 million during the year ended December 31, 2018 to $253.3 million during the year ended December 31, 2019. The increase in revenue was related to an increase in the volume of data services provided during the year ended December 31, 2019 as compared to the same period for 2018. Service in kind revenue was $20.5 million and $21.8 million for the year ended December 31, 2019 and 2018, respectively.
Segment profit decreased by $4.3 million, or 5.1%, from $84.1 million during the year ended December 31, 2018 to $79.8 million during the year ended December 31, 2019. The decline in segment profit is attributable to higher data costs as we have expanded our sources of data and have experienced increased costs on the renewal of existing contracts, as well as an increase in salaries and benefits as we have increased headcount to support segment growth. Segment profit as a percentage of revenue decreased from 33.7% during the year ended December 31, 2018 to 31.5% for the same period in 2019 primarily due to the factors noted above.
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.
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, 2019, we had approximately $236.2 million of cash and cash equivalents of which $86.9 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 $3,087.3 million during the year ended December 31, 2019, including $325.3 million of funds received from customers to pay independent physician investigators, or investigators, as compared to $2,894.4 million during the year ended December 31, 2018, including $293.6 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
During the year ended December 31, 2019, net cash provided by operations was $253.6 million, compared to $329.8 million in 2018. Cash provided by operating activities decreased from the prior year primarily due to an increase in cash outflows associated with acquisition related earn-out payments as well as an increase in cash outflows from working capital. The changes in working capital were driven by changes in our accounts receivable, unbilled services and advanced billings accounts, as a result of a slight increase in our days sales outstanding compared to the prior year.
Cash Flow from Investing Activities
Net cash used in investing activities was $73.2 million during the year ended December 31, 2019, compared to $55.5 million in 2018. The increase in cash outflows is attributable to spending on capital expenditures, as we made increased investments in our information technology infrastructure and the build-out of new office space added to support our growing business.
Cash Flow from Financing Activities
Net cash used in financing activities was $90.7 million during the year ended December 31, 2019 compared to $319.5 million for the same period of 2018. During the year ended December 31, 2019, our long-term debt balance, including borrowings under our revolving line of credit, increased by $172.3 million compared to a $265.9 million decrease due to payments on our debt during the year ended December 31, 2018. Cash flows for the year ended December 31, 2019 include a $300.0 million cash outflow for the repurchase and retirement of common stock. The year ended December 31, 2018 also included a $79.7 million cash outflow associated with the portion of acquisition related earn-out payments being classified as a financing activity.
Share Repurchase Program
On August 30, 2019, our board of directors approved the Repurchase Program, authorizing the repurchase of up to $500.0 million of our common stock in an open market purchase, privately-negotiated transactions, secondary offerings, block trades or otherwise in accordance with all applicable securities laws and regulations, including through Rule 10b5-1 trading plans and pursuant to Rule 10b-18 under the Exchange Act. The Repurchase Program does not obligate us to repurchase any particular amount of our common stock, and it may be modified, suspended or terminated at any time at the board of directors' discretion. The Repurchase Program expires on December 31, 2021.
Concurrent with the September 2019 secondary offering, we repurchased from the underwriter, and subsequently retired, 3,079,765 shares at a price of $97.41 per share, for an aggregate purchase price of approximately $300.0 million.
As of December 31, 2019, we have remaining authorization to repurchase up to $200.0 million of its common stock under the Repurchase Program.
Indebtedness
On October 28, 2019, we entered into a credit agreement providing for senior secured credit facilities, or the Senior Secured Credit Facility, totaling $1,750.0 million.
Senior Secured Credit Facility
The Senior Secured Credit Facility provides senior secured financing of up to $1,750.0 million, consisting of:
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•
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the First Lien Term Loan in an aggregate principal amount of $1,000.0 million; and
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•
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the Revolver in an aggregate principal amount of up to $750.0 million.
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The 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 Senior Secured Credit Facility 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) $500.0 million, plus (b) all voluntary prepayments and corresponding voluntary commitment reductions of the Senior Secured Credit Facility, 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 First Lien Term Loan and the Revolver bear interest at a rate equal to, at our option, either (a) LIBOR for the relevant interest period, plus an applicable margin; provided that, solely with respect to the 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 First Lien Term Loan is based on our ratio of total debt to EBITDA per the table below:
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Pricing
Level
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Total indebtedness
to EBITDA Ratio
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Letter of
Credit
Fees
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ABR Margin
Rate
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Adjusted LIBOR
Margin Rate
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Commitment
Fees
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I
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> 3.25x
|
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2.00%
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1.00%
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|
2.00%
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|
0.35%
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II
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|
< 3.25x but > 2.50x
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|
1.75%
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|
0.75%
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|
1.75%
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|
0.30%
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III
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|
< 2.50x but > 1.75x
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1.50%
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|
0.50%
|
|
1.50%
|
|
0.25%
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IV
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|
< 1.75x but > 1.00x
|
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1.25%
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|
0.25%
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1.25%
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0.20%
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V
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< 1.00x
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1.00%
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—%
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1.00%
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0.15%
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In addition to paying interest on outstanding principal under the Revolver, we are required to pay a commitment fee to the lenders under the 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, 2019, the interest rate on the First Lien Term Loan was 3.21%.
Prepayments
The Senior Secured Credit Facility requires us to prepay outstanding term loans, subject to certain exceptions, with:
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•
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100% of the net cash proceeds of the incurrence or issuance of certain debt; and
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•
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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.
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The foregoing mandatory prepayments will be applied first to accrued interest and fees and second, to the scheduled installments of principal of the Senior Secured Credit Facility in direct order of maturity.
We may voluntarily repay outstanding loans under the Senior Secured Credit Facility 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 First Lien Term Loan is a floating rate term loan with scheduled, fixed quarterly principal payments of $6.3 million to be made quarterly until October 28, 2024.
We have the option of one-, two-, three- or six-month borrowing terms under the Revolver. Principal amounts outstanding under the Revolver are due and payable in full at maturity, on or about October 28, 2024.
Guarantee and Security
All obligations of the borrower under the Senior Secured Credit Facility 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 Senior Secured Credit Facility, 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 Senior Secured Credit Facility contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to:
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•
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make investments and acquisitions;
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•
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incur or guarantee additional indebtedness;
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•
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enter into mergers or consolidations and other fundamental changes;
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•
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conduct sales and other dispositions of property or assets;
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•
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enter into sale-leaseback transactions or hedge agreements;
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•
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prepay subordinated debt;
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•
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pay dividends or make other payments in respect of capital stock;
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•
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change the line of business;
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•
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enter into transactions with affiliates;
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|
•
|
enter into burdensome agreements with negative pledge clauses and clauses restriction; and
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|
•
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subsidiary distributions.
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Our Senior Secured Credit Facility contains 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 Senior Secured Credit Facility documents; (vii) monetary judgment defaults; (viii) certain ERISA matters; and (ix) certain change of control events.
The Senior Secured Credit Facility 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 Senior Secured Credit Facility allows us 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 Senior Secured Credit Facility also contains 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. On May 31, 2018, we amended our accounts receivable financing agreement. The amendment increased the agreement's borrowing capacity, decreased the applicable margin, and extended the termination date to May 31, 2021, unless terminated earlier pursuant to its terms.
We may borrow up to $200.0 million under the accounts receivable financing agreement, 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, 2019, the outstanding balance was $170.0 million.
The accounts receivable financing agreement matures on May 31, 2021, unless terminated earlier pursuant to its terms.
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 1.25%. As of December 31, 2019 and 2018, the interest rate on the accounts receivable financing agreement was 3.22% and 3.72%, respectively. 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 that 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.
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, 2019:
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|
|
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
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Payments Due by Period
|
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Less than 1
year
|
|
1 - 3 years
|
|
3 - 5 years
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|
More than 5
years
|
|
Total
|
|
(in thousands)
|
Principal payments on long-term debt (1)
|
$
|
25,000
|
|
|
$
|
220,000
|
|
|
$
|
1,013,800
|
|
|
$
|
—
|
|
|
$
|
1,258,800
|
|
Interest payments on long-term debt (1)
|
40,818
|
|
|
64,390
|
|
|
53,886
|
|
|
—
|
|
|
159,094
|
|
Service purchase commitments (2)
|
129,866
|
|
|
88,450
|
|
|
6,918
|
|
|
67
|
|
|
225,301
|
|
Operating leases
|
45,162
|
|
|
79,580
|
|
|
47,759
|
|
|
87,454
|
|
|
259,955
|
|
Less: sublease income
|
(161
|
)
|
|
(242
|
)
|
|
(38
|
)
|
|
—
|
|
|
(441
|
)
|
Uncertain income tax positions (3)
|
—
|
|
|
—
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|
|
—
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|
|
—
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|
|
—
|
|
Total
|
$
|
240,685
|
|
|
$
|
452,178
|
|
|
$
|
1,122,325
|
|
|
$
|
87,521
|
|
|
$
|
1,902,709
|
|
|
|
(1)
|
Principal payments are based on the terms contained in our credit agreements. Principal payments include payments on the senior secured credit facility and the accounts receivable financing agreement. Interest payments are based on the interest rate in effect on December 31, 2019.
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(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.
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(3)
|
As of December 31, 2019, our liability related to uncertain income tax positions was approximately $30.4 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.
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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.
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
Revenue is generated from contracts with customers. Revenue is recognized when control of the performance obligation is transferred to the customer, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those services. Our long-term arrangements for clinical research services are considered a single performance obligation because we provide a highly-integrated service. Revenue is recognized based on the proportion of total contract costs incurred to date to the estimated total contract costs through completion. We use the cost-to-cost measure of progress for these contracts because it best depicts the transfer of control to the customer as the performance obligation is fulfilled. The accounting for these long-term contracts involves significant judgment, particularly as it relates to the process of estimating total contract costs, which includes direct costs, reimbursable out-of-pocket expenses, reimbursable investigator fees, and the contract profit. The contracts provide for the right to payment for the work performed to date, which is invoiced to the customer as work progresses, either based on units performed or the achievement of billing milestones. We review the estimated total contract costs to determine if these estimates are still accurate and, if necessary, we adjust the total estimated costs. During our 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. 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. We assume that actual costs incurred to date under the contract are a valid basis for estimating future costs. Should our 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. Clinical research services delivered under fee-for-service arrangements are recognized over time. Revenue from time and materials contracts is recognized as hours are incurred.
Our Data Solutions segment provides data reports and analytics to customers based on agreed-upon specifications. If a customer requests more than one type of data report or series of data reports within a contract, each distinct type of data report is a separate performance obligation. When multiple performance obligations exist, the transaction price is allocated to performance obligations on a relative standalone selling price basis. In cases where we contract to provide a series of data reports, or in some cases data, we recognize revenue over time using the ‘units delivered’ output method as the data or reports are delivered. Certain Data Solutions arrangements include upfront customization or consultative services for customers. Under these arrangements, we contract with a customer to carry out a specific study, ultimately resulting in delivery of a custom report or data product. These arrangements are a single performance obligation given the integrated nature of the service being provided. We typically recognize revenue under these contracts over time, using an output-based measure, generally time elapsed, to measure progress and transfer of control of the performance obligation to the customer.
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 revenue recognition policies require that we make an accurate assessment of our customers’ creditworthiness. Approximately 17% 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, 2019, 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.
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 $8.1 million was required as of December 31, 2019 relating to certain state net operating loss carryforwards, foreign net operating loss carryforwards, certain foreign deferred tax assets 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, 2019, we had recorded a liability for uncertain tax positions of $30.4 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 $30.4 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:
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•
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Since the Company does not have sufficient history to estimate the expected volatility of its common stock price, expected volatility is based upon a blended approach that utilizes the volatility of the Company's common stock for periods in which the Company has sufficient information and the volatility for selected reasonably similar publicly traded companies for which historical information is available.
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•
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The risk‑free interest rate assumption is based upon observed interest rates appropriate for the term of our employee stock options.
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•
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The dividend yield assumption is based on the history and expectation of dividend payouts.
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•
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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.
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•
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We account for forfeitures as they occur.
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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, 2019, 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 2019, as part of our annual impairment analysis, we performed the qualitative assessment for approximately $1.0 billion, or 68.3% of our goodwill balance of $1.5 billion, which relates to our EDS, PR, and SS business units, and for our indefinite-lived trade name intangible asset balances.
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. We performed our impairment test for the Data Solutions operating segment during the fourth quarter of 2019. It was concluded that the estimated fair value of the Data Solutions operating segment exceeded its carrying value by approximately $185 million, or 27%.
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 3 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10‑K.
Fair Value Measurements on a Recurring Basis
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, were liabilities of $3.0 million and assets of $3.3 million at December 31, 2019 and 2018, respectively.
No other liabilities or assets are remeasured at fair value.
Recent Accounting Standards
For information on new accounting standards 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.
Dividend History
We have not declared or paid dividends during 2019, 2018 and 2017.
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 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 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 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, 2019. 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, 2019 was effective.
The Company’s independent registered public accounting firm has issued a report on the Company’s internal control over financial reporting. This report appears in this Annual Report on Form 10-K.
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/s/ Colin Shannon
|
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/s/ Michael J. Bonello
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Colin Shannon
|
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Michael J. Bonello
|
President, Chief Executive Officer and Chairman of the Board of Directors
|
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Executive Vice President and Chief Financial Officer
|
(Principal Executive Officer)
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(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 Financial Statements
We have audited the accompanying consolidated balance sheets of PRA Health Sciences, Inc. and subsidiaries (the "Company") as of December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with the 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, 2019, 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 21, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.
