NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
Description of Business
PPD, Inc. (together with its subsidiaries “PPD” or the “Company”) is a holding company incorporated in Delaware. References to the “Company” throughout these condensed consolidated financial statements refer to PPD, Inc. and its consolidated subsidiaries, unless the context indicates otherwise. The Company is a leading provider of drug development services to the biopharmaceutical industry, focused on helping the Company’s customers bring their medicines and other treatments to patients around the world. The Company has been in the drug development services business for 35 years, providing a comprehensive suite of clinical development and laboratory services to pharmaceutical, biotechnology, medical device, government organizations and other industry participants. The Company has deep experience across a broad range of rapidly growing areas of drug development and engages with customers through a variety of commercial models, including both full-service and functional service partnerships and other offerings tailored to address the specific needs of the Company’s customers. The Company has two reportable segments, Clinical Development Services (“Clinical Development Services”) and Laboratory Services (“Laboratory Services”).
Unaudited Interim Financial Information and the Use of Estimates
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial reporting. The significant accounting policies followed by the Company for interim financial reporting are consistent with the accounting policies it follows for annual financial reporting and are disclosed in Note 1, “Basis of Presentation and Summary of Significant Accounting Policies,” of the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”). There have been no significant changes to the Company’s significant accounting policies during the first six months of 2021.
The preparation of financial statements in conformity with U.S. 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. The Company monitors estimates and assumptions on a continuous basis and updates these estimates and assumptions as facts and circumstances change and new information is obtained, including facts and circumstances related to the novel coronavirus disease (“COVID-19”) pandemic. Actual results could differ from those estimates and assumptions due to, among other things, the impacts caused by the COVID-19 pandemic.
In the opinion of the Company’s management, these condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the full twelve-month period ending December 31, 2021 or any other future period. Therefore, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the 2020 Form 10-K. The information as of December 31, 2020 in the Company’s condensed consolidated balance sheet included herein is derived from the Company’s audited consolidated financial statements included in the 2020 Form 10-K.
Merger Agreement
On April 15, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Thermo Fisher Scientific Inc., a company organized under the laws of Delaware (“Thermo Fisher”) and Powder Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Thermo Fisher (“Merger Sub”) pursuant to which the Company will be, subject to the terms and conditions of the Merger Agreement, merged with and into Merger Sub, with PPD continuing as the surviving corporation and a wholly owned subsidiary of Thermo Fisher. Under, and subject to, the terms of the Merger Agreement, the Company’s stockholders will have the right to receive $47.50 per share in cash, without interest and less applicable withholding tax, for each share of Company common stock upon the closing of the proposed merger. The board of directors of the Company have unanimously approved the Merger Agreement and the transactions contemplated thereby and stockholders holding in aggregate approximately 60% of the issued and outstanding shares of the Company’s common stock duly executed and delivered to Thermo Fisher a written consent, adopting and approving the Merger Agreement and the transactions contemplated thereby. The consummation of the proposed merger remains subject to the satisfaction or, to the extent permitted by law, waiver of customary closing conditions, including approvals under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended and certain other competition and foreign direct investment laws. Subject to such closing conditions, the Company continues to expect the proposed merger to close by the end of 2021.
Third-party costs incurred related to the proposed merger during the three and six months ended June 30, 2021 were $11.5 million and are recorded as a component of selling, general and administrative (“SG&A”) expenses on the condensed consolidated statements of operations.
2. Revenue
Performance Obligations
Revenue recognized from performance obligations partially satisfied in prior periods was $51.9 million and $84.0 million for the three and six months ended June 30, 2021, respectively, and $30.9 million and $54.5 million for the three and six months ended June 30, 2020, respectively. These cumulative catch-up adjustments primarily relate to contract modifications executed in the relevant period, which resulted in changes to the transaction price, and to a lesser extent, changes in transaction price related to variable consideration and changes in estimates such as estimated total costs.
As of June 30, 2021, the aggregate amounts of transaction price allocated to unsatisfied performance obligations with an original contract term of greater than one year was $8.6 billion. The Company expects to recognize 36% to 42% of the transaction price allocated to unsatisfied performance obligations over the next 12 months as services are rendered, with the remainder recognized thereafter during the remaining contract term. The Company does not include the value of the transaction price allocated to unsatisfied performance obligations for contracts that have an original contract term of less than one year, for contracts which are determined to be short-term based on certain termination for convenience provisions or where the right to invoice practical expedient has been applied.
Accounts Receivable and Unbilled Services, net and Unearned Revenue
The Company’s accounts receivable and unbilled services, net, consisted of the following amounts on the dates set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2021
|
|
December 31, 2020
|
Accounts receivable
|
|
$
|
1,028,954
|
|
|
$
|
735,568
|
|
Unbilled services
|
|
984,794
|
|
|
882,078
|
|
Total accounts receivable and unbilled services
|
|
2,013,748
|
|
|
1,617,646
|
|
Allowance for doubtful accounts
|
|
(7,023)
|
|
|
(7,928)
|
|
Total accounts receivable and unbilled services, net
|
|
$
|
2,006,725
|
|
|
$
|
1,609,718
|
|
The Company’s unearned revenue consisted of the following amounts on the dates set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2021
|
|
December 31, 2020
|
Unearned revenue
|
|
$
|
1,351,584
|
|
|
$
|
1,060,544
|
|
As of June 30, 2021 and December 31, 2020, contract assets of $208.3 million and $171.2 million, respectively, were included in unbilled services. The changes in the Company’s contract assets and unearned revenue resulted from the timing difference between the Company’s satisfaction of performance obligations under its contracts, achievement of billing milestones and customer payments. Additionally, during the six months ended June 30, 2021 and 2020, the Company recognized revenue of $669.4 million and $709.5 million, respectively, from the balance of unearned revenue outstanding as of the beginning of each respective year. Impairments of accounts receivable, unbilled services and contract assets were insignificant during the three and six months ended June 30, 2021 and 2020.
Customer Concentration
Concentrations of credit risk with respect to accounts receivable and unbilled services, net, are limited due to the Company’s large number of customers. As of June 30, 2021, no one customer accounted for greater than 10% of accounts receivable and unbilled services, net. As of December 31, 2020, one customer accounted for approximately 12% of accounts receivable and unbilled services, net. During each of the three months ended June 30, 2021 and 2020, one customer accounted for approximately 13% and 11%, respectively, of revenues. No one customer accounted for greater than 10% of revenues for the six months ended June 30, 2021 or 2020.