Adoption of New Accounting Standards
As discussed in Note 2 to the financial statements, effective January 1, 2019, the Company adopted Accounting Standards Codification (ASC) Topic 842, “Leases,” using the modified retrospective approach, and as discussed in Note 3 to the financial statements, effective January 1, 2018, the Company adopted of ASC Topic 606, “Revenue from Contracts with Customers,” using the modified retrospective method.
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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition - Clinical Research - Refer to Note 3 to the Financial Statements
Critical Audit Matter Description
The Company recognizes long-term clinical research revenue over the contract term (“over time”) as the work progresses, due to the Company’s right to payment for work performed to date. The long-term arrangements for clinical research services are considered a single performance obligation because the Company provides a highly-integrated service. Revenue is recognized based on the proportion of total contract costs incurred to date to the estimated total contract costs through completion. The
Company uses the cost-to-cost measure of progress for these contracts because it best depicts the transfer of control to the customer as the performance obligation is fulfilled. The accounting for these long-term contracts involves significant judgment, particularly as it relates to the process of estimating total contract costs, which includes direct costs, reimbursable out-of-pocket expenses, reimbursable investigator fees, and profit. The contracts provide for the right to payment for the work performed to date, which is invoiced to the customer as work progresses, either based on units performed or the achievement of billing milestones.
Given the judgments necessary to estimate total costs for the performance obligation used to recognize revenue for certain long-term clinical research contracts, auditing such estimates required extensive audit effort due to the volume and complexity of long-term clinical research contracts and the high degree of auditor judgment applied when performing audit procedures and evaluating the results of those procedures.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s estimates of total costs for the performance obligation used to recognize revenue for certain long-term clinical research contracts included the following, among others:
|
|
•
|
We tested the effectiveness of controls over long-term contract revenue, including those over the estimates of total costs for performance obligations.
|
|
|
•
|
We selected a sample of long-term clinical research contracts and performed the following:
|
|
|
•
|
Evaluated whether the contracts were properly included in management’s calculation of long-term contract revenue based on the terms and conditions of each contract, including whether continuous transfer of control to the customer occurred as progress was made toward fulfilling the performance obligation.
|
|
|
•
|
Compared the transaction price to the consideration expected to be received based on current rights and obligations under the contracts and any modifications that were agreed upon with the customers.
|
|
|
•
|
Tested management’s identification of the distinct performance obligation(s).
|
|
|
•
|
Tested the accuracy and completeness of the total costs incurred to date for the performance obligation.
|
|
|
•
|
Evaluated the estimates of total cost for the performance obligation by:
|
|
|
•
|
Comparing costs incurred to date to the costs management estimated to be incurred to date.
|
|
|
•
|
Evaluating management’s ability to achieve the estimates of total cost by performing corroborating inquiries with the Company’s project managers and financial analysts, and comparing the estimates to management’s work plans and cost estimates.
|
|
|
•
|
Tested the mathematical accuracy of management’s calculation of revenue for the performance obligation.
|
|
|
•
|
Performed data analytics to assess contract balances.
|
|
|
•
|
We evaluated management’s ability to estimate total costs accurately by comparing actual costs and margins to management’s historical estimates for performance obligations that have been fulfilled.
|
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
February 21, 2020
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, 2019, 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, 2019, 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, 2019, of the Company and our report dated February 21, 2020 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of ASC, Topic 842, “Leases”.
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 21, 2020
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
236,232
|
|
|
$
|
144,221
|
|
Restricted cash
|
38
|
|
|
488
|
|
Accounts receivable and unbilled services, net
|
658,517
|
|
|
568,099
|
|
Prepaid expenses and other current assets
|
88,141
|
|
|
66,605
|
|
Income taxes receivable
|
2,639
|
|
|
2,942
|
|
Total current assets
|
985,567
|
|
|
782,355
|
|
Fixed assets, net
|
180,716
|
|
|
154,764
|
|
Operating lease right-of-use assets
|
186,343
|
|
|
—
|
|
Goodwill
|
1,502,756
|
|
|
1,494,762
|
|
Intangible assets, net
|
638,577
|
|
|
704,446
|
|
Deferred tax assets
|
10,282
|
|
|
8,954
|
|
Deferred financing fees
|
3,377
|
|
|
1,373
|
|
Other assets
|
36,812
|
|
|
39,813
|
|
Total assets
|
$
|
3,544,430
|
|
|
$
|
3,186,467
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Current portion of borrowings under credit facilities
|
$
|
88,800
|
|
|
$
|
—
|
|
Current portion of long-term debt
|
25,000
|
|
|
—
|
|
Accounts payable
|
55,293
|
|
|
43,734
|
|
Accrued expenses and other current liabilities
|
302,705
|
|
|
369,477
|
|
Income taxes payable
|
2,094
|
|
|
44,306
|
|
Current portion of operating lease liabilities
|
37,603
|
|
|
—
|
|
Advanced billings
|
505,714
|
|
|
441,357
|
|
Total current liabilities
|
1,017,209
|
|
|
898,874
|
|
Deferred tax liabilities
|
78,511
|
|
|
100,712
|
|
Long-term debt, net
|
1,140,178
|
|
|
1,082,384
|
|
Long-term portion of operating lease liabilities
|
172,370
|
|
|
—
|
|
Other long-term liabilities
|
46,171
|
|
|
53,077
|
|
Total liabilities
|
2,454,439
|
|
|
2,135,047
|
|
Commitments and contingencies (Note 15)
|
|
|
|
|
|
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 -- 63,491,550 and 65,394,526 at December 31, 2019 and 2018, respectively
|
635
|
|
|
654
|
|
Additional paid-in capital
|
1,006,182
|
|
|
960,535
|
|
Accumulated other comprehensive loss
|
(160,108
|
)
|
|
(170,659
|
)
|
Retained earnings
|
243,282
|
|
|
254,500
|
|
Equity attributable to PRA Health Sciences, Inc. stockholders
|
1,089,991
|
|
|
1,045,030
|
|
Noncontrolling interest
|
—
|
|
|
6,390
|
|
Total stockholders' equity
|
1,089,991
|
|
|
1,051,420
|
|
Total liabilities and stockholders' equity
|
$
|
3,544,430
|
|
|
$
|
3,186,467
|
|
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,
|
|
2019
|
|
2018
|
|
2017
|
Revenue
|
$
|
3,066,262
|
|
|
$
|
2,871,922
|
|
|
$
|
2,259,389
|
|
Operating expenses:
|
|
|
|
|
|
Direct costs (exclusive of depreciation and amortization)
|
1,539,541
|
|
|
1,500,226
|
|
|
1,283,868
|
|
Reimbursable expenses
|
650,080
|
|
|
570,405
|
|
|
311,015
|
|
Selling, general and administrative expenses
|
394,925
|
|
|
371,795
|
|
|
321,987
|
|
Transaction-related costs
|
1,835
|
|
|
35,817
|
|
|
87,709
|
|
Depreciation and amortization expense
|
114,898
|
|
|
112,247
|
|
|
78,227
|
|
Loss on disposal of fixed assets
|
1,058
|
|
|
120
|
|
|
358
|
|
Income from operations
|
363,925
|
|
|
281,312
|
|
|
176,225
|
|
Interest expense, net
|
(51,987
|
)
|
|
(57,399
|
)
|
|
(46,729
|
)
|
Loss on modification or extinguishment of debt
|
(3,928
|
)
|
|
(952
|
)
|
|
(15,023
|
)
|
Foreign currency losses, net
|
(2,257
|
)
|
|
(1,043
|
)
|
|
(39,622
|
)
|
Other income (expense), net
|
174
|
|
|
(371
|
)
|
|
(304
|
)
|
Income before income taxes and equity in income of unconsolidated joint ventures
|
305,927
|
|
|
221,547
|
|
|
74,547
|
|
Provision for (benefit from) income taxes
|
62,808
|
|
|
67,232
|
|
|
(12,623
|
)
|
Income before equity in income of unconsolidated joint ventures
|
243,119
|
|
|
154,315
|
|
|
87,170
|
|
Equity in income of unconsolidated joint ventures, net of tax
|
—
|
|
|
143
|
|
|
123
|
|
Net income
|
243,119
|
|
|
154,458
|
|
|
87,293
|
|
Net income attributable to noncontrolling interest
|
(99
|
)
|
|
(553
|
)
|
|
(366
|
)
|
Net income attributable to PRA Health Sciences, Inc.
|
$
|
243,020
|
|
|
$
|
153,905
|
|
|
$
|
86,927
|
|
Net income per share attributable to common stockholders:
|
|
|
|
|
|
Basic
|
$
|
3.77
|
|
|
$
|
2.40
|
|
|
$
|
1.39
|
|
Diluted
|
$
|
3.68
|
|
|
$
|
2.32
|
|
|
$
|
1.32
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
Basic
|
64,506
|
|
|
64,123
|
|
|
62,437
|
|
Diluted
|
66,004
|
|
|
66,341
|
|
|
65,773
|
|
The accompanying notes are an integral part of the consolidated financial statements.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Net income
|
$
|
243,119
|
|
|
$
|
154,458
|
|
|
$
|
87,293
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
Foreign currency translation adjustments net of tax $(2,504), $4,670, and $0
|
9,083
|
|
|
(41,042
|
)
|
|
83,814
|
|
Unrealized (losses) gains on derivative instruments, net of income taxes of $(2,897), $1,007, and $96
|
(3,031
|
)
|
|
2,152
|
|
|
149
|
|
Reclassification adjustments:
|
|
|
|
|
|
Losses on derivatives included in net income, net of income taxes, $3,017, $1,649, and $2,699
|
3,156
|
|
|
4,828
|
|
|
4,156
|
|
Comprehensive income
|
252,327
|
|
|
120,396
|
|
|
175,412
|
|
Comprehensive income attributable to noncontrolling interest
|
(175
|
)
|
|
(680
|
)
|
|
(269
|
)
|
Comprehensive income attributable to PRA Health Sciences, Inc.
|
$
|
252,152
|
|
|
$
|
119,716
|
|
|
$
|
175,143
|
|
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
(Note 18)
|
|
Retained
Earnings
|
|
Non-controlling Interest
|
|
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
Total
|
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
|
|
Impact to retained earnings from adoption of ASC 606
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(60,587
|
)
|
|
—
|
|
|
(60,587
|
)
|
Balance at January 1, 2018
|
63,624
|
|
|
636
|
|
|
905,423
|
|
|
(136,470
|
)
|
|
100,595
|
|
|
5,710
|
|
|
875,894
|
|
Exercise of common stock options and employee stock purchase plan purchases
|
1,626
|
|
|
16
|
|
|
30,535
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30,551
|
|
Stock award distributions net of shares for tax withholding
|
145
|
|
|
2
|
|
|
(5,339
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,337
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
29,916
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
29,916
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
153,905
|
|
|
553
|
|
|
154,458
|
|
Other comprehensive loss, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
(34,189
|
)
|
|
—
|
|
|
127
|
|
|
(34,062
|
)
|
Balance at December 31, 2018
|
65,395
|
|
|
654
|
|
|
960,535
|
|
|
(170,659
|
)
|
|
254,500
|
|
|
6,390
|
|
|
1,051,420
|
|
Impact from adoption of ASU 2018-02, Reclassification of certain tax effects from accumulated other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
1,419
|
|
|
(1,419
|
)
|
|
—
|
|
|
—
|
|
Balance at January 1, 2019
|
65,395
|
|
|
654
|
|
|
960,535
|
|
|
(169,240
|
)
|
|
253,081
|
|
|
6,390
|
|
|
1,051,420
|
|
Exercise of common stock options, employee stock purchase plan purchases and other
|
879
|
|
|
9
|
|
|
45,790
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
45,799
|
|
Stock award distributions net of shares for tax withholding
|
298
|
|
|
3
|
|
|
(117
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(114
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
45,834
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
45,834
|
|
Acquisition of non-controlling interest
|
—
|
|
|
—
|
|
|
1,290
|
|
|
—
|
|
|
—
|
|
|
(6,565
|
)
|
|
(5,275
|
)
|
Repurchase and retirement of common stock
|
(3,080
|
)
|
|
(31
|
)
|
|
(47,150
|
)
|
|
—
|
|
|
(252,819
|
)
|
|
—
|
|
|
(300,000
|
)
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
243,020
|
|
|
99
|
|
|
243,119
|
|
Other comprehensive income, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
9,132
|
|
|
—
|
|
|
76
|
|
|
9,208
|
|
Balance at December 31, 2019
|
63,492
|
|
|
$
|
635
|
|
|
$
|
1,006,182
|
|
|
$
|
(160,108
|
)
|
|
$
|
243,282
|
|
|
$
|
—
|
|
|
$
|
1,089,991
|
|
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,
|
|
2019
|
|
2018
|
|
2017
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
$
|
243,119
|
|
|
$
|
154,458
|
|
|
$
|
87,293
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization expense
|
114,898
|
|
|
112,247
|
|
|
78,227
|
|
Amortization of debt issuance costs and discount
|
1,814
|
|
|
2,111
|
|
|
2,108
|
|
Amortization of terminated interest rate swaps
|
6,538
|
|
|
7,146
|
|
|
6,684
|
|
Stock-based compensation expense
|
45,834
|
|
|
29,143
|
|
|
12,616
|
|
Non-cash transaction related stock-based compensation expense
|
—
|
|
|
773
|
|
|
5,294
|
|
Unrealized foreign currency (gains) losses
|
(6,467
|
)
|
|
(3,307
|
)
|
|
39,700
|
|
Loss on modification or extinguishment of debt
|
519
|
|
|
952
|
|
|
15,023
|
|
Loss on disposal of fixed assets
|
1,058
|
|
|
120
|
|
|
358
|
|
Change in acquisition-related contingent consideration
|
—
|
|
|
34,538
|
|
|
74,969
|
|
Equity in income of unconsolidated joint ventures
|
—
|
|
|
(143
|
)
|
|
(123
|
)
|
Deferred income taxes
|
(23,907
|
)
|
|
11,665
|
|
|
(75,915
|
)
|
Other reconciling items
|
606
|
|
|
30
|
|
|
763
|
|
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:
|
|
|
|
|
|
Accounts receivable and unbilled services
|
(89,304
|
)
|
|
(17,017
|
)
|
|
(136,330
|
)
|
Prepaid expenses and other assets
|
(13,660
|
)
|
|
(18,931
|
)
|
|
1,762
|
|
Accounts payable and other liabilities
|
21,584
|
|
|
31,579
|
|
|
35,792
|
|
Income taxes
|
(31,029
|
)
|
|
5,241
|
|
|
10,640
|
|
Advanced billings
|
65,213
|
|
|
14,216
|
|
|
61,547
|
|
Payment of acquisition-related contingent consideration
|
(83,249
|
)
|
|
(35,029
|
)
|
|
—
|
|
Net cash provided by operating activities
|
253,567
|
|
|
329,792
|
|
|
220,408
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchase of fixed assets
|
(74,294
|
)
|
|
(55,880
|
)
|
|
(61,318
|
)
|
Proceeds from the sale of fixed assets
|
26
|
|
|
43
|
|
|
56
|
|
Cash received (paid) for interest on interest rate swap
|
667
|
|
|
181
|
|
|
(874
|
)
|
Return of joint venture capital contribution
|
418
|
|
|
—
|
|
|
—
|
|
Cash received from the sale of marketable securities
|
—
|
|
|
183
|
|
|
—
|
|
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
|
)
|
Net cash used in investing activities
|
(73,183
|
)
|
|
(55,473
|
)
|
|
(687,420
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
1,300,000
|
|
|
—
|
|
|
550,000
|
|
Repayment of long-term debt
|
(1,216,533
|
)
|
|
(224,394
|
)
|
|
(125,513
|
)
|
Proceeds from accounts receivable financing agreement
|
30,000
|
|
|
60,000
|
|
|
20,000
|
|
Repayment on accounts receivable financing agreement
|
(30,000
|
)
|
|
(10,000
|
)
|
|
(20,000
|
)
|
Borrowings on line of credit
|
233,800
|
|
|
—
|
|
|
121,500
|
|
Repayments of line of credit
|
(145,000
|
)
|
|
(91,500
|
)
|
|
(30,000
|
)
|
Payment of debt prepayment and debt extinguishment costs
|
—
|
|
|
—
|
|
|
(9,226
|
)
|
Payment for debt issuance costs
|
(4,541
|
)
|
|
—
|
|
|
(6,588
|
)
|
Acquisition of noncontrolling interest
|
(4,138
|
)
|
|
—
|
|
|
—
|
|
Proceeds from stock issued under employee stock purchase plan and stock option exercises
|
45,819
|
|
|
31,382
|
|
|
7,236
|
|
Taxes paid related to net shares settlement of equity awards
|
(114
|
)
|
|
(5,337
|
)
|
|
—
|
|
Repurchase and retirement of common stock
|
(300,000
|
)
|
|
—
|
|
|
—
|
|
Payment of acquisition-related contingent consideration
|
—
|
|
|
(79,663
|
)
|
|
(400
|
)
|
Net cash (used in) provided by financing activities
|
(90,707
|
)
|
|
(319,512
|
)
|
|
507,009
|
|
Effects of foreign exchange changes on cash, cash equivalents, and restricted cash
|
1,884
|
|
|
(2,988
|
)
|
|
3,555
|
|
Change in cash, cash equivalents, and restricted cash
|
91,561
|
|
|
(48,181
|
)
|
|
43,552
|
|
Cash, cash equivalents, and restricted cash, beginning of year
|
144,709
|
|
|
192,890
|
|
|
149,338
|
|
Cash, cash equivalents, and restricted cash, end of year
|
$
|
236,270
|
|
|
$
|
144,709
|
|
|
$
|
192,890
|
|
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, or the Company, is a full-service global contract research organization providing a broad range of product development and data solution services to 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.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP.
(2) Recent Accounting Standards
Recently Implemented Accounting Standards
Leases
On January 1, 2019, the Company adopted ASC Topic 842, “Leases,” or ASC 842, using the revised modified retrospective approach provided by ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements.” The revised modified retrospective approach recognizes the effects of initially applying the new leases standard as a cumulative effect adjustment to retained earnings as of the adoption date. Under this election, the provisions of ASC 840 apply to the accounting and disclosures for lease arrangements in the comparative periods in the Company's financial statements.
The adoption of ASC 842 resulted in the recognition of lease liabilities of $211.7 million (recorded as $31.9 million in short-term lease liabilities and $179.8 million in long-term lease liabilities) and $187.1 million of lease right-of-use, or ROU, assets as of January 1, 2019. Upon adoption of ASC 842, the Company had lease obligations associated with deferred rent, lease loss liabilities, above market lease liabilities, and tenant improvement allowances, totaling $25.7 million, that were reclassified to the lease ROU assets. The Company had prepaid rent balances, totaling $1.1 million, that were reclassified as a reduction of the current portion of operating lease liabilities. The adoption of ASC 842 did not impact the consolidated statements of operations, consolidated statements of cash flows, or earnings per share.
Financial Instruments - Targeted Improvements to Accounting for Hedging Activities
In August 2017, the Financial Accounting Standards Board, or 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 Company adopted this standard effective January 1, 2019 and the application of ASU No. 2017-12 did not have a material impact on the Company's consolidated financial statements.
Comprehensive Income - Reclassification of Certain Tax Effects
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 of 2017, or the 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 Company adopted this standard effective January 1, 2019 and the application of ASU No. 2018-02 resulted in a reclassification of $1.4 million from accumulated other comprehensive loss to retained earnings for the stranded tax effects resulting from the Act.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recently Issued Accounting Standards
Goodwill simplification
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. The adoption of ASU No. 2017-04 is not expected to have a material impact on the Company's consolidated financial statements.
Cloud computing
In August 2018, the FASB issued ASU No. 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," in order to expand on the FASB's guidance of capitalized costs incurred in a cloud computing arrangement. The amendments in this update require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The amendments to ASU No. 2018-15 are effective for the reporting period beginning after December 15, 2019, and interim periods therein. The adoption of ASU No. 2018-15 is not expected to have a material impact on the Company's consolidated financial statements.
Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The provisions of ASU 2016-13 modify the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology and require consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance is effective for the reporting period beginning after December 15, 2019, and the interim periods therein. The adoption of ASU 2016-13 is not expected to have a material impact on the Company’s consolidated financial statements.
(3) 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
The accounting guidance issued by the FASB concerning a variable interest entity, 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.
Takeda PRA Development Center KK
The Company entered into a joint venture with Takeda Pharmaceutical Company Ltd. during 2017. The joint venture was dissolved during the second quarter of 2019. For further discussion on the joint venture, refer to Note 5, Business Combinations.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accounts Receivable Financing Agreement
On March 22, 2016, the Company entered into a receivable financing agreement, which the Company refers to as the "Accounts Receivable Financing Agreement," to securitize certain of its accounts receivable. This agreement was subsequently amended on May 31, 2018. 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 $200.0 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 11, 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 value determinations, and contingencies.
Reportable Segments
The Company is 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 ASC Topic 280, “Segment Reporting,” or ASC 280, and has concluded that there are substantial similarities and overlaps in the capabilities delivered at 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.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company's operations consist of two reportable segments. This 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 Losses
The Company provides for contingent losses 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, 2019 and 2018, 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.
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,
|
|
2019
|
|
2018
|
|
2017
|
Cash and cash equivalents
|
$
|
236,232
|
|
|
$
|
144,221
|
|
|
$
|
192,229
|
|
Restricted cash
|
38
|
|
|
488
|
|
|
661
|
|
Total cash, cash equivalents, and restricted cash
|
$
|
236,270
|
|
|
$
|
144,709
|
|
|
$
|
192,890
|
|
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 customers have not been billed. Unbilled services where the Company’s right to bill is conditioned on something other than the passage of time are contract assets and are separately disclosed in Note 6, Accounts Receivable, Unbilled Services, and Advanced Billings.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, also referred to as contract liabilities, consist of advanced payments and billings on a contract in excess of revenue recognized. These amounts represent consideration received or unconditionally due from a customer prior to transferring services to the customer under the terms of the service contract. These balances are reported net of contract assets on a contract-by-contract basis at the end of each reporting period.
In order to determine revenue recognized in the period from advanced billings liabilities, the Company first allocates revenue from the customer contract to the individual advanced billings liability balance outstanding at the beginning of the period until the revenue exceeds that balance.
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 requires 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 accumulated 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. 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 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
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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 liabilities that are measured on a recurring basis as of December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Liabilities:
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
—
|
|
|
$
|
2,976
|
|
|
$
|
—
|
|
|
$
|
2,976
|
|
Total
|
$
|
—
|
|
|
$
|
2,976
|
|
|
$
|
—
|
|
|
$
|
2,976
|
|
The following table summarizes the fair value of the Company’s financial assets that are measured on a recurring basis as of December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
—
|
|
|
$
|
3,318
|
|
|
$
|
—
|
|
|
$
|
3,318
|
|
Total
|
$
|
—
|
|
|
$
|
3,318
|
|
|
$
|
—
|
|
|
$
|
3,318
|
|
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.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2017
|
|
—
|
|
|
50,644
|
|
Reclassification adjustment
|
|
50,644
|
|
|
(50,644
|
)
|
Change in fair value recognized in transaction-related costs
|
|
34,538
|
|
|
—
|
|
Transfer out
|
|
(85,182
|
)
|
|
—
|
|
Balance at December 31, 2018
|
|
$
|
—
|
|
|
$
|
—
|
|
There were no Level 3 financial assets or liabilities measured on a recurring basis for the year ended December 31, 2019.
The $85.2 million transfer out during the year ended December 31, 2018 represented an earn-out payment to the sellers of Symphony Health Solutions Corporation, or Symphony Health, at the conclusion of the earn-out period. This amount was paid in April 2019.
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.
As of December 31, 2019, assets carried on the balance sheet and not remeasured to fair value on a recurring basis totaling approximately $2,141.3 million were identified as Level 3. These assets are comprised of goodwill of $1,502.8 million and identifiable intangible assets, net of $638.6 million.
Refer to Note 11, 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, ROU assets 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 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.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 2019, as part of the Company’s annual impairment analysis, the Company performed the qualitative assessment for approximately $1.0 billion, or 68.3% of its total goodwill balance, which relates to its EDS, PR and SS business units, and for its 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. The Company performed its impairment test for the Data Solutions operating segment during the fourth quarter of 2019. It was concluded that the estimated fair value of the Data Solutions operating segment exceeded its carrying value by approximately $185 million, or 27%, and therefore no impairment existed.
Revenue Recognition
On January 1, 2018, the Company adopted Accounting Standards Codification, or ASC, Topic 606, "Revenue from Contracts with Customers," or ASC 606, using the modified retrospective method for all contracts that were not completed as of January 1, 2018. The financial information for the year ended December 31, 2017 continues to be accounted for under the accounting standards in effect for the period presented. Accordingly, the Company has included its revenue recognition policies and disclosures for the years ended December 31, 2019 and 2018 and the policies and disclosures for the year ended December 31, 2017 below.
Revenue Recognition Policies for the years ended December 31, 2019 and 2018
All revenue is generated from contracts with customers. Revenue is recognized when control of the performance obligation is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those services. Revenue recognition is determined through the application of the following steps:
|
|
•
|
identification of the contract, or contracts, with a customer;
|
|
|
•
|
identification of the performance obligations in the contract;
|
|
|
•
|
determination of the transaction price;
|
|
|
•
|
allocation of the transaction price to the performance obligations in the contract; and
|
|
|
•
|
recognition of revenue when, or as, the Company satisfies a performance obligation.
|
Clinical Research
The Company generally enters into contracts with customers to provide clinical research services with payments based on either fixed‑service fee, time and materials, or fee‑for‑service arrangements. The Company is also entitled to reimbursement for investigator fees and out-of-pocket costs associated with these services. At contract inception, the Company assesses the services promised in the contracts with customers to identify the performance obligations in the arrangement.
The long term arrangements for clinical research services are considered a single performance obligation because the Company provides a highly-integrated service. Revenue is recognized based on the proportion of total contract costs incurred to date to the estimated total contract costs through completion. The Company uses the cost-to-cost measure of progress for these contracts because it best depicts the transfer of control to the customer as the performance obligation is fulfilled. The accounting for these long term contracts involves significant judgment, particularly as it relates to the process of estimating
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
total contract costs, which includes direct costs, reimbursable out-of-pocket expenses, reimbursable investigator fees, and the contract profit. The contracts provide for the right to payment for the work performed to date, which is invoiced to the customer as work progresses, either based on units performed or the achievement of billing milestones.