3. Goodwill and Intangible Assets, Net
Goodwill, Net
The changes in the carrying amount of goodwill by segment consisted of the following on the dates set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Total
|
|
Clinical Development Services
|
|
Laboratory Services
|
Balance at December 31, 2020:
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,946,919
|
|
|
$
|
1,720,305
|
|
|
$
|
226,614
|
|
Accumulated impairment losses
|
|
(126,711)
|
|
|
(99,432)
|
|
|
(27,279)
|
|
Goodwill, net
|
|
1,820,208
|
|
|
1,620,873
|
|
|
199,335
|
|
Activity:
|
|
|
|
|
|
|
Translation adjustments
|
|
(208)
|
|
|
(208)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2021:
|
|
|
|
|
|
|
Goodwill
|
|
1,946,711
|
|
|
1,720,097
|
|
|
226,614
|
|
Accumulated impairment losses
|
|
(126,711)
|
|
|
(99,432)
|
|
|
(27,279)
|
|
Goodwill, net
|
|
$
|
1,820,000
|
|
|
$
|
1,620,665
|
|
|
$
|
199,335
|
|
Intangible Assets, Net
The Company’s definite-lived intangible assets consisted of the following on the dates set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
(in thousands)
|
|
Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
Customer relationships
|
|
$
|
901,683
|
|
|
$
|
(504,960)
|
|
|
$
|
396,723
|
|
|
$
|
902,302
|
|
|
$
|
(479,341)
|
|
|
$
|
422,961
|
|
Trade names
|
|
378,636
|
|
|
(175,229)
|
|
|
203,407
|
|
|
378,764
|
|
|
(159,131)
|
|
|
219,633
|
|
Backlog
|
|
181,685
|
|
|
(181,685)
|
|
|
—
|
|
|
181,762
|
|
|
(181,196)
|
|
|
566
|
|
Investigator/payer network
|
|
243,804
|
|
|
(228,633)
|
|
|
15,171
|
|
|
245,683
|
|
|
(217,963)
|
|
|
27,720
|
|
Technology/intellectual property
|
|
8,600
|
|
|
(4,725)
|
|
|
3,875
|
|
|
8,600
|
|
|
(4,256)
|
|
|
4,344
|
|
Know-how/processes
|
|
599,147
|
|
|
(554,683)
|
|
|
44,464
|
|
|
598,922
|
|
|
(525,742)
|
|
|
73,180
|
|
Total
|
|
$
|
2,313,555
|
|
|
$
|
(1,649,915)
|
|
|
$
|
663,640
|
|
|
$
|
2,316,033
|
|
|
$
|
(1,567,629)
|
|
|
$
|
748,404
|
|
Amortization expense was $46.1 million and $84.7 million for the three and six months ended June 30, 2021, respectively, and $39.4 million and $79.1 million for the three and six months ended June 30, 2020, respectively.
4. Long-term Debt and Finance Lease Obligations
Long-term debt and finance lease obligations consisted of the following on the dates set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Maturity Date
|
|
Effective Rate
|
|
Stated Rate
|
|
June 30, 2021
|
|
December 31, 2020
|
New Term Loan
|
|
January 2028
|
|
2.94%
|
|
2.75%
|
|
$
|
3,042,375
|
|
|
$
|
—
|
|
2025 Notes
|
|
June 2025
|
|
4.97%
|
|
4.63%
|
|
500,000
|
|
|
500,000
|
|
2028 Notes
|
|
June 2028
|
|
5.24%
|
|
5.00%
|
|
700,000
|
|
|
700,000
|
|
2015 Term Loan (1)
|
|
August 2022
|
|
3.71%
|
|
3.50%
|
|
—
|
|
|
3,064,006
|
|
Finance lease obligations
|
|
Various
|
|
Various
|
|
Various
|
|
50,297
|
|
|
25,734
|
|
|
|
|
|
|
|
|
|
4,292,672
|
|
|
4,289,740
|
|
Unamortized debt discount
|
|
(14,302)
|
|
|
(4,198)
|
|
Unamortized debt issuance costs
|
|
(37,433)
|
|
|
(23,112)
|
|
Current portion of long-term debt and finance lease obligations
|
|
(34,696)
|
|
|
(36,238)
|
|
Long-term debt and finance lease obligations, less current portion
|
|
$
|
4,206,241
|
|
|
$
|
4,226,192
|
|
(1) Maturity date, effective rate and stated rate are as of December 31, 2020 for the extinguished 2015 Term Loan.
Extinguished 2015 Credit Agreement
On August 18, 2015, Jaguar Holding Company II and Pharmaceutical Product Development, LLC entered into a credit agreement (the “2015 Credit Agreement”), as amended, consisting of a $2.575 billion senior secured term loan (the “2015 Term Loan”) issued at 99.5% of face value, or a discount of 0.5%, and a $300.0 million senior secured revolving credit facility (the “2015 Revolving Credit Facility”). In May and November of 2016, the Company amended the 2015 Credit Agreement to increase the borrowings of the 2015 Term Loan by $660.0 million in total. Borrowings under the 2015 Term Loan bore interest at a variable rate based on the London Inter-bank Offered Rate (“LIBOR”) for a specific interest period plus an applicable margin, subject to a Eurocurrency rate floor of 1.00%. The 2015 Term Loan was scheduled to mature on August 18, 2022 and the 2015 Revolving Credit Facility was scheduled to mature on May 15, 2022.
On January 13, 2021, the Company extinguished the 2015 Term Loan in accordance with the provisions governing the 2015 Credit Agreement for $3,064.0 million with the proceeds received from the Company’s New Term Loan (as defined below), together with cash on hand. At the same time, the Company also extinguished its then existing 2015 Revolving Credit Facility. The total loss on extinguishment of debt associated with the extinguishments of the 2015 Term Loan and the 2015 Revolving Credit Facility was $10.7 million. As a result, the obligations of the Company under the 2015 Credit Agreement were discharged on that date.
New Credit Agreement
On January 13, 2021, the Company and its indirect wholly-owned subsidiary, PPD Development, L.P. (the “Co-Borrower”) entered into and closed a new (i) $3,050.0 million aggregate principal amount senior secured first-lien term loan facility (the “New Term Loan”) issued at 99.5% of face value, or a discount of 0.5%, maturing in January 2028 and (ii) $600.0 million committed principal amount senior secured first-lien revolving credit facility (the “New Revolving Credit Facility”) maturing in January 2026 under the credit agreement dated as of January 13, 2021 (the “New Credit Agreement”). Debt issuance costs of $23.0 million, consisting primarily of arrangement fees and professional fees, were deferred in connection with the New Term Loan. Additionally, debt issuance costs of $1.1 million related to professional fees were deferred in connection with the New Revolving Credit Facility.