A single performance obligation requires the inclusion of investigator fees and out-of-pocket costs in both the contract revenue value and in the cost used to measure progress in transferring control to the customer. As part of the client proposal and contract negotiation process, the Company develops a detailed project budget for the direct costs and reimbursable costs based on the scope of the work, the complexity of the study, the geographical locations involved and historical experience. The inclusion of investigator fees and out-of-pocket costs in the measurement of progress under these long-term fixed-service fee contracts as part of a single performance obligation can 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, which is recognized as unbilled services. The magnitude of this timing difference compared to historical accounting is dependent on the relative size and progress of the direct service portion of the arrangement compared to the progress of the reimbursable investigator fees and reimbursable out-of-pocket costs relative to their respective forecasted costs over the life of the project.
The estimated total contract costs are reviewed and revised periodically throughout the life of the contract, with adjustments to revenue resulting from such revisions being recorded on a cumulative basis in the period in which the revisions are identified.
The Company establishes pricing based on the Company’s internal pricing guidelines, discount agreements, if any, and negotiations with the client. The transaction price is the contractually defined amount that includes adjustment for variable consideration such as reimbursable costs, discounts, and bonus or penalties, which are estimable. The estimated amount of variable consideration will be included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
A majority of the Company’s long-term contracts undergo modifications over the contract period. During the modification process, the Company recognizes revenue to the extent it incurs costs, provided that a contractual understanding has been reached.
Fixed-service fee arrangements for Phase I and Phase IIa clinical services and bio-analytical services are short-term contracts for accounting purposes as these contracts are cancelable and the termination penalties for exiting these contracts are not substantive. The Company generally bills for services on a milestone basis. The transaction price, representing the value of the services to be provided over the contract term inclusive of all costs for which the Company is a principal, is the contractually defined amount that includes adjustment for variable consideration, such as reimbursable expenses and discounts, which are estimable. When multiple performance obligations exist, the transaction price is allocated to the performance obligations on a relative standalone selling price basis. Given the highly integrated nature of the services provided, most contracts represent a single performance obligation. Due to the Company's right to payment for work performed, revenue is recognized over time as services are delivered.
Clinical research services delivered under fee-for-service arrangements are recognized over time. The services are accounted for as a single performance obligation that is a series of distinct services with substantially the same pattern of transfer to the customer. Clinical research services provided in these types of arrangements are typically linked to the delivery of resources billed at contractual rates, such rates being dependent on the role and the tenure of the resource provided. The fee-for-service is typically billed one month in arrears, which generally results in an unbilled services asset at period-end. In addition, out-of-pocket costs are reimbursed by the customer. Fees are allocated to each distinct month of service using time elapsed as a measure of progress toward the satisfaction of the performance obligation and variable consideration is allocated to the period in which it is incurred.
Revenue from time and materials contracts is recognized as hours are incurred.
The Company may offer volume discounts to certain of its large customers based on annual volume, which is variable consideration that is considered in the transaction price. The Company records an estimate of the volume rebate as a reduction of the transaction price based on the estimated total rebates to be earned by the customers for the period.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Data Solutions
The Company provides data reports and analytics to customers based on agreed-upon specifications, including the timing of delivery, which is typically either weekly, monthly, or quarterly. If a customer requests more than one type of data report or series of data reports within a contract, each distinct type of data report is a separate performance obligation. The contracts provide for the Company to be compensated for the value of each deliverable. The transaction price is determined using list prices, discount agreements, if any, and negotiations with the customers, and generally includes any out-of-pocket expenses. Typically, the Company bills in advance of services being provided with the amount being recorded as advanced billings.
When multiple performance obligations exist, the transaction price is allocated to performance obligations on a relative standalone selling price basis. In cases where the Company contracts to provide a series of data reports, or in some cases data, the Company recognizes revenue over time using the “units delivered” output method as the data or reports are delivered. Expense reimbursements are recorded to revenue as the expenses are incurred as they relate directly to the services performed.
Certain Data Solutions arrangements include upfront customization or consultative services for customers. These arrangements often include payments based on the achievement of certain contractual milestones. Under these arrangements, the Company contracts with a customer to carry out a specific study, ultimately resulting in delivery of a custom report or data product. These arrangements are a single performance obligation given the integrated nature of the service being provided. The Company typically recognizes revenue under these contracts over time, using an output-based measure, generally time elapsed, to measure progress and transfer of control of the performance obligation to the customer. Expense reimbursements are recorded to revenue as the expenses are incurred as they relate directly to the service performed.
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 services. 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 and is recognized as services are delivered. At the end of the contract year, any unused customer purchase credits may be forfeited or carried over to the next contract year based on the terms of the data supplier contract. For the years ended December 31, 2019, 2018 and 2017, the Company recognized service in kind revenue of $20.5 million, $21.8 million and $5.8 million, respectively, from these transactions, which is included in revenue in the accompanying consolidated statements of operations. The cost of data acquired under these arrangements is included in direct costs.
Significant Judgments and Estimates
Accounting for the Company’s long term contracts requires estimates of future costs to be incurred to fulfill the contract obligations.
Due to the nature of the work required to be performed by the Company to fulfill performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment. The Company's long-term contracts may contain incentive fees, penalties, or other provisions that can either increase or decrease the transaction price. The Company estimates variable consideration at the most likely amount to which the Company expects to be entitled. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company's estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the anticipated performance and information that is available to the Company. Judgment is also required to identify performance obligations and in determining the relative standalone selling price of those obligations, specifically for the Data Solutions segment. The estimates and assumptions are evaluated on an ongoing basis and adjusted, as needed, using historical experience and contract specific factors. Actual results could differ significantly from these estimates.
Performance Obligations
Revenue recognized for the years ended December 31, 2019 and 2018 from reimbursable expenses and services completed in prior periods was $83.4 million and $79.1 million, respectively. This primarily relates to adjustments attributable to changes in estimates such as estimated total contract costs, and from contract modifications on long-term fixed price contracts executed in the current period, which result in changes to the transaction price.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company does not disclose the value of the transaction price allocated to unsatisfied performance obligations on contracts that have an original contract term of less than one year. These contracts are short in duration and revenue recognition generally follows the delivery of the promised services. The total transaction price for the undelivered performance obligation on contracts with an original initial contract term greater than one year is $5.3 billion as of December 31, 2019. This amount includes reimbursement revenue and investigator fees. The Company expects to recognize revenue over the remaining contract term of the individual projects, with contract terms generally ranging from one to five years.
Revenue Recognition Policies for the year ended December 31, 2017
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, 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 that 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. The estimated total contract costs are reviewed and revised periodically throughout the life of the contract, 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.
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.
The Company incurs out-of-pocket costs that 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 for the year ended December 31, 2017. Prior to the year ended December 31, 2018, the Company did not recognize revenue for investigator fees and recognized revenue and the related expense for reimbursable out-of-pocket costs. Upon adoption of ASC 606 on January 1, 2018, all investigator and other reimbursable expenses are included within revenue as part of one performance obligation, as described above.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents, accounts receivable, unbilled services, and derivatives. As of December 31, 2019, 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.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue from individual customers greater than 10% of consolidated revenue in the respective periods was as follows:
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017 (1)
|
Customer A
|
*
|
|
*
|
|
10.3
|
%
|
Customer B
|
*
|
|
*
|
|
*
|
|
(1) As noted in the Revenue Recognition section of this Note, the Company adopted ASC 606 on January 1, 2018 using the modified retrospective method. Comparative prior period amounts were calculated using service revenue only.
* Less than 10%
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,
|
|
2019
|
|
2018
|
Customer A
|
11.2
|
%
|
|
12.2
|
%
|
Customer B
|
15.6
|
%
|
|
11.4
|
%
|
* Less than 10%
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. 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 adjustment and recorded in accumulated other comprehensive loss in the consolidated balance sheets.
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.
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 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 statements 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 on examination by
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 types of stock-based compensation utilized by the Company are restricted share awards and restricted share units, or collectively RSAs/RSUs, and stock options.
The Company accounts for its stock-based compensation for stock options 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 stock 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,
|
|
2019
|
|
2018
|
|
2017
|
Risk-free interest rate
|
1.8
|
%
|
|
2.8
|
%
|
|
1.9
|
%
|
Expected life, in years
|
6.1
|
|
|
6.3
|
|
|
6.3
|
|
Dividend yield
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Volatility
|
30.7
|
%
|
|
28.9
|
%
|
|
29.7
|
%
|
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. Since the Company does not have sufficient history to estimate the expected volatility of its common share price, expected volatility is based on a blended approach that utilizes the volatility of the Company's common stock for periods in which the Company has sufficient information and the volatility for selected reasonably similar publicly traded companies for which the historical information is available. Forfeitures are accounted for as they occur.
The Company accounts for its stock-based compensation for RSAs/RSUs based on the closing market price of the Company’s common stock on 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.
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.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Operating Leases
As discussed further in Note 2, Recent Accounting Standards, and in Note 8, Leases, on January 1, 2019, the Company adopted ASC 842 using the revised modified retrospective approach. Comparative prior period information continues to be accounted for under the accounting standards in effect for the period presented. Accordingly, the Company has included its lease policies and disclosures for the year ended December 31, 2019 and the policies applicable for the years ended December 31, 2018 and 2017 are described below.
Lease Policies for the year ended December 31, 2019
On January 1, 2019, the Company adopted ASC 842 using the revised modified retrospective approach. The revised modified retrospective approach recognizes the effects of initially applying the new leases standard as a cumulative effect adjustment to retained earnings as of the adoption date. Under this election, the provisions of ASC 840 apply to the accounting and disclosures for lease arrangements in the comparative periods in an entity’s financial statements. In addition, the Company elected the package of practical expedients permitted under the transition guidance within ASC 842, in which the Company need not reassess (i) the historical lease classification, (ii) whether any expired or existing contract is or contains a lease, or (iii) the initial direct costs for any existing leases.
Upon the initial application of ASC 842 on January 1, 2019, or the transition date, lease liabilities were measured by using the remaining minimum rental payments under ASC 840. The Company’s ASC 840 minimum rental payments include executory costs and rental payments that depend on an index or rate are calculated based on the rate in effect at the transition date. The lease liability is measured at the present value of future lease payments, discounted using the discount rate as of the transition date. In addition to recognizing the lease liability, the Company recognized a corresponding lease ROU asset. The ROU asset is initially measured as the amount of lease liability, adjusted for any initial lease costs or lease payments made before or at the commencement of the lease, and reduced by any lease incentives and deferred rent. As of the transition date, the Company’s leases consisted of only operating leases and upon recognition of the lease liability and ROU assets, there was no adjustment to retained earnings.
All leases entered into after January 1, 2019 are accounted for under ASC 842. Under ASC 842, a contract is or contains a lease when (i) explicitly or implicitly identified assets have been deployed in the contract and (ii) the customer obtains substantially all of the economic benefits from the use of that underlying asset and directs how and for what purpose the asset is used during the term of the contract. The Company also considers whether its service arrangements include the right to control the use of an asset. The Company determines if an arrangement is a lease at inception of the contract, which is the date on which the terms of the contract are agreed to and the agreement creates enforceable rights and obligations. The commencement date of the lease is the date that the lessor makes an underlying asset available for use by a lessee.
At the lease commencement date, a lease liability is recognized based on the present value of the lease payments not yet paid, discounted using the discount rate for the lease at lease commencement. When readily determinable, the discount rate used to calculate the lease liability is the rate implicit in the lease. As the Company's leases typically do not provide an implicit rate, the Company uses its incremental borrowing rate based on the lease term and economic environment at the lease commencement date. The lease term used to calculate the lease liability includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. With limited exceptions, the nature of the Company's facility leases is such that there are not economic or other conditions that would indicate that it is reasonably certain at lease commencement that the Company will exercise options to extend the term.
The Company determines if its lease obligations are operating or finance leases at the lease commencement date and considers whether the lease grants an option to purchase the underlying asset that it is reasonably certain to exercise, the remaining economic life of the underlying asset, the present value of the sum of the remaining lease payments and any residual value guaranteed, and the nature of the asset.
The initial measurement of the lease liability is determined based on the future lease payments, which may include lease payments that depend on an index or a rate (such as the consumer price index or other market index). The Company initially measures payments based on an index or rate by using the applicable rate at lease commencement and subsequent changes in such rates are recognized as variable lease costs. Variable payments that do not depend on a rate or index are not included in the lease liability and are recognized as they are incurred. The Company’s contracts that include a lease component generally include additional services that are transferred to the lessee (e.g., common-area maintenance services), which are
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
nonlease components. Contracts typically also include other costs and fees that do not provide a separate service to the lessee, such as costs paid by the lessee to reimburse the lessor for administrative costs or payment for the lessor’s costs for property taxes, insurance related to the leased asset, and other lessor costs. The Company elected the practical expedient to account for the lease and nonlease components as a single lease component. At the lease commencement date, the Company recognizes a ROU asset representing its right to use the underlying asset over the lease term. If significant events, changes in circumstances, or other events indicate that the lease term has changed, the Company would reassess lease classification, remeasure the lease liability by using revised inputs as of the reassessment date, and adjust the ROU asset. These reassessment events are typically related to the exercise of optional renewals or significant new investments in leasehold improvements. The costs of services and costs related to reimbursements of the lessor’s cost are generally variable rent obligations, which are excluded from the future lease payments included in the lease liability. For leases with a term of one year or less, or short-term leases, the Company has elected to not recognize the lease liability for these arrangements and the lease payments are recognized in the consolidated statements of operations on a straight-line basis over the lease term. For certain equipment leases, such as vehicles, the Company applies a portfolio approach to account for the operating lease ROU assets and liabilities.
The total expense for the operating lease liability is recognized on a straight-line basis over the lease term, beginning on the lease commencement date. The Company classifies the lease costs within operating expenses consistent with the classification policies for all other operating costs.
Lease Policies for the years ended December 31, 2018 and 2017
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 recognition of rent expense 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; (4) third-party fees incurred in connection with secondary offerings and share repurchases; and (5) stock-based compensation expense related to the release of the transfer restrictions on vested options.
Prior Period Reclassifications
Certain amounts in prior periods have been reclassified to conform with current period presentation.
(4) Joint Ventures
The Company entered into a joint venture with Takeda Pharmaceutical Company Ltd. during 2017. The joint venture was dissolved in 2019. For further discussion on the joint venture, refer to Note 5, Business Combinations.
The Company entered into a joint venture agreement with A2 Healthcare Corporation (formerly part of Asklep, Inc.) in 2013. The joint venture was dissolved in October 2018.
(5) Business Combinations
Symphony Health Solutions, Inc.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 $686.9 million. 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 contingent consideration was valued at $147.5 million at the acquisition date. The fair value of the contingent consideration was a Level 3 measurement and was reassessed each reporting period until the end of the earn-out period. The Company recorded $32.6 million and $85.7 million to transaction-related costs in the consolidated statements of operations during the years ended December 31, 2018 and 2017, respectively, associated with changes in the fair value of the earn-out liability and adjustments upon the finalization of the earn-out calculations. The Company made earn-out payments totaling $83.2 million, $114.7 million, and $67.8 million during the years ended December 31, 2019, 2018 and 2017, respectively.
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 $476.9 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 for the year ended December 31, 2017. During the year ended December 31, 2018, the Company incurred $1.4 million of expenses associated with transaction-related retention incentives that are included in transaction-related costs in the consolidated statements of operations.
The Company’s 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
|
|
(66,846
|
)
|
|
|
Deferred tax liabilities
|
|
(104,869
|
)
|
|
|
Other long-term liabilities
|
|
(6,740
|
)
|
|
|
Estimated fair value of net assets acquired
|
|
210,018
|
|
|
|
Purchase price, including contingent consideration and working capital adjustment
|
|
686,877
|
|
|
|
Total goodwill
|
|
$
|
476,859
|
|
|
|
The results of operations for Symphony Health are included in the consolidated financial statements of the Company from the date of acquisition. During the year ended December 31, 2017, Symphony Health's revenue and net income totaled $90.5 million and $6.3 million, respectively.
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.
|
|
|
|
|
|
Year Ended
|
(in thousands, except per share amounts)
|
December 31, 2017
|
Total revenue
|
$
|
2,408,770
|
|
Net income attributable to PRA Health Sciences, Inc.
|
104,700
|
|
Net income per share:
|
|
Basic
|
$
|
1.68
|
|
Diluted
|
$
|
1.59
|
|
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 enabled 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 represented 50% of the fair value of the net assets and workforce that Takeda contributed to the joint venture. The joint venture provided services including clinical trial monitoring, project management, regulatory strategy and submissions, data management, biostatistics, drug safety reporting, and medical monitoring.
Prior to dissolution of the joint venture, the Company determined that the TDC joint venture was a VIE in which the Company was 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 for the year ended December 31, 2017.
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.
On May 31, 2019, per the terms of the agreement, the TDC joint venture dissolved and the Company acquired Takeda’s 50% interest for $4.1 million.
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 $31.3 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 for the year ended December 31, 2017.
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
|
|
(31
|
)
|
|
|
Estimated fair value of net assets acquired
|
|
16,004
|
|
|
|
Purchase price, including contingent consideration
|
|
47,339
|
|
|
|
Total goodwill
|
|
$
|
31,335
|
|
|
|
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.
(6) Accounts Receivable, Unbilled Services, and Advanced Billings
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,
|
|
2019
|
|
2018
|
Accounts receivable
|
$
|
512,061
|
|
|
$
|
437,001
|
|
Unbilled services
|
149,194
|
|
|
133,147
|
|
Total accounts receivable and unbilled services
|
661,255
|
|
|
570,148
|
|
Less allowance for doubtful accounts
|
(2,738
|
)
|
|
(2,049
|
)
|
Total accounts receivable and unbilled services, net
|
$
|
658,517
|
|
|
$
|
568,099
|
|
Unbilled services as of December 31, 2019 and 2018 includes $76.0 million and $66.6 million, respectively, of contract assets where the Company’s right to bill is conditioned on criteria other than the passage of time. There were no impairment losses on contract assets during the years ended December 31, 2019 and 2018.
A rollforward of the allowance for doubtful accounts is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Beginning balance
|
$
|
2,049
|
|
|
$
|
1,433
|
|
|
$
|
1,203
|
|
Charged to income from operations
|
1,294
|
|
|
605
|
|
|
255
|
|
Write-offs, recoveries and the effects of foreign currency exchange
|
(605
|
)
|
|
11
|
|
|
(25
|
)
|
Ending balance
|
$
|
2,738
|
|
|
$
|
2,049
|
|
|
$
|
1,433
|
|
Advanced billings were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Advanced billings
|
|
$
|
505,714
|
|
|
$
|
441,357
|
|
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Advanced billings increased by $64.4 million during the year ended December 31, 2019 and decreased by $27.9 million during the year ended December 31, 2018 primarily due to the timing of customer payments. During the years ended December 31, 2019 and 2018, the Company recognized revenue of $413.1 million and $393.2 million related to advanced billings recorded as of January 1, 2019 and 2018, respectively.
(7) Fixed Assets
The carrying amount of fixed assets is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Computer hardware and software
|
$
|
207,931
|
|
|
$
|
172,346
|
|
Leasehold improvements
|
82,482
|
|
|
58,300
|
|
Furniture and equipment
|
48,305
|
|
|
45,962
|
|
Total fixed assets
|
338,718
|
|
|
276,608
|
|
Accumulated depreciation
|
(158,002
|
)
|
|
(121,844
|
)
|
Total fixed assets, net
|
$
|
180,716
|
|
|
$
|
154,764
|
|
All U.S. fixed assets are included as collateral for the payment and performance in full of the term loans pledged by the Company and its subsidiaries.
Depreciation expense was $46.3 million, $40.6 million, and $29.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.
(8) Leases
The Company’s material lease obligations are operating leases for office and other facilities in which the Company conducts business. The facility leases generally provide an initial lease term ranging from three to 20 years and include one or more optional extensions. The Company's leases have remaining lease terms of one year to 20 years. The leases typically include rent escalation clauses and for some markets the leases frequently include periodic market adjustments to the base rent over the term of the lease. In certain instances, the Company subleases space that has been exited or is no longer required. The Company’s sublease income is immaterial.
The components of lease expense were as follows for the year ended December 31, 2019 (in thousands):
|
|
|
|
|
|
Lease cost:
|
|
|
Operating lease cost
|
|
$
|
41,573
|
|
Short-term lease cost
|
|
2,591
|
|
Variable lease cost
|
|
7,626
|
|
Sublease income
|
|
(178
|
)
|
Net lease cost
|
|
$
|
51,612
|
|
Total lease expense, net of sublease income, for the years ended December 31, 2018 and 2017 was $39.6 million and $37.0 million, respectively.
Supplemental cash flow information related to leases was as follows for the year ended December 31, 2019 (in thousands):
|
|
|
|
|
|
Cash paid for amounts included in the measurements of lease liabilities, all included in operating cash flows
|
|
$
|
41,594
|
|
Right-of-use assets obtained in exchange for lease obligations
|
|
32,423
|
|
Other supplemental information related to leases was as follows as of December 31, 2019:
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
Weighted average remaining lease term
|
|
7.7 years
|
Weighted average discount rate
|
|
4.3%
|
Maturities of operating lease liabilities were as follows as of December 31, 2019 (in thousands):
|
|
|
|
|
|
2020
|
|
$
|
44,760
|
|
2021
|
|
43,369
|
|
2022
|
|
35,179
|
|
2023
|
|
27,554
|
|
2024
|
|
19,153
|
|
Thereafter
|
|
77,067
|
|
Total lease payments
|
|
247,082
|
|
Less imputed interest
|
|
(37,109
|
)
|
Total
|
|
$
|
209,973
|
|
As of December 31, 2019, the Company has additional non-cancelable operating leases that have not yet commenced with future lease payments totaling $12.9 million. These leases will commence in the first quarter of 2020 with initial lease terms ranging from two to twenty years.
As of December 31, 2018, the Company disclosed the following future non-cancelable rent obligations as determined under ASC 840 (in thousands):
|
|
|
|
|
|
2019
|
|
$
|
43,675
|
|
2020
|
|
40,948
|
|
2021
|
|
37,469
|
|
2022
|
|
30,238
|
|
2023
|
|
24,235
|
|
Thereafter
|
|
90,978
|
|
Total lease payments
|
|
$
|
267,543
|
|
(9) 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, 2017
|
$
|
1,036,443
|
|
|
$
|
475,981
|
|
|
$
|
1,512,424
|
|
Adjustments to Symphony Health purchase price allocation
|
—
|
|
|
878
|
|
|
878
|
|
Adjustments to Parallel 6 purchase price allocation
|
(1,117
|
)
|
|
—
|
|
|
(1,117
|
)
|
Currency translation
|
(17,423
|
)
|
|
—
|
|
|
(17,423
|
)
|
Balance at December 31, 2018
|
1,017,903
|
|
|
476,859
|
|
|
1,494,762
|
|
Currency translation
|
7,994
|
|
|
—
|
|
|
7,994
|
|
Balance at December 31, 2019
|
$
|
1,025,897
|
|
|
$
|
476,859
|
|
|
$
|
1,502,756
|
|
There are no accumulated impairment charges as of December 31, 2019 and 2018.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Intangible Assets
Intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Gross Amount
|
|
Accumulated Amortization
|
|
Net Amount
|
|
Gross Amount
|
|
Accumulated Amortization
|
|
Net Amount
|
Customer relationships
|
$
|
559,768
|
|
|
$
|
(137,728
|
)
|
|
$
|
422,040
|
|
|
$
|
555,915
|
|
|
$
|
(103,248
|
)
|
|
$
|
452,667
|
|
Trade names (finite-lived)
|
28,536
|
|
|
(16,582
|
)
|
|
11,954
|
|
|
28,505
|
|
|
(12,810
|
)
|
|
15,695
|
|
Patient list and other intangibles
|
44,474
|
|
|
(35,654
|
)
|
|
8,820
|
|
|
44,474
|
|
|
(30,939
|
)
|
|
13,535
|
|
Database
|
137,100
|
|
|
(59,347
|
)
|
|
77,753
|
|
|
137,100
|
|
|
(32,561
|
)
|
|
104,539
|
|
Total finite-lived intangible assets
|
769,878
|
|
|
(249,311
|
)
|
|
520,567
|
|
|
765,994
|
|
|
(179,558
|
)
|
|
586,436
|
|
Trade names (indefinite-lived)
|
118,010
|
|
|
—
|
|
|
118,010
|
|
|
118,010
|
|
|
—
|
|
|
118,010
|
|
Total intangible assets
|
$
|
887,888
|
|
|
$
|
(249,311
|
)
|
|
$
|
638,577
|
|
|
$
|
884,004
|
|
|
$
|
(179,558
|
)
|
|
$
|
704,446
|
|
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, 2019, 2018 and 2017, the Company concluded that the fair value of indefinite‑lived intangibles exceeded the carrying value and, therefore, no impairment exists. Amortization expense was $68.6 million, $71.6 million and $49.2 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Estimated amortization expense related to finite‑lived intangible assets for the next five years and thereafter is as follows (in thousands):
|
|
|
|
|
2020
|
$
|
69,194
|
|
2021
|
64,081
|
|
2022
|
49,689
|
|
2023
|
37,943
|
|
2024
|
28,738
|
|
2025 and thereafter
|
270,922
|
|
Total
|
$
|
520,567
|
|
(10) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Compensation, including bonuses, fringe benefits and payroll taxes
|
$
|
118,762
|
|
|
$
|
133,758
|
|
Accrued reimbursable expenses
|
107,145
|
|
|
89,317
|
|
Accrued data costs
|
27,150
|
|
|
17,422
|
|
Interest
|
4,783
|
|
|
2,980
|
|
Acquisition-related contingent consideration
|
—
|
|
|
83,249
|
|
Other
|
44,865
|
|
|
42,751
|
|
Total accrued expenses and other current liabilities
|
$
|
302,705
|
|
|
$
|
369,477
|
|
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) Debt
The Company had the following debt outstanding as of December 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate as of December 31, 2019
|
|
Principal amount
|
|
Maturity Date
|
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
Senior Secured Credit Facility:
|
|
|
|
|
|
|
|
|
First Lien Term Loan
|
|
3.21
|
%
|
|
$
|
1,000,000
|
|
|
$
|
916,533
|
|
|
October 2024
|
Revolver
|
|
3.21
|
%
|
|
88,800
|
|
|
—
|
|
|
October 2024
|
Accounts receivable financing agreement
|
|
3.22
|
%
|
|
170,000
|
|
|
170,000
|
|
|
May 2021
|
Total debt
|
|
|
|
1,258,800
|
|
|
1,086,533
|
|
|
|
Less current portion of Revolver (1)
|
|
|
|
(88,800
|
)
|
|
—
|
|
|
|
Less current portion of long-term debt
|
|
|
|
(25,000
|
)
|
|
—
|
|
|
|
Total long-term debt
|
|
|
|
1,145,000
|
|
|
1,086,533
|
|
|
|
Less debt issuance costs
|
|
|
|
(4,822
|
)
|
|
(4,149
|
)
|
|
|
Total long-term debt, net
|
|
|
|
$
|
1,140,178
|
|
|
$
|
1,082,384
|
|
|
|
|
|
(1)
|
The Company assesses its ability and intent to repay the outstanding borrowings on the Revolver at the end of each reporting period in order to determine the proper balance sheet classification. Outstanding borrowings on the Revolver that the Company intends to repay in less than 12 months are classified as current.
|
As of December 31, 2019, the contractual maturities of the Company's debt obligations were as follows (in thousands):
|
|
|
|
|
2020
|
$
|
25,000
|
|
2021
|
195,000
|
|
2022
|
25,000
|
|
2023
|
25,000
|
|
2024 and thereafter
|
$
|
988,800
|
|
Total
|
$
|
1,258,800
|
|
The Company’s primary financing arrangements are its senior secured credit facility (the “Senior Secured Credit Facility”), which consists of a first lien term loan (“First Lien Term Loan”) and a revolving credit facility (the “Revolver”), and its Accounts Receivable Financing Agreement.