The proceeds from borrowings under the New Term Loan, together with cash on hand, were used to (i) refinance in full the principal amount outstanding and accrued and unpaid interest, fees and other amounts then due and owing under the 2015 Term Loan and (ii) pay fees and expenses relating to the New Credit Agreement.
Borrowings under the New Term Loan bear interest, initially, at a rate equal to, at the option of the Company, either (a) Adjusted LIBOR (as defined in the New Credit Agreement) plus a margin of 2.25% with an “Adjusted LIBOR floor” of 0.50% or (b) Base Rate (as defined in the New Credit Agreement) plus a margin of 1.25%, with a “Base Rate floor” of 1.50%. Loans under the New Revolving Credit Facility bear interest, initially, at a rate equal to, at the option of the Company either (a) Adjusted LIBOR plus a margin of 2.00% with an “Adjusted LIBOR floor” of 0.00% or (b) Base Rate plus a margin of 1.00% with a “Base Rate floor” of 1.00%. Pricing on each of the New Term Loan and New Revolving Credit Facility includes a 25 basis point step-down to the respective interest rate margins upon the achievement and maintenance of a total net leverage ratio of 3.75:1.00 or lower or upon the public announcement that the Company’s corporate credit rating from each of Moody’s and S&P is equal to or better than Ba2 or BB, respectively. Interest on the New Term Loan was based on Adjusted LIBOR as of June 30, 2021.
In addition to paying interest on outstanding principal under the New Revolving Credit Facility, the Company is required to pay a commitment fee, payable quarterly in arrears, of 0.50% per annum on the average daily unused portion of the New Revolving Credit Facility, with step-downs to (i) 0.375% and (ii) 0.25% per annum on such portion upon achievement of a total net leverage ratio equal to or less than (i) 4.75x and (ii) 3.75x, respectively, and an additional 0.125% per annum upon the public announcement that the Company’s corporate credit rating from each of Moody’s and S&P is equal to or better than Ba2 or BB, respectively. The commitment fee shall, however, in no event be less than 0.25% per annum. The commitment fee was set at 0.375% per annum until the date the Company delivers the applicable financial statements for the quarter ending June 30, 2021. The borrowers must also pay customary letter of credit fees.
The borrowers are required, subject to certain exceptions, to pay outstanding loans under the New Term Loan, (i) commencing with the fiscal year ending December 31, 2022, with 50% of excess cash flow, with step-downs upon achievement of certain first lien net leverage ratios, (ii) with 100% of the net cash proceeds of all non-ordinary course asset sales by the Company and its restricted subsidiaries, with step-downs upon achievement of certain first lien net leverage ratios and subject to the Company’s reinvestment right and (iii) with 100% of the net cash proceeds of issuances of debt obligations of the Company and its restricted subsidiaries, other than permitted debt. The borrowers may also voluntarily repay outstanding loans under the New Term Loan and the New Revolving Credit Facility at any time without premium or penalty, except in connection with, or resulting in, any repricing event. In addition, the borrowers may elect to permanently terminate or reduce all or a portion of the revolving credit commitments and the letter of credit sub-limit under the New Revolving Credit Facility at any time without premium or penalty.
The borrowers are required to repay installments on the New Term Loan in quarterly principal amounts equal to 0.25% of the original principal amount of the New Term Loan borrowed on the closing date on the last business day of each calender quarter end, with the balance payable on January 13, 2028. The entire principal amount of revolving loans outstanding (if any) under the New Revolving Credit Facility are due and payable in full at maturity on January 13, 2026, on which day the revolving credit commitments thereunder will terminate.
All obligations under the New Credit Agreement are unconditionally guaranteed on a senior basis by, subject to certain exceptions, each existing and subsequently acquired or organized wholly owned restricted subsidiary of the Company organized in the United States and certain other non-U.S. subsidiaries. The obligations of the borrowers under the New Credit Agreement and the guarantees are secured, subject to certain exceptions and excluded assets, by (i) the equity securities of the Co-Borrower and each guarantor, and of each direct, restricted subsidiary of the Company, the Co-Borrower and of each subsidiary guarantor and (ii) security interests in, and mortgages on, substantially all personal property and material owned real property of the Company and each subsidiary guarantor.
The New Credit Agreement includes negative covenants limiting the ability of the Company and its restricted subsidiaries to incur indebtedness and liens, sell assets and make restricted payments, including dividends and investments, subject to certain exceptions. In addition, the New Credit Agreement also contains other customary affirmative and negative covenants and customary events of default (with customary grace periods, as applicable). Additionally, certain negative covenants are subject to customary investment grade fall-away provisions if the Company has a public corporate credit/family ratings that is investment grade from Moody’s and S&P (so long as there is no ongoing event of default) and will be reinstated if the rating condition is no longer met. If an event of default occurs the administrative agent shall, at the request of, or may, with the consent of the required lenders, (i) terminate lenders’ commitments under the New Credit Agreement, (ii) declare any outstanding loans under the New Credit Agreement to be immediately due and payable, (iii) require that the Company cash collateralize the letters of credit (“L/C”) obligations and (iv) exercise on behalf of itself, the L/C issuers and the lenders all rights and remedies available to it, the L/C issuers and the lenders under the loan documents or applicable law.
From time to time, the Company is required to have L/C issued on its behalf to provide credit support for guarantees, contractual commitments and insurance policies. As of June 30, 2021 and December 31, 2020, the Company had L/C outstanding with an aggregate value of $1.6 million, respectively, which reduced available borrowings under the New Revolving Credit Facility and 2015 Revolving Credit Facility by such amount. As of June 30, 2021, the Company had available credit under the New Revolving Credit Facility of $598.4 million. The Company did not have any borrowings outstanding under the New Revolving Credit Facility as of or at any time during the three and six month periods ended June 30, 2021.
Debt Covenants and Default Provisions
Other than the customary covenants and default provisions related to the New Credit Agreement, there were no changes to the debt covenants or default provisions related to the Company’s other outstanding debt or other obligations during the first six months of 2021. The Company was in compliance with all covenants for all long-term debt arrangements as of June 30, 2021 and December 31, 2020. For additional information on the Company’s debt arrangements, debt covenants and default provisions, see Note 9, “Long-term Debt and Finance Lease Obligations,” of the Company’s audited consolidated financial statements included in the 2020 Form 10-K.