Senior Secured Credit Facility
On September 3, 2019, the Company received the proceeds from a $300.0 million incremental term loan under the Senior Secured Credit Facility, or the Incremental Borrowing. The Incremental Borrowing was used to fund the share repurchase which is discussed further in "Note 12 - Stockholders' Equity." In accordance with the guidance in ASC 470-50, "Debt - Modifications and Extinguishments," the Incremental Borrowing was accounted for as a debt modification. The Incremental Borrowing resulted in a $1.9 million loss on modification of debt, which consisted of third-party fees associated with the transaction, and which is included in loss on modification or extinguishment of debt in the consolidated statements of operations for the year ended December 31, 2019.
On October 28, 2019, the Company refinanced its Senior Secured Credit Facility. The refinancing increased the overall capacity of the Senior Secured Credit Facility to $1.75 billion (consisting of a $1.0 billion First Lien Term Loan and a $750.0 million Revolver), extended the maturity date to October 2024, and re-priced at current rates. The proceeds from the Senior Secured Credit Facility were primarily used to repay the existing principal balance of the First Lien Term Loan. The Company incurred $6.6 million in fees related to this refinancing. In accordance with the guidance in ASC 470-50 the refinancing was accounted for as a partial debt extinguishment. This resulted in a $2.1 million loss on extinguishment of debt, consisting of $0.5 million write-off of unamortized debt issuance costs and $1.6 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, 2019.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Senior Secured Credit Facility also contains customary representations, warranties, affirmative covenants, and events of default. The variable interest rate is a rate equal to the London Interbank Offered Rate (“LIBOR”) or the adjusted base rate (“ABR”) at the election of the Company, plus a margin based on the ratio of total indebtedness to EBITDA. The margin, which is based upon the Company's debt-to-EBITDA ratio, ranges from 1.0% to 2.0%, in the case of LIBOR loans, and 0.0% to 1.0%, in the case of ABR loans. The Company has the option of one-, two-, three- or six-month base interest rates. The credit agreement governing the Senior Secured Credit Facility includes provisions that allow the agreement to be amended to replace the LIBOR rate with a comparable or successor floating rate.
The First Lien Term Loan requires the Company to repay 2.5% of the original aggregate principal amount per annum in equal quarterly installments beginning on March 31, 2020 through September 30, 2024, with the remaining balance due at maturity. There are no voluntary prepayment penalties and prepayment is required upon the issuance of certain debt or asset sales or other events.
The Revolver requires the Company to pay to lenders a commitment fee for unused commitments of 0.15% to 0.35% based on the Company’s debt-to-EBITDA ratio. Principal amounts outstanding are due and payable in full at maturity. The Revolver includes borrowing capacity available for letters of credit up to $25.0 million. As of December 31, 2019, the Company had $5.4 million in letters of credit outstanding, which are secured by the Revolver.
As collateral for borrowings under the Senior Secured Credit Facility, 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 Senior Secured Credit Facility 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 Senior Secured Credit Facility, subject to compliance with applicable law, as of December 31, 2019, all amounts in retained earnings were free of restriction and were available for the payment of dividends. The Senior Secured Credit Facility also contains customary representations, warranties, affirmative covenants, and events of default.
Accounts Receivable Financing Agreement
On May 31, 2018, the Company amended its Accounts Receivable Financing Agreement. The amendment increased the agreement's borrowing capacity to $200.0 million, decreased the applicable margin from 1.60% to 1.25%, and extended the maturity date to May 31, 2021, unless terminated earlier pursuant to its terms. As of December 31, 2019 and 2018, there was $30.0 million of remaining capacity available under the accounts receivable financing agreement.
Loans under the Accounts Receivable Financing Agreement accrue interest at either a reserve-adjusted LIBOR or a base rate, plus 1.25%. The Company may prepay loans upon one business day prior notice and may terminate the Accounts Receivable Financing Agreement with 15 days’ prior notice.
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.
Fair Value of Debt
The estimated fair value of the Company’s debt was $1,255.8 million and $1,084.2 million at December 31, 2019 and 2018, respectively, and was determined based on Level 2 inputs, which are primarily based on rates at which the debt is traded among financial institutions adjusted for the Company’s credit standing and the Revolver is based on current borrowing rates.
(12) Stockholders’ Equity
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Secondary Offerings and Share Repurchase Program
During 2019, 2018 and 2017, Kohlberg Kravis Roberts & Co. L.P., or KKR, and certain executive officers of the Company sold a total of 6,666,684, 6,500,000 and 10,000,000 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 $0.6 million, $0.5 million, and $1.0 million during years ended December 31, 2019, 2018 and 2017, respectively. The fees are included in transaction-related costs in the accompanying consolidated statements of operations. As of December 31, 2019, KKR did not own any of the Company’s outstanding common stock.
On August 30, 2019, the Company's Board of Directors, or the Board, approved a share repurchase program, or the Repurchase Program, authorizing the repurchase of up to $500.0 million of the Company's common stock in open market purchase, privately-negotiated transactions, secondary offerings, block trades or otherwise in accordance with all applicable securities laws and regulations, including through Rule 10b5-1 trading plans and pursuant to Rule 10b-18 under the Securities Exchange Act of 1934, as amended, or the Exchange Act. The Repurchase Program does not obligate the Company to repurchase any particular amount of its common stock, and it may be modified, suspended or terminated at any time at the Board's discretion. The Repurchase Program expires on December 31, 2021.
Concurrent with the 2019 secondary offering, the Company repurchased from the underwriter, and subsequently retired, 3,079,765 shares at a price of $97.41 per share, for an aggregate purchase price of approximately $300.0 million.
As of December 31, 2019, the Company has remaining authorization to repurchase up to $200.0 million of its common stock under the Repurchase Program.
(13) Stock-Based Compensation
Stock Option and RSA/RSU Activity
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 2013 Plan. The 2013 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 2013 Plan was 12.5% of the outstanding shares at closing on a fully diluted basis. The Company rolled over 2,052,909 stock options under the 2013 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 2013 Plan were 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 2018, 2017, and 2016, the transfer restrictions on such shares issuable upon exercise of vested options granted under the 2013 Plan were released. The release of the transfer restrictions was considered a modification under ASC 718, “Stock Compensation.” As a result of these modifications, the Company incurred approximately $0.8 million, and $5.3 million of incremental compensation expense during the years ended December 31, 2018 and 2017, respectively, which is included in transaction-related costs in the accompanying consolidated statements of operations.
On November 23, 2014 and in connection with the IPO, the Board of Directors approved the formation of the 2014 Omnibus Plan for Key Employees, or the 2014 Plan. The 2014 Plan allowed 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.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The 2018 Stock Incentive Plan, or the 2018 Plan, was approved by stockholders at the annual meeting on May 31, 2018. The 2018 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 2018 Plan authorized the issuance of 2,000,000 shares of common stock plus all shares that remained available under the 2014 Plan on May 31, 2018 (which included shares carried over from the 2013 Plan).
Generally, the Company grants stock options with exercise prices 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 which is between three years and five years. 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.
Aggregated information regarding the Company’s option plans is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Wtd. Average
Exercise Price
|
|
Wtd. Average
Remaining
Contractual Life
(in Years)
|
|
Intrinsic Value
(in millions)
|
Outstanding at December 31, 2018
|
4,641,600
|
|
|
$
|
62.29
|
|
|
7.8
|
|
$
|
149.7
|
|
Granted
|
1,157,500
|
|
|
98.44
|
|
|
|
|
|
Exercised
|
(652,769
|
)
|
|
39.85
|
|
|
|
|
|
Expired/forfeited
|
(284,725
|
)
|
|
87.23
|
|
|
|
|
|
Outstanding at December 31, 2019
|
4,861,606
|
|
|
$
|
72.45
|
|
|
7.5
|
|
$
|
188.3
|
|
Exercisable at December 31, 2019
|
1,846,731
|
|
|
$
|
42.70
|
|
|
5.7
|
|
$
|
126.4
|
|
The weighted average fair value of options granted during the years ended December 31, 2019, 2018 and 2017 was $32.89, $34.08 and $25.24, respectively. The total fair value of options vested during the years ended December 31, 2019, 2018 and 2017 was $22.8 million, $14.6 million and $5.2 million, respectively.
Selected information regarding the Company’s stock options as of December 31, 2019 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 - 35.50
|
|
1,059,531
|
|
|
4.1
|
|
$
|
13.92
|
|
|
1,059,531
|
|
|
4.1
|
|
$
|
13.92
|
|
$
|
37.83 - 75.81
|
|
1,304,125
|
|
|
7.4
|
|
$
|
71.62
|
|
|
455,475
|
|
|
7.3
|
|
$
|
69.79
|
|
$
|
75.89 - 95.94
|
|
1,265,275
|
|
|
9.1
|
|
$
|
91.87
|
|
|
87,150
|
|
|
8.0
|
|
$
|
81.56
|
|
$
|
96.00 - 116.11
|
|
1,232,675
|
|
|
8.7
|
|
$
|
103.70
|
|
|
244,575
|
|
|
8.7
|
|
$
|
103.04
|
|
The Company’s RSAs/RSUs will settle in shares of the Company’s common stock on the applicable vesting date. Most RSAs/RSUs granted to employees vest over two or three years. RSAs/RSUs granted to the Company's non-employee directors vest over one or two years.
Activity related to the Company’s RSAs/RSUs in 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards
|
|
Wtd. Average
Grant-Date
Fair Value
|
|
Intrinsic
Value
(millions)
|
Unvested at December 31, 2018
|
344,250
|
|
|
$
|
81.39
|
|
|
$
|
31.7
|
|
Granted
|
357,936
|
|
|
97.14
|
|
|
|
Forfeited
|
(44,500
|
)
|
|
82.09
|
|
|
|
Vested
|
(25,250
|
)
|
|
60.89
|
|
|
|
Unvested at December 31, 2019
|
632,436
|
|
|
$
|
91.07
|
|
|
$
|
70.3
|
|
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2019, there was $113.7 million of unrecognized compensation cost related to unvested stock-based awards, which is expected to be recognized over a weighted average period of two years.
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 3,000,000 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 with the administrator of the ESPP having the right to establish different offering periods. The Company's first offering period commenced on January 1, 2018 and the Company recognized stock-based compensation expense of $4.0 million and $3.3 million associated with the ESPP during the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019, there have been 301,975 shares issued and 2,698,025 shares reserved for future issuance under the ESPP.
Stock-based Compensation Expense
Stock-based compensation expense related to employee stock plans is summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Direct costs
|
$
|
14,177
|
|
|
$
|
9,508
|
|
|
$
|
3,552
|
|
Selling, general and administrative
|
31,657
|
|
|
19,635
|
|
|
9,064
|
|
Transaction-related costs
|
—
|
|
|
773
|
|
|
5,294
|
|
Total stock-based compensation expense
|
$
|
45,834
|
|
|
$
|
29,916
|
|
|
$
|
17,910
|
|
(14) Income Taxes
The components of income before income taxes and equity in income of unconsolidated joint ventures are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Domestic
|
$
|
145,863
|
|
|
$
|
45,672
|
|
|
$
|
(52,083
|
)
|
Foreign
|
160,064
|
|
|
175,875
|
|
|
126,630
|
|
|
$
|
305,927
|
|
|
$
|
221,547
|
|
|
$
|
74,547
|
|
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of the provision for (benefit from) income taxes were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
38,333
|
|
|
$
|
14,793
|
|
|
$
|
30,084
|
|
State
|
13,216
|
|
|
776
|
|
|
2,607
|
|
Foreign
|
35,166
|
|
|
39,998
|
|
|
30,601
|
|
Total current income tax expense
|
86,715
|
|
|
55,567
|
|
|
63,292
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(15,999
|
)
|
|
14,224
|
|
|
(70,041
|
)
|
State
|
(5,073
|
)
|
|
1,403
|
|
|
(1,203
|
)
|
Foreign
|
(2,835
|
)
|
|
(3,962
|
)
|
|
(4,671
|
)
|
Total deferred income tax (benefit) expense
|
(23,907
|
)
|
|
11,665
|
|
|
(75,915
|
)
|
Total income tax expense (benefit)
|
$
|
62,808
|
|
|
$
|
67,232
|
|
|
$
|
(12,623
|
)
|
Income taxes computed at the statutory U.S. federal income tax rate are reconciled to the provision for (benefit from) income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Statutory federal income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
1.6
|
%
|
|
0.8
|
%
|
|
(5.5
|
)%
|
Impact of the U.S. Tax Cuts and Jobs Act of 2017:
|
|
|
|
|
|
Rate change
|
—
|
%
|
|
(5.2
|
)%
|
|
(56.0
|
)%
|
U.S. minimum tax on foreign entities
|
1.6
|
%
|
|
3.3
|
%
|
|
—
|
%
|
Base erosion anti-abuse tax
|
—
|
%
|
|
8.4
|
%
|
|
—
|
%
|
Tax on foreign earnings:
|
|
|
|
|
|
Foreign rate differential
|
1.8
|
%
|
|
0.8
|
%
|
|
(20.3
|
)%
|
Foreign earnings taxed in the U.S.
|
(1.1
|
)%
|
|
7.9
|
%
|
|
60.7
|
%
|
Foreign dividends
|
—
|
%
|
|
—
|
%
|
|
5.2
|
%
|
Research and development credits
|
(1.5
|
)%
|
|
(2.6
|
)%
|
|
(3.3
|
)%
|
Stock-based compensation
|
(1.2
|
)%
|
|
(9.6
|
)%
|
|
(39.9
|
)%
|
Nondeductible contingent consideration
|
—
|
%
|
|
3.1
|
%
|
|
35.4
|
%
|
Valuation allowance
|
(0.1
|
)%
|
|
0.4
|
%
|
|
(28.0
|
)%
|
Change in liability for uncertain tax positions
|
(1.3
|
)%
|
|
0.4
|
%
|
|
(3.2
|
)%
|
Nondeductible expenses
|
0.3
|
%
|
|
1.0
|
%
|
|
2.2
|
%
|
Other
|
(0.6
|
)%
|
|
0.6
|
%
|
|
0.8
|
%
|
Effective income tax rate
|
20.5
|
%
|
|
30.3
|
%
|
|
(16.9
|
)%
|
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,
|
|
2019
|
|
2018
|
Net operating loss carryforwards
|
$
|
9,544
|
|
|
$
|
15,741
|
|
Accruals and reserves
|
10,043
|
|
|
13,496
|
|
Equity based compensation
|
15,004
|
|
|
8,821
|
|
Operating lease liabilities
|
35,683
|
|
|
—
|
|
Prepaid expenses and other
|
9,429
|
|
|
15,809
|
|
Deferred and unbilled revenue
|
64,033
|
|
|
55,771
|
|
Tax credits
|
2,231
|
|
|
2,645
|
|
|
145,967
|
|
|
112,283
|
|
Valuation allowance
|
(8,072
|
)
|
|
(9,824
|
)
|
Total deferred tax assets (net of valuation allowance)
|
137,895
|
|
|
102,459
|
|
Identified intangibles
|
(156,321
|
)
|
|
(177,845
|
)
|
Operating lease right-of-use assets
|
(29,440
|
)
|
|
—
|
|
Depreciable, amortizable and other property
|
(20,363
|
)
|
|
(16,372
|
)
|
Deferred tax liabilities
|
(206,124
|
)
|
|
(194,217
|
)
|
Net deferred tax liability
|
$
|
(68,229
|
)
|
|
$
|
(91,758
|
)
|
Long-term deferred tax asset
|
$
|
10,282
|
|
|
$
|
8,954
|
|
Long-term deferred tax liability
|
$
|
(78,511
|
)
|
|
$
|
(100,712
|
)
|
The Company’s foreign subsidiaries are taxed separately in their respective jurisdictions. As of December 31, 2019, the Company has cumulative foreign net operating loss carryforwards of approximately $8.5 million. In addition, the Company has federal net operating loss carryforwards of approximately $5.2 million and state net operating loss carryforwards of approximately $225.8 million.
The carryforward periods for the Company’s net operating losses vary from four 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 U.S. Tax Cuts and Jobs Act ("the Act") was signed into U.S. 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 of worldwide income to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. Additionally, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act.
The Company calculated its best estimate of the impact of the Act in its year-end income tax provision and recorded $0.2 million as additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. This 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.
During the year ended December 31, 2018, the Company completed its analysis of the impact of the Act which resulted in an additional tax benefit of $0.6 million in the fourth quarter of 2018 and a total tax provision of $3.0 million related to the impact of the Act for the year ended December 31, 2018. The total tax provision included a $14.5 million provision related to adjustments to the transition tax and a $11.5 million benefit related to the remeasurement of certain deferred tax
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
assets and liabilities. Additionally, the Company has elected to treat any potential Global Intangible Low-taxed Income ("GILTI") inclusions as a period cost.
The application of the Act and the related regulations is complex and requires significant judgment, particularly with respect to the GILTI and the base erosion and anti-abuse tax (“BEAT”) provisions. If the structure of the Company’s arrangements changes or new regulations are issued that clarify or change the application of these or other provisions of the Act, these changes could have a material effect on the Company’s tax provision.
The Company also has state income tax credit carryforwards available to potentially offset future state income tax of $2.2 million. The state credits begin expiring in 2022. The Company has a $1.6 million valuation allowance against the benefits of these credits.
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, 2019 relates to certain foreign net operating losses, certain foreign deferred tax assets, certain state net operating losses and state tax credit carryforwards.
A reconciliation of the beginning and ending amount of gross unrecognized income tax benefits is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Beginning balance
|
$
|
12,891
|
|
|
$
|
7,911
|
|
|
$
|
12,432
|
|
Additions based on tax positions related to current year
|
1,609
|
|
|
764
|
|
|
1,641
|
|
Additions for income tax positions of prior years
|
16,704
|
|
|
1,065
|
|
|
400
|
|
Impact of changes in exchange rates
|
(9
|
)
|
|
(58
|
)
|
|
427
|
|
Impact of change in federal tax rate
|
—
|
|
|
4,236
|
|
|
(3,536
|
)
|
Settlements with tax authorities
|
(118
|
)
|
|
(180
|
)
|
|
(108
|
)
|
Reductions for income tax positions for prior years
|
(356
|
)
|
|
(456
|
)
|
|
(3,174
|
)
|
Reductions due to lapse of applicable statute of limitations
|
(363
|
)
|
|
(391
|
)
|
|
(171
|
)
|
Ending balance
|
$
|
30,358
|
|
|
$
|
12,891
|
|
|
$
|
7,911
|
|
As of December 31, 2019, 2018, and 2017, the total gross unrecognized tax benefits were $30.4 million, $12.9 million, and $7.9 million, respectively. During the year ended December 31, 2019, the liability for uncertain tax positions increased by $17.5 million of which $16.5 million had no impact on income tax expense for the year ended December 31, 2019 as it was previously accrued. As of December 31, 2019, the total amount of gross unrecognized tax benefits which, if recognized, would impact the Company’s effective tax rate is $30.4 million. The Company anticipates changes in total unrecognized tax benefits due to the expiration of statute of limitations within the next 12 months. Specifically, adjustments related to certain 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 an increase of $2.2 million, an increase of $0.6 million, and a decrease of $0.8 million during the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, the Company has a total of $4.4 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 2010 through 2018 tax years.
As of December 31, 2019, the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately $692.2 million. Because $363.4 million of such earnings have previously been subject to the one-time
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
transition tax on foreign earnings required by the 2017 Tax Act, 2018 and 2019 earnings were subject to GILTI inclusion, any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of the Company's foreign investments would generally be limited to foreign withholding taxes and state taxes and it is not practicable to calculate the deferred tax liability. The Company intends to indefinitely reinvest these earnings.
A rollforward of the deferred tax asset valuation allowance accounts is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Beginning balance
|
$
|
9,824
|
|
|
$
|
25,226
|
|
|
$
|
21,689
|
|
Additions - excess benefit offset to NOL change
|
—
|
|
|
—
|
|
|
12,623
|
|
Additions - purchase accounting
|
—
|
|
|
—
|
|
|
219
|
|
Additions - charged to expense
|
153
|
|
|
1,428
|
|
|
12,863
|
|
Additions - U.S. federal tax rate change
|
—
|
|
|
—
|
|
|
1,330
|
|
Deductions - charged to expense (including translation adjustments)
|
(1,905
|
)
|
|
(16,830
|
)
|
|
(23,498
|
)
|
Ending balance
|
$
|
8,072
|
|
|
$
|
9,824
|
|
|
$
|
25,226
|
|
The valuation allowance at December 31, 2019 is primarily related to state loss carryforwards, state credit carryforwards, certain foreign deferred tax assets, and loss carryforwards in various foreign jurisdictions.
(15) Commitments and Contingencies
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 12 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.
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, 2019, 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
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 $1.0 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, 2019 and 2018, the Company maintained a reserve of approximately $5.5 million and $5.1 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.
(16) 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 $14.3 million, $13.6 million and $11.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.
As a result of the Takeda transactions during 2017, the Company maintains a defined benefit pension plan sponsored by a TDS subsidiary in Germany. The unfunded status of the plan in Germany, which covers eight employees, totaled $1.0 million and $0.9 million at December 31, 2019 and 2018, respectively, and was recorded in other long-term liabilities on the consolidated balance sheets.
The TDC joint venture also maintained a defined benefit pension plan in Japan. The funded status of this plan, which covered approximately 106 employees, totaled $0.8 million at December 31, 2018, and was recorded in other assets on the consolidated balance sheets. When the TDC joint venture was dissolved on May 31, 2019, this pension plan was frozen and all assets and obligations associated with the plan were transferred to Takeda.
Additional disclosures regarding these defined benefit pension plans have been excluded due to their immateriality.
(17) 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.
As of December 31, 2019, the Company had two interest rate swaps outstanding. The first interest rate swap has an aggregate notional amount of $375.0 million and a fixed payment rate of 2.2% offsetting a one-month LIBOR variable rate with a maturity date of December 6, 2020. The second interest rate swap has an aggregate notional amount of $250.0 million and a fixed payment rate of 2.3% offsetting a one-month LIBOR variable rate with a maturity date of September 6, 2020.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the notional amounts and fair values (determined using level 2 inputs) of the Company’s derivatives as of December 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Classification
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
Notional amount
|
|
Asset/(Liability)
|
|
Notional amount
|
|
Asset/(Liability)
|
Derivatives in an asset position:
|
Other assets
|
|
|
|
|
|
|
|
$
|
625,000
|
|
|
$
|
3,318
|
|
Derivatives in a liability position:
|
Accrued expenses and other current liabilities
|
|
$
|
625,000
|
|
|
$
|
(2,976
|
)
|
|
|
|
|
The Company records any change in the fair value of derivatives designated as hedging instruments under ASC 815 to other accumulated other 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. 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.
In the third quarter of 2015, the Company paid $32.9 million to terminate the interest rate swap agreements it entered into during October 2013. Amounts previous recorded in accumulated other comprehensive loss related to these interest rate swaps, totaling $29.6 million on the termination date, are being reclassified into earnings over the term of the previously hedged borrowing using the swaplet method. For the terminated swaps, the Company reclassified $6.5 million, $6.8 million, and $6.3 million previously recorded in accumulated other comprehensive loss into interest expense during the years ended December 31, 2019, 2018, and 2017, respectively. The closing of the refinancing of the Senior Secured Credit Facility in October 2019 did not impact the amortization of losses frozen in accumulated other comprehensive loss associated with the terminated swaps.
The table below presents the effect of the Company's derivatives on the consolidated statements of operations and comprehensive income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
Derivatives in Cash Flow Hedging Relationships (Interest Rate Contracts)
|
2019
|
|
2018
|
|
2017
|
Amount of pre-tax (loss) gain recognized in other comprehensive income on derivatives
|
$
|
(5,928
|
)
|
|
$
|
3,159
|
|
|
$
|
245
|
|
Amount of loss reclassified from accumulated other comprehensive loss into interest expense, net on derivatives
|
(6,173
|
)
|
|
(6,477
|
)
|
|
(6,855
|
)
|
The Company expects that $7.5 million of unrealized losses will be reclassified out of accumulated other comprehensive loss and into interest expense, net over the next 12 months.
The following table presents the effect of cash flow hedge accounting on the consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Interest expense, net
|
|
$
|
(51,987
|
)
|
|
$
|
(57,399
|
)
|
|
(46,729
|
)
|
Loss on cash flow hedging relationships in Subtopic 815-20 (interest contracts):
|
|
|
|
|
|
|
|
|
Loss reclassified from accumulated other comprehensive loss into interest expense, net
|
|
(6,173
|
)
|
|
(6,477
|
)
|
|
(6,855
|
)
|
(18) Accumulated Other Comprehensive Loss
The following table presents a summary of the components of accumulated other comprehensive loss (in thousands):
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
|
|
Derivative
Instruments
|
|
Total
|
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
|
)
|
Other comprehensive (loss) income before reclassifications, net of tax
|
(41,169
|
)
|
|
2,152
|
|
|
(39,017
|
)
|
Reclassification adjustments, net of tax
|
—
|
|
|
4,828
|
|
|
4,828
|
|
Balance at December 31, 2018
|
(158,349
|
)
|
|
(12,310
|
)
|
|
(170,659
|
)
|
Impact from adoption of ASU 2018-02, Reclassification of certain tax effects from accumulated other comprehensive income
|
—
|
|
|
1,419
|
|
|
1,419
|
|
Balance at January 1, 2019
|
(158,349
|
)
|
|
(10,891
|
)
|
|
(169,240
|
)
|
Other comprehensive income (loss) before reclassifications, net of tax
|
9,007
|
|
|
(3,031
|
)
|
|
5,976
|
|
Reclassification adjustments, net of tax
|
—
|
|
|
3,156
|
|
|
3,156
|
|
Balance at December 31, 2019
|
$
|
(149,342
|
)
|
|
$
|
(10,766
|
)
|
|
$
|
(160,108
|
)
|
Foreign Currency Translation
The change in the foreign currency translation adjustment during the year ended December 31, 2019 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 strengthened by 3.5%, 4.7% and 12.0% versus the GBP, CAD and RUB, respectively, during the year ended December 31, 2019, and the USD depreciated by 2.0% versus the EUR, respectively, during the same period. The movement in the GBP, CAD and RUB represented $11.8 million, $1.9 million and $3.0 million, respectively, of the $9.0 million income recorded to accumulated other comprehensive loss during the year ended December 31, 2019. The overall change was partially offset by losses in the EUR, representing $6.1 million of the adjustment, respectively.