New Finance Lease Agreement
In January 2021, the Company entered into a new lease agreement for its existing laboratory facilities in Virginia. The new lease agreement replaced the prior operating lease agreements for certain existing facilities, consolidated multiple operating leases into one new lease agreement and extended the term of the lease for the facilities. The new finance lease totaling $26.3 million was recorded as a component of property and equipment, net, and current and long-term debt and finance lease obligations on the condensed consolidated balance sheets.
Scheduled Maturities of Long-term Debt and Finance Lease Obligations
As of June 30, 2021, the scheduled maturities of long-term debt and settlement of finance lease obligations for the remainder of 2021, each of the next five years and thereafter were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Year
|
|
Amount
|
2021 (remaining six months)
|
|
$
|
17,517
|
|
2022
|
|
34,363
|
|
2023
|
|
34,417
|
|
2024
|
|
34,331
|
|
2025
|
|
534,421
|
|
2026
|
|
34,835
|
|
Thereafter
|
|
3,602,788
|
|
Total
|
|
$
|
4,292,672
|
|
5. Income Taxes
The Company’s effective income tax rate was 33.0% and 21.2% for the three months ended June 30, 2021 and 2020, respectively, and 28.6% and 15.3% for the six months ended June 30, 2021 and 2020, respectively. The Company’s provision for income taxes for the three and six months ended June 30, 2021 was primarily due to the estimated tax effect on the Company’s pre-tax income and the impact of statutory rate changes in the United Kingdom. The Company’s provision for income taxes for the three and six months ended June 30, 2020 was primarily due to the estimated tax effect on the Company’s pre-tax income and the impact of certain favorable discrete items, partially offset by the tax impact of certain non-deductible compensation costs.
As of June 30, 2021 and December 31, 2020, the Company’s total unrecognized tax benefits were $23.9 million and $21.3 million, respectively. Included in the balance of unrecognized tax benefits as of June 30, 2021 and December 31, 2020, were $17.1 million and $14.9 million, respectively, net of the federal benefit for state taxes that, if recognized, would reduce the Company’s effective tax rate. In addition, the Company believes that it is reasonably possible that the total amount of unrecognized tax benefits could decrease by up to $3.4 million within the next 12 months due to the filing of amended returns, settlement of audits and the expiration of the statutes of limitations.
The Company has analyzed its filing positions in all significant federal, state and foreign jurisdictions where it is required to file income tax returns, as well as open tax years in these jurisdictions. The significant jurisdictions with periods subject to examination where the Company does business are the 2017 through 2020 tax years for the United States and the United Kingdom. Various U.S., foreign and state income tax returns are under examination by taxing authorities. The Company does not believe that the outcome of any examination will have a material impact on its results of operations, financial condition and/or cash flows.
6. Derivative Instruments and Hedging Activities
The Company has variable rate borrowings under its New Term Loan, and as a result, is exposed to interest rate fluctuations on these borrowings. From time to time, the Company enters into interest rate swaps to mitigate the risk in fluctuations in interest rates. For hedges that qualify, the Company accounts for these interest rate swaps as cash flow hedges because their purpose is to hedge the Company’s exposure to increases in interest rates on its variable rate borrowings and as the interest rate swaps effectively convert variable rate borrowings to fixed rate borrowings based on the fixed interest rate for the interest rate swaps plus the applicable margin on the New Term Loan. For those designated interest rate swaps accounted for as cash flow hedges, the Company recognizes in accumulated other comprehensive loss (“AOCL”) or accumulated other comprehensive income (“AOCI”), net of tax, any changes in the fair value, representing unrealized gains or losses, of its interest rate swaps. The Company assesses effectiveness at inception and on an ongoing quarterly basis. The Company may also enter into interest rate swap agreements that are not designated as cash flow hedges for accounting purposes. Changes in the fair value of interest rate swaps not designated as cash flow hedges are reported in the statements of operations as part of other (expense) income, net. The Company does not use derivative financial instruments for speculative or trading purposes and does not offset the fair value amounts of its derivatives. Current market conditions, including dislocation in the financial markets and volatility in interest rates, may affect the performance of the Company’s hedging relationships for cash flow hedges, which could cause the hedges to no longer be effective.
The following table summarizes the material terms of the interest rate swaps outstanding as of June 30, 2021 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swap #
|
|
Terms
|
|
Notional Amount
|
|
Fixed Interest Rate
|
|
Maturity Date
|
|
Designated/Undesignated
|
1
|
|
Variable to fixed
|
|
$
|
1,500,000
|
|
|
1.19%
|
|
March 31, 2025
|
|
Designated
|
2
|
|
Variable to fixed
|
|
1,428,000
|
|
|
1.22%
|
|
March 31, 2025
|
|
Designated
|
3
|
|
Variable to fixed
|
|
72,000
|
|
|
1.22%
|
|
March 31, 2025
|
|
Undesignated
|
4
|
|
Variable to fixed
|
|
500,000
|
|
|
1.17%
|
|
March 31, 2025
|
|
Undesignated
|
5
|
|
Fixed to variable
|
|
500,000
|
|
|
0.52%
|
|
March 31, 2025
|
|
Undesignated
|
During the three months ended June 30, 2021 and 2020, the Company recorded a loss of $0.3 million and $0.2 million, respectively, in other (expense) income, net, from the settlement and change in the fair value of the undesignated interest rate swaps. During the six months ended June 30, 2021 and 2020, the Company recorded a gain of $0.7 million and a loss of $1.9 million, respectively, in other (expense) income, net, from the settlement and change in the fair value of the undesignated interest rate swaps. The Company expects to reclassify current unrealized losses of $32.5 million within the next 12 months from AOCL to interest expense, net, on the condensed consolidated statements of operations as interest payments are made on the New Term Loan.