The change in the foreign currency translation adjustment during the year ended December 31, 2018 was primarily due to the movements in the GBP, EUR, CAD, and RUB exchange rates against the USD. The USD strengthened by 5.6%, 4.5%, 7.9% and 17.1% versus the GBP, EUR, CAD and RUB respectively, during the year ended December 31, 2018. The movement in the GBP, EUR, CAD and RUB represented $12.4 million, $15.2 million, $3.2 million and $4.6 million, respectively, of the $41.2 million loss recorded to accumulated other comprehensive loss during the year ended December 31, 2018.
The change in the foreign currency translation adjustment during the year ended December 31, 2017 was primarily due to the movements in the GBP, EUR, CAD, and RUB exchange rates against the 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.
Accumulated earnings of the Company’s U.K. subsidiary totaling $375.4 million have been previously taxed in the U.S. or were deemed to have been repatriated as part of the one-time transition tax under the Act enacted December 22, 2017. The Company has deemed a corresponding amount of intercompany accounts between its U.S. and U.K. subsidiaries to be of a long-term investment nature; these balances have been remeasured to foreign currency translation adjustment during the year ended December 31, 2019.
Derivative Instruments
See Note 17 for further information on changes to accumulated other comprehensive loss related to the derivative instruments.
(19) Net Income Per Share
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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,
|
|
2019
|
|
2018
|
|
2017
|
Basic weighted average common shares outstanding
|
64,506
|
|
|
64,123
|
|
|
62,437
|
|
Effect of dilutive stock options and RSAs/RSUs
|
1,498
|
|
|
2,218
|
|
|
3,336
|
|
Diluted weighted average common shares outstanding
|
66,004
|
|
|
66,341
|
|
|
65,773
|
|
Anti-dilutive shares
|
1,998
|
|
|
1,620
|
|
|
741
|
|
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.
(20) Supplemental Cash Flow Information
The following table presents the Company’s supplemental cash flow information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Cash paid during the period for:
|
|
|
|
|
|
Income taxes, net of refunds
|
$
|
111,283
|
|
|
$
|
43,127
|
|
|
$
|
47,829
|
|
Interest
|
42,198
|
|
|
48,911
|
|
|
48,330
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
Issuance of common stock for the acquisition of Value Health Solutions, Inc.
|
—
|
|
|
—
|
|
|
369
|
|
Accrued fixed assets purchases
|
9,767
|
|
|
10,312
|
|
|
3,962
|
|
Cashless exercises of stock options
|
—
|
|
|
12,390
|
|
|
13,252
|
|
The acquisition date fair value of contingent consideration liabilities recorded during the year ended December 31, 2017 totaled $155.8 million. Refer to Note 3 - Significant Accounting Polices and Note 5 - Business Combinations.
Supplemental cash flow disclosures related to the adoption of ASC 842 are included in Note 8 - Leases.
(21) 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, 2019, 2018 and 2017. 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):
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
2018
|
Revenue:
|
|
|
Americas:
|
|
|
|
United States
|
$
|
2,082,204
|
|
$
|
1,962,509
|
|
Other
|
48,670
|
|
47,116
|
|
Americas
|
2,130,874
|
|
2,009,625
|
|
Europe, Africa, and Asia-Pacific
|
|
|
United Kingdom
|
758,432
|
|
689,345
|
|
Netherlands
|
113,029
|
|
115,778
|
|
Other
|
63,927
|
|
57,174
|
|
Europe, Africa, and Asia-Pacific
|
935,388
|
|
862,297
|
|
Total revenue
|
$
|
3,066,262
|
|
$
|
2,871,922
|
|
|
|
|
|
|
|
Year Ended
|
|
December 31, 2017
|
Service Revenue (1):
|
|
Americas:
|
|
United States
|
$
|
1,310,772
|
|
Other
|
42,227
|
|
Americas
|
1,352,999
|
|
Europe, Africa, and Asia-Pacific
|
|
United Kingdom
|
479,623
|
|
Netherlands
|
79,555
|
|
Other
|
36,197
|
|
Europe, Africa, and Asia-Pacific
|
595,375
|
|
Total service revenue
|
1,948,374
|
|
Reimbursement revenues
|
311,015
|
|
Total revenue
|
$
|
2,259,389
|
|
(1) As noted in Note 3, the Company adopted ASC 606 on January 1, 2018 using the modified retrospective method. Comparative prior period amounts continue to be reported under the accounting standards in effect for the period presented.
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Long-lived assets (2):
|
|
|
|
Americas:
|
|
|
|
United States
|
$
|
220,167
|
|
|
$
|
118,860
|
|
Other
|
6,944
|
|
|
950
|
|
Americas
|
227,111
|
|
|
119,810
|
|
Europe, Africa, and Asia-Pacific
|
|
|
|
United Kingdom
|
21,872
|
|
|
4,153
|
|
Netherlands
|
41,527
|
|
|
18,321
|
|
Other
|
76,549
|
|
|
12,480
|
|
Europe, Africa, and Asia-Pacific
|
139,948
|
|
|
34,954
|
|
Total long-lived assets
|
$
|
367,059
|
|
|
$
|
154,764
|
|
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) As noted in Note 3, the Company adopted ASC 842 on January 1, 2019 and has elected to use the effective date as the date of initial application on transition. Comparative prior period amounts continue to be reported under the accounting standards in effect for the period presented.
(22) Segments
The Company is 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.
|
|
|
•
|
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 segment profit as the primary measure of each segment's operating results in order to allocate resources and in assessing the Company's performance. 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):
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Revenue:
|
|
|
|
|
|
Clinical Research
|
$
|
2,812,969
|
|
|
$
|
2,622,409
|
|
|
$
|
2,168,891
|
|
Data Solutions
|
253,293
|
|
|
249,513
|
|
|
90,498
|
|
Total revenue
|
3,066,262
|
|
|
2,871,922
|
|
|
2,259,389
|
|
Direct costs (exclusive of depreciation and amortization):
|
|
|
|
|
|
Clinical Research
|
1,366,066
|
|
|
1,334,803
|
|
|
1,231,690
|
|
Data Solutions
|
173,475
|
|
|
165,423
|
|
|
52,178
|
|
Total direct costs (exclusive of depreciation and amortization)
|
1,539,541
|
|
|
1,500,226
|
|
|
1,283,868
|
|
Reimbursable expenses:
|
|
|
|
|
|
Clinical Research
|
650,080
|
|
|
570,405
|
|
|
311,015
|
|
Data Solutions
|
—
|
|
|
—
|
|
|
—
|
|
Total reimbursable expenses
|
650,080
|
|
|
570,405
|
|
|
311,015
|
|
Segment profit:
|
|
|
|
|
|
Clinical Research
|
796,823
|
|
|
717,201
|
|
|
626,186
|
|
Data Solutions
|
79,818
|
|
|
84,090
|
|
|
38,320
|
|
Total segment profit
|
$
|
876,641
|
|
|
$
|
801,291
|
|
|
$
|
664,506
|
|
Less expenses not allocated to segments:
|
|
|
|
|
|
Selling, general and administrative expenses
|
394,925
|
|
|
371,795
|
|
|
321,987
|
|
Transaction-related costs
|
1,835
|
|
|
35,817
|
|
|
87,709
|
|
Depreciation and amortization expense
|
114,898
|
|
|
112,247
|
|
|
78,227
|
|
Loss on disposal of fixed assets, net
|
1,058
|
|
|
120
|
|
|
358
|
|
Consolidated income from operations
|
363,925
|
|
|
281,312
|
|
|
176,225
|
|
Interest expense, net
|
(51,987
|
)
|
|
(57,399
|
)
|
|
(46,729
|
)
|
Loss on modification or extinguishment of debt
|
(3,928
|
)
|
|
(952
|
)
|
|
(15,023
|
)
|
Foreign currency losses, net
|
(2,257
|
)
|
|
(1,043
|
)
|
|
(39,622
|
)
|
Other income (expense), net
|
174
|
|
|
(371
|
)
|
|
(304
|
)
|
Consolidated income before income taxes and equity in income of unconsolidated joint ventures
|
$
|
305,927
|
|
|
$
|
221,547
|
|
|
$
|
74,547
|
|
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(23) Quarterly Financial Data (unaudited)
The following table summarizes the Company’s unaudited quarterly results of operations (in thousands, except per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Revenue
|
$
|
722,022
|
|
|
$
|
763,309
|
|
|
$
|
780,691
|
|
|
$
|
800,240
|
|
Income from operations
|
78,723
|
|
|
88,013
|
|
|
95,788
|
|
|
101,401
|
|
Provision for income taxes
|
28,138
|
|
|
24,804
|
|
|
3,375
|
|
|
6,491
|
|
Income before equity in gains of unconsolidated joint ventures
|
44,256
|
|
|
41,055
|
|
|
83,007
|
|
|
74,801
|
|
Equity in income of unconsolidated joint ventures
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income
|
44,256
|
|
|
41,055
|
|
|
83,007
|
|
|
74,801
|
|
Net (income) loss attributable to non-controlling interests
|
(172
|
)
|
|
73
|
|
|
—
|
|
|
—
|
|
Net income attributable to PRA Health Sciences, Inc.
|
44,084
|
|
|
41,128
|
|
|
83,007
|
|
|
74,801
|
|
Comprehensive income
|
43,827
|
|
|
39,820
|
|
|
56,384
|
|
|
112,296
|
|
Comprehensive income attributable to noncontrolling interest
|
(127
|
)
|
|
(48
|
)
|
|
—
|
|
|
—
|
|
Comprehensive income attributable to PRA Health Sciences, Inc.
|
$
|
43,700
|
|
|
$
|
39,772
|
|
|
$
|
56,384
|
|
|
$
|
112,296
|
|
Basic earnings per share (1)
|
$
|
0.68
|
|
|
$
|
0.63
|
|
|
$
|
1.28
|
|
|
$
|
1.19
|
|
Diluted earnings per share (1)
|
$
|
0.66
|
|
|
$
|
0.62
|
|
|
$
|
1.25
|
|
|
$
|
1.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Revenue
|
$
|
701,837
|
|
|
$
|
722,841
|
|
|
$
|
717,596
|
|
|
$
|
729,648
|
|
Income from operations (2)
|
71,948
|
|
|
73,796
|
|
|
38,812
|
|
|
96,756
|
|
Provision for income taxes
|
17,654
|
|
|
17,490
|
|
|
20,248
|
|
|
11,840
|
|
Income before equity in gains of unconsolidated joint ventures
|
39,187
|
|
|
42,236
|
|
|
1,810
|
|
|
71,082
|
|
Equity in income of unconsolidated joint ventures
|
28
|
|
|
46
|
|
|
44
|
|
|
25
|
|
Net income
|
39,215
|
|
|
42,282
|
|
|
1,854
|
|
|
71,107
|
|
Net (income) loss attributable to non-controlling interests
|
(234
|
)
|
|
(305
|
)
|
|
(359
|
)
|
|
345
|
|
Net income attributable to PRA Health Sciences, Inc.
|
38,981
|
|
|
41,977
|
|
|
1,495
|
|
|
71,452
|
|
Comprehensive income (loss)
|
61,294
|
|
|
8,185
|
|
|
(31
|
)
|
|
50,948
|
|
Comprehensive (income) loss attributable to noncontrolling interest
|
(582
|
)
|
|
(48
|
)
|
|
(193
|
)
|
|
143
|
|
Comprehensive income (loss) attributable to PRA Health Sciences, Inc.
|
$
|
60,712
|
|
|
$
|
8,137
|
|
|
$
|
(224
|
)
|
|
$
|
51,091
|
|
Basic earnings per share (1)
|
$
|
0.61
|
|
|
$
|
0.66
|
|
|
$
|
0.02
|
|
|
$
|
1.10
|
|
Diluted earnings per share (1)
|
$
|
0.59
|
|
|
$
|
0.64
|
|
|
$
|
0.02
|
|
|
$
|
1.07
|
|
|
|
(1)
|
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.
|
|
|
(2)
|
During the three months ended September 30, 2018, the Company recorded $42.6 million of transaction-related costs associated with the change in fair value of contingent consideration. During the three months ended March 31, 2018, the Company recorded an $11.6 million reduction to transaction-related costs associated with the change in fair value of contingent consideration.
|
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(24) Subsequent Events
In January 2020, the Company acquired Care Innovations, Inc., an entity that provides digital health services, for approximately $165 million and additional earn-out payments of up to $50 million contingent on the achievement of certain financial targets. The Company financed the initial payment from cash on hand and the Revolver.