The Company recognized the following amounts of pre-tax (loss) gain as a component of other comprehensive income (“OCI”) or other comprehensive loss (“OCL”) during the three and six months ended June 30, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Pre-Tax (Loss) Gain Recognized in OCI or OCL
|
|
|
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(10,271)
|
|
|
$
|
(31,955)
|
|
|
$
|
30,595
|
|
|
$
|
(138,345)
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides the location of the pre-tax (loss) gain reclassified from AOCL into the condensed consolidated statements of operations for the periods indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-Tax (Loss) Gain Reclassified from AOCL into Statements of Operations
|
|
|
|
|
(in thousands)
|
|
Location of (Loss) Gain Reclassified from AOCL into Statements of Operations
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
|
Interest rate swaps
|
|
Interest expense, net
|
|
$
|
(8,372)
|
|
|
$
|
(2,563)
|
|
|
$
|
(16,496)
|
|
|
$
|
488
|
|
|
|
|
|
Interest rate swaps
|
|
Other income, net
|
|
—
|
|
|
(3,114)
|
|
|
—
|
|
|
(9,741)
|
|
|
|
|
|
The fair value of derivative instruments consisted of the following balances on the dates set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
(in thousands)
|
|
Balance sheet location
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Other accrued expenses
|
|
$
|
—
|
|
|
$
|
31,445
|
|
|
$
|
—
|
|
|
$
|
32,188
|
|
Interest rate swaps
|
|
Other liabilities
|
|
—
|
|
|
25,784
|
|
|
—
|
|
|
74,286
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Prepaid expenses and other current assets
|
|
1,907
|
|
|
—
|
|
|
1,901
|
|
|
—
|
|
Interest rate swaps
|
|
Other assets
|
|
—
|
|
|
—
|
|
|
1,667
|
|
|
—
|
|
Interest rate swaps
|
|
Other accrued expenses
|
|
—
|
|
|
5,973
|
|
|
—
|
|
|
5,184
|
|
Interest rate swaps
|
|
Other liabilities
|
|
—
|
|
|
9,330
|
|
|
—
|
|
|
11,893
|
|
|
|
|
|
$
|
1,907
|
|
|
$
|
72,532
|
|
|
$
|
3,568
|
|
|
$
|
123,551
|
|
The Company considers the fair value of the interest rate swap assets and liabilities to be a Level 2 classification within the fair value hierarchy. See Note 8, “Fair Value Measurements,” for additional information.
7. Commitments and Contingencies
The Company records liabilities for pending and threatened litigation matters when an adverse outcome is probable and the amount of the potential liability can be reasonably estimated. The Company reviews claims and legal proceedings on a continuous basis and records or adjusts liabilities recorded for such matters based on updated facts and circumstances including settlements or offers to settle, judicial rulings, advice of counsel or other information pertinent to a particular matter. Legal costs associated with contingencies are charged to expense as incurred.
In the ordinary course of business, the Company periodically becomes involved in a variety of pending and threatened proceedings and claims, including investigations, disputes, litigations and regulatory matters. These actions may be threatened or commenced by various parties, including customers, current or former employees, vendors, government agencies, including tax authorities, or others. Based on the latest information available, the Company does not expect that any pending or threatened proceeding, claim or investigation, dispute, litigation or regulatory matter, either individually or in the aggregate, will have a material adverse effect on the business, financial position, results of operations and/or cash flows of the Company.
8. Fair Value Measurements
The Company records certain assets and liabilities at fair value on a recurring and nonrecurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, or the exit price, in an orderly transaction between market participants at the measurement date. U.S. GAAP establishes a fair value hierarchy that gives highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest level to unobservable inputs. The inputs used to measure fair value are classified into the following fair value hierarchy:
•Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company can access at the measurement date.
•Level 2 - Observable inputs other than quoted prices in Level 1, including (i) quoted prices for similar assets and liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in markets that are not active and (iii) observable inputs for the assets or liabilities other than quoted market prices.
•Level 3 - Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. This includes assets and liabilities determined using pricing models, discounted cash flow methodologies or similar techniques reflecting the Company’s own assumptions.
Recurring Fair Value Measurements
The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2021
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Investments
|
$
|
1,266
|
|
|
$
|
—
|
|
|
$
|
220,267
|
|
|
$
|
221,533
|
|
Derivative instruments
|
—
|
|
|
1,907
|
|
|
—
|
|
|
1,907
|
|
Total assets
|
$
|
1,266
|
|
|
$
|
1,907
|
|
|
$
|
220,267
|
|
|
$
|
223,440
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
$
|
—
|
|
|
$
|
72,532
|
|
|
$
|
—
|
|
|
$
|
72,532
|
|
Recapitalization investment portfolio liability
|
—
|
|
|
—
|
|
|
155,584
|
|
|
155,584
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
72,532
|
|
|
$
|
155,584
|
|
|
$
|
228,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Investments
|
$
|
1,307
|
|
|
$
|
—
|
|
|
$
|
264,587
|
|
|
$
|
265,894
|
|
Derivative instruments
|
—
|
|
|
3,568
|
|
|
—
|
|
|
3,568
|
|
Total assets
|
$
|
1,307
|
|
|
$
|
3,568
|
|
|
$
|
264,587
|
|
|
$
|
269,462
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
|
$
|
—
|
|
|
$
|
123,551
|
|
|
$
|
—
|
|
|
$
|
123,551
|
|
Recapitalization investment portfolio liability
|
—
|
|
|
—
|
|
|
204,742
|
|
|
204,742
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
123,551
|
|
|
$
|
204,742
|
|
|
$
|
328,293
|
|
Fair Value Investments
The following table summarizes the Company’s quantitative information about the fair value measurements of Auven Therapeutics Holdings, L.P. (“Auven”) and venBio Global Strategic Fund, L.P. (“venBio”) on the dates set forth below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information About Level 3 Fair Value Measurements for June 30, 2021
|
Description
|
|
Fair Value
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range of Rates
|
Fair value option investments
|
|
$205,434
|
|
Market evaluation/pricing models
|
|
Discount for lack of marketability
|
|
20.0% - 32.5%
|
|
|
|
|
Recent acquisition transactions
|
|
Discount for lack of control
|
|
20.0% - 35.0%
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information About Level 3 Fair Value Measurements for December 31, 2020
|
Description
|
|
Fair Value
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range of Rates
|
Fair value option investments
|
|
$253,801
|
|
Market evaluation/pricing models
|
|
Discount for lack of marketability
|
|
12.5% - 32.5%
|
|
|
|
|
Recent acquisition transactions
|
|
Discount for lack of control
|
|
20.0% - 35.0%
|
See Note 6, “Investments,” of the Company’s audited consolidated financial statements included in the 2020 Form 10-K for additional information on the Company’s investments.
Changes in fair value of the Company’s investments measured on a recurring basis using significant unobservable inputs (Level 3) for the respective periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2021
|
|
2020
|
Balance as of January 1,
|
|
$
|
264,587
|
|
|
$
|
248,453
|
|
|
|
|
|
|
Recognized fair value (loss) gain
|
|
(47,057)
|
|
|
67,727
|
|
Cash distributions received
|
|
(112)
|
|
|
(2,247)
|
|
Capital contributions paid
|
|
2,849
|
|
|
2,011
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30,
|
|
$
|
220,267
|
|
|
$
|
315,944
|
|
Recapitalization Investment Portfolio Liability
Changes in fair value of the recapitalization investment portfolio liability measured on a recurring basis using significant unobservable inputs (Level 3) for the respective periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2021
|
|
2020
|
Balance as of January 1,
|
|
$
|
204,742
|
|
|
$
|
191,678
|
|
Recapitalization investment portfolio consideration change in value
|
|
(36,339)
|
|
|
50,997
|
|
Cash distributions paid
|
|
(12,819)
|
|
|
—
|
|
|
|
|
|
|
Balance as of June 30,
|
|
$
|
155,584
|
|
|
$
|
242,675
|
|
Fair Value of Financial Instruments
The Company estimated the fair value of its financial instruments using available market information. The estimate of fair value has been determined based on the fair value hierarchy for U.S. GAAP. The carrying amounts for cash and cash equivalents, accounts receivable and unbilled services, net, accounts payable and unearned revenue approximate their fair values due to the short-term nature of these financial instruments. The following table presents information about the carrying value and estimated fair value of the Company’s financial instruments on the dates set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
(in thousands)
|
|
Carrying Amount
|
|
Estimated Fair Value
|
|
Carrying Amount
|
|
Estimated Fair Value
|
|
|
|
|
|
|
|
|
|
New Term Loan
|
|
$
|
3,042,375
|
|
|
$
|
3,038,572
|
|
|
$
|
—
|
|
|
$
|
—
|
|
2025 Notes
|
|
500,000
|
|
|
526,250
|
|
|
500,000
|
|
|
527,645
|
|
2028 Notes
|
|
700,000
|
|
|
756,875
|
|
|
700,000
|
|
|
754,257
|
|
2015 Term Loan
|
|
—
|
|
|
—
|
|
|
3,064,006
|
|
|
3,067,652
|
|
The estimated fair value of the New Term Loan, 2025 Notes and 2028 Notes is based on recently reported market transactions and prices for identical or similar financial instruments obtained from a third-party pricing source. The Company considers the fair value of the New Term Loan, 2025 Notes and the 2028 Notes to be within the Level 2 classification of the fair value hierarchy. The estimated fair value of the Company’s previously outstanding 2015 Term Loan was determined in the same manner as the New Term Loan.
9. Accumulated Other Comprehensive Loss
The balances of AOCL, net of tax, were as follows for the three and six months ended June 30, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Foreign
Currency
Translation
|
|
Derivative
Instruments
|
|
Defined Benefit Plan
|
|
Accumulated Other Comprehensive Loss
|
Balance as of March 31, 2021
|
|
$
|
(221,275)
|
|
|
$
|
(43,041)
|
|
|
$
|
(3,314)
|
|
|
$
|
(267,630)
|
|
OCI or (OCL) before reclassifications
|
|
20,935
|
|
|
(7,756)
|
|
|
—
|
|
|
13,179
|
|
Amounts reclassified from AOCL
|
|
—
|
|
|
6,302
|
|
|
188
|
|
|
6,490
|
|
Net OCI or (OCL)
|
|
20,935
|
|
|
(1,454)
|
|
|
188
|
|
|
19,669
|
|
Balance as of June 30, 2021
|
|
$
|
(200,340)
|
|
|
$
|
(44,495)
|
|
|
$
|
(3,126)
|
|
|
$
|
(247,961)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Foreign
Currency
Translation
|
|
Derivative
Instruments
|
|
Defined Benefit Plan
|
|
Accumulated Other Comprehensive Loss
|
Balance as of December 31, 2020
|
|
$
|
(201,426)
|
|
|
$
|
(79,922)
|
|
|
$
|
(3,497)
|
|
|
$
|
(284,845)
|
|
OCI before reclassifications
|
|
1,086
|
|
|
23,009
|
|
|
—
|
|
|
24,095
|
|
Amounts reclassified from AOCL
|
|
—
|
|
|
12,418
|
|
|
371
|
|
|
12,789
|
|
Net OCI
|
|
1,086
|
|
|
35,427
|
|
|
371
|
|
|
36,884
|
|
Balance as of June 30, 2021
|
|
$
|
(200,340)
|
|
|
$
|
(44,495)
|
|
|
$
|
(3,126)
|
|
|
$
|
(247,961)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Foreign
Currency
Translation
|
|
Derivative
Instruments
|
|
Defined Benefit Plan
|
|
Accumulated Other Comprehensive Loss
|
Balance as of March 31, 2020
|
|
$
|
(394,405)
|
|
|
$
|
(69,139)
|
|
|
$
|
(908)
|
|
|
$
|
(464,452)
|
|
OCI or (OCL) before reclassifications
|
|
35,159
|
|
|
(24,065)
|
|
|
—
|
|
|
11,094
|
|
Amounts reclassified from AOCL
|
|
—
|
|
|
4,275
|
|
|
132
|
|
|
4,407
|
|
Net OCI or OCL
|
|
35,159
|
|
|
(19,790)
|
|
|
132
|
|
|
15,501
|
|
Balance as of June 30, 2020
|
|
$
|
(359,246)
|
|
|
$
|
(88,929)
|
|
|
$
|
(776)
|
|
|
$
|
(448,951)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Foreign
Currency
Translation
|
|
Derivative
Instruments
|
|
Defined Benefit Plan
|
|
Accumulated Other Comprehensive Loss
|
Balance as of December 31, 2019
|
|
$
|
(306,452)
|
|
|
$
|
8,566
|
|
|
$
|
(1,018)
|
|
|
$
|
(298,904)
|
|
OCL before reclassifications
|
|
(52,794)
|
|
|
(104,473)
|
|
|
(22)
|
|
|
(157,289)
|
|
Amounts reclassified from AOCI or AOCL
|
|
—
|
|
|
6,978
|
|
|
264
|
|
|
7,242
|
|
Net (OCL) or OCI
|
|
(52,794)
|
|
|
(97,495)
|
|
|
242
|
|
|
(150,047)
|
|
Balance as of June 30, 2020
|
|
$
|
(359,246)
|
|
|
$
|
(88,929)
|
|
|
$
|
(776)
|
|
|
$
|
(448,951)
|
|
The following table presents the significant reclassifications to the condensed consolidated statements of operations out of AOCL or AOCI and the line item affected on the condensed consolidated statements of operations for the respective periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
|
Details about AOCL or AOCI Components
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
|
|
Affected line item in statements of operations
|
(Losses) gains on derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(8,372)
|
|
|
$
|
(2,563)
|
|
|
$
|
(16,496)
|
|
|
$
|
488
|
|
|
|
|
|
|
Interest expense, net
|
Interest rate swaps
|
|
—
|
|
|
(3,114)
|
|
|
—
|
|
|
(9,741)
|
|
|
|
|
|
|
Other (expense) income, net
|
Income tax benefit
|
|
2,070
|
|
|
1,402
|
|
|
4,078
|
|
|
2,275
|
|
|
|
|
|
|
Provision for income taxes
|
Total net of income tax
|
|
$
|
(6,302)
|
|
|
$
|
(4,275)
|
|
|
$
|
(12,418)
|
|
|
$
|
(6,978)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial loss
|
|
$
|
(232)
|
|
|
$
|
(159)
|
|
|
$
|
(459)
|
|
|
$
|
(321)
|
|
|
|
|
|
|
Other (expense) income, net
|
Income tax benefit
|
|
44
|
|
|
27
|
|
|
88
|
|
|
57
|
|
|
|
|
|
|
Provision for income taxes
|
Total net of income tax
|
|
$
|
(188)
|
|
|
$
|
(132)
|
|
|
$
|
(371)
|
|
|
$
|
(264)
|
|
|
|
|
|
|
|
10. Related Party Transactions
Majority Sponsors Transactions
The Company’s majority sponsors include the Carlyle Group Inc. (“Carlyle”) and Hellman & Friedman LLC (“H&F”). Affiliates of Carlyle had investments in the New Term Loan totaling $91.9 million as of June 30, 2021 and investments in the 2015 Term Loan totaling $12.6 million as of December 31, 2020. The amounts paid to the relevant affiliates for those loans for the respective periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
(in thousands)
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
|
Interest paid
|
|
$
|
640
|
|
|
$
|
600
|
|
|
$
|
1,174
|
|
|
$
|
1,400
|
|
|
|
|
|
Principal paid
|
|
230
|
|
|
200
|
|
|
12,853
|
|
|
400
|
|
|
|
|
|
Recapitalization investment portfolio distributions made to affiliates of Carlyle and affiliates of H&F during the three and six months ended June 30, 2021 were $11.8 million. There were no such payments made during the three and six months ended June 30, 2020. See Note 1, “Basis of Presentation and Summary of Significant Accounting Policies,” of the Company’s audited consolidated financial statements included in the 2020 Form 10-K for additional information related to the recapitalization investment portfolio liability.
SNBL Transactions
The Company owns 60% of its consolidated subsidiary PPD-SNBL K.K. (“PPD-SNBL”). The 40% ownership interest held by Shin Nippon Biomedical Laboratories Ltd. (“SNBL”) is classified as a redeemable noncontrolling interest on the condensed consolidated balance sheets due to certain put options, one of which is triggered by a change in control of the Company, under which SNBL may require the Company to purchase SNBL’s remaining ownership interest at fair value upon the occurrence of certain events described in the PPD-SNBL shareholders agreement. As of June 30, 2021, no such events had occurred. Upon closing of the proposed merger with Thermo Fisher and for a period of one year thereafter, SNBL will have the right, but not the obligation, to exercise its put option to sell its 40% ownership interest in PPD-SNBL to the Company.
Both the Company and SNBL have service agreements to provide administrative and support services to PPD-SNBL, both of which will remain in effect as long as the PPD-SNBL shareholders agreement remains in effect. The Company and SNBL also have a collaboration agreement under which the parties may collaborate on various drug development services. This collaboration agreement will remain in effect as long as SNBL owns at least 20% of PPD-SNBL. For the three months ended June 30, 2021 and 2020, the Company incurred expenses for services rendered under the services agreement of $0.3 million. For the six months ended June 30, 2021 and 2020, the Company incurred expenses under the services agreement of $0.5 million and $0.5 million, respectively. The expenses are recorded as a component of SG&A expenses on the condensed consolidated statements of operations. Additionally, as of June 30, 2021, the Company owed SNBL $0.3 million for services rendered under the services agreement. No such amount was owed to SNBL as of December 31, 2020.
11. Earnings Per Share
The following table provides a reconciliation of the numerator and denominator of the basic and diluted earnings per share (“EPS”) computations for the periods set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
(in thousands, except per share data)
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
51,464
|
|
|
$
|
62,111
|
|
|
$
|
98,800
|
|
|
$
|
48,991
|
|
|
|
|
|
Net income attributable to noncontrolling interest
|
|
(456)
|
|
|
(194)
|
|
|
(1,911)
|
|
|
(2,912)
|
|
|
|
|
|
Recapitalization investment portfolio consideration
|
|
7,727
|
|
|
(71,059)
|
|
|
36,339
|
|
|
(50,997)
|
|
|
|
|
|
Net income (loss) attributable to common stockholders of PPD, Inc.
|
|
$
|
58,735
|
|
|
$
|
(9,142)
|
|
|
$
|
133,228
|
|
|
$
|
(4,918)
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
351,134
|
|
|
348,584
|
|
|
350,784
|
|
|
333,023
|
|
|
|
|
|
Effect of dilutive stock options and share awards
|
|
8,138
|
|
|
—
|
|
|
7,684
|
|
|
—
|
|
|
|
|
|
Diluted weighted-average common shares outstanding
|
|
359,272
|
|
|
348,584
|
|
|
358,468
|
|
|
333,023
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
|
$
|
(0.03)
|
|
|
$
|
0.38
|
|
|
$
|
(0.01)
|
|
|
|
|
|
Diluted
|
|
$
|
0.16
|
|
|
$
|
(0.03)
|
|
|
$
|
0.37
|
|
|
$
|
(0.01)
|
|
|
|
|
|
See Note 4, “Stockholders’ Deficit and Redeemable Noncontrolling Interest,” and Note 1, “Basis of Presentation and Summary of Significant Accounting Policies,” of the Company’s audited consolidated financial statements included in the 2020 Form 10-K for additional information related to shares and the recapitalization investment portfolio consideration.
The Company does not include potentially dilutive shares in the calculation of diluted weighted-average number of common shares outstanding in cases where the inclusion of such additional shares would be anti-dilutive. Potential common shares related to time-based and vested performance-based stock options and unvested restricted stock units may be determined to be anti-dilutive based on the application of the treasury stock method and are also anti-dilutive in periods when there is a net loss attributable to common stockholders of PPD, Inc.
The number of potential common shares outstanding that were considered anti-dilutive using the treasury stock method and therefore excluded from the computation of diluted EPS, weighted for the portion of the period they were outstanding, for the respective periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
(in thousands)
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
|
Anti-dilutive equity awards
|
|
2,252
|
|
|
1,088
|
|
|
2,031
|
|
|
544
|
|
|
|
|
|
At June 30, 2021, unvested (i) performance-based options, (ii) performance stock units and (iii) liquidity/realization options totaling 5.2 million potential shares were outstanding but excluded from the calculation of diluted EPS, as these shares are contingently issuable based on the Company’s actual or expected achievement of performance factors or certain market conditions.
12. Segments
The Company is managed through two reportable segments, Clinical Development Services and Laboratory Services. The Company determines reportable segments using the management approach. The management approach is based on how the Company’s chief operating decision maker (“CODM”) organizes the segments for purposes of assessing performance and making operating decisions. The Clinical Development Services segment provides a wide range of services to its customers including early development/Phase I, patient recruitment and enrollment, investigator site management, Phase II-IV clinical trial management, medical communications and various peri- and post-approval services. The Laboratory Services segment provides comprehensive services to its customers including bioanalytical, vaccine sciences, good manufacturing practice, central lab and biomarker testing. Both segments provide services to pharmaceutical, biotechnology, medical device, government organizations and other industry participants.
The Company’s CODM assesses segment performance and makes resource allocation decisions based on segment revenues and segment operating income. The CODM reviews the Company’s assets on a consolidated basis and does not assess performance or make operating decisions based on segment assets.
Information on reportable segment revenue and segment operating income, including a reconciliation of segment operating income to consolidated income from operations, for the respective periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
(in thousands)
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
|
Segment revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical Development Services
|
|
$
|
1,300,217
|
|
|
$
|
815,250
|
|
|
$
|
2,417,587
|
|
|
$
|
1,686,136
|
|
|
|
|
|
Laboratory Services
|
|
275,255
|
|
|
195,668
|
|
|
536,265
|
|
|
397,244
|
|
|
|
|
|
Total segment revenue
|
|
1,575,472
|
|
|
1,010,918
|
|
|
2,953,852
|
|
|
2,083,380
|
|
|
|
|
|
Segment direct costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical Development Services
|
|
377,056
|
|
|
283,378
|
|
|
733,105
|
|
|
592,456
|
|
|
|
|
|
Laboratory Services
|
|
120,887
|
|
|
89,748
|
|
|
238,956
|
|
|
176,799
|
|
|
|
|
|
Total segment direct costs
|
|
497,943
|
|
|
373,126
|
|
|
972,061
|
|
|
769,255
|
|
|
|
|
|
Segment reimbursed costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical Development Services
|
|
480,404
|
|
|
198,226
|
|
|
830,086
|
|
|
421,755
|
|
|
|
|
|
Laboratory Services
|
|
36,105
|
|
|
25,581
|
|
|
67,260
|
|
|
52,902
|
|
|
|
|
|
Total segment reimbursed costs
|
|
516,509
|
|
|
223,807
|
|
|
897,346
|
|
|
474,657
|
|
|
|
|
|
Segment SG&A expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical Development Services
|
|
193,941
|
|
|
135,518
|
|
|
367,425
|
|
|
277,350
|
|
|
|
|
|
Laboratory Services
|
|
30,072
|
|
|
21,863
|
|
|
57,434
|
|
|
43,646
|
|
|
|
|
|
Total segment SG&A expenses
|
|
224,013
|
|
|
157,381
|
|
|
424,859
|
|
|
320,996
|
|
|
|
|
|
Segment operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical Development Services
|
|
248,816
|
|
|
198,128
|
|
|
486,971
|
|
|
394,575
|
|
|
|
|
|
Laboratory Services
|
|
88,191
|
|
|
58,476
|
|
|
172,615
|
|
|
123,897
|
|
|
|
|
|
Total segment operating income
|
|
337,007
|
|
|
256,604
|
|
|
659,586
|
|
|
518,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses not allocated to segments:
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
2,253
|
|
|
1,713
|
|
|
5,759
|
|
|
20,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A expenses
|
|
106,014
|
|
|
80,235
|
|
|
199,104
|
|
|
164,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
80,255
|
|
|
68,763
|
|
|
153,398
|
|
|
135,078
|
|
|
|
|
|
Long-lived asset impairment
|
|
—
|
|
|
—
|
|
|
1,584
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
148,485
|
|
|
$
|
105,893
|
|
|
$
|
299,741
|
|
|
$
|
198,975
|
|
|
|
|
|
13. Entity-wide Information by Geographic Location
The table below presents certain entity-wide information about the Company’s operations by geographic location. The Company allocates revenues to geographic locations based on where the services are performed. Total revenues by geographic location for the respective periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
(in thousands)
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
967,637
|
|
|
$
|
574,060
|
|
|
$
|
1,788,849
|
|
|
$
|
1,132,299
|
|
|
|
|
|
Latin America
|
|
51,640
|
|
|
45,711
|
|
|
94,016
|
|
|
90,621
|
|
|
|
|
|
Europe, Middle East and Africa
|
|
391,425
|
|
|
279,159
|
|
|
774,384
|
|
|
633,610
|
|
|
|
|
|
Asia-Pacific
|
|
164,770
|
|
|
111,988
|
|
|
296,603
|
|
|
226,850
|
|
|
|
|
|
Revenue
|
|
$
|
1,575,472
|
|
|
$
|
1,010,918
|
|
|
$
|
2,953,852
|
|
|
$
|
2,083,380
|
|
|
|
|
|
14. Other (Expense) Income, Net
The components of other (expense) income, net, for the respective periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands)
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Other (expense) income, net:
|
|
|
|
|
|
|
|
|
Foreign currency (losses) gains, net
|
|
$
|
(12,798)
|
|
|
$
|
(23,198)
|
|
|
$
|
(4,765)
|
|
|
$
|
14,454
|
|
Interest rate swap (losses) gains
|
|
(335)
|
|
|
(3,268)
|
|
|
668
|
|
|
(11,606)
|
|
Other income
|
|
531
|
|
|
424
|
|
|
676
|
|
|
589
|
|
Other expense
|
|
(32)
|
|
|
(196)
|
|
|
(210)
|
|
|
(381)
|
|
Total other (expense) income, net
|
|
$
|
(12,634)
|
|
|
$
|
(26,238)
|
|
|
$
|
(3,631)
|
|
|
$
|
3,056
|
|