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 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, 2020 and 2019, including year-over-year comparisons of our financial performance and condition for these years. Discussion and analysis of the year ended December 31, 2018 specifically, as well as the year-over-year comparison of our financial performance and condition for the years ended December 31, 2019 and 2018, 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, 2019, filed with the SEC on February 21, 2020.
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.
Overview of the Impact of COVID-19 to our Business
The novel coronavirus COVID-19, or COVID-19, which surfaced in Wuhan, China, in December 2019, has been declared a pandemic and has spread to multiple global regions, including the United States and Europe. The impact of this pandemic has been and will likely continue to be extensive in many aspects of society, which has resulted in and will likely continue to result in significant disruptions to the global economy, as well as businesses around the world. In an effort to halt the outbreak of COVID-19, a number of countries, including the United States, have placed significant restrictions on travel and many businesses have announced extended closures.
The disruptions caused by COVID-19 did not have a material impact on our financial results to start the year; however, as the global spread of the virus began to accelerate late in the first quarter of 2020, we began to experience an adverse impact to our financial results, which continued through the fourth quarter of 2020. We believe that we will continue to experience disruptions to our business due to the COVID-19 pandemic into 2021.
As the COVID-19 pandemic continues to evolve rapidly, we cannot at this time accurately predict the effects of these conditions on our operations. Uncertainties remain as to the duration of the pandemic, the geographic location of specific outbreaks, and the length and scope of the travel restrictions and business closures imposed by the governments of impacted countries. The COVID-19 outbreak has had, and a continuing outbreak or future outbreaks may have, several important impacts on our business:
•Workforce: In response to the outbreak and business disruption, we have prioritized the health and safety of our employees and we closed the majority of our physical office locations worldwide in March. Although we have begun limited re-openings of some of our offices, most of our workforce is able to work remotely in an effective way.
•Backlog: We have not experienced any material COVID-19 related trial cancellations. Although business development activities began to normalize during the second and third quarters, the year ended December 31, 2020 was impacted by COVID-19. Late in the first quarter, we experienced bid-defense meeting
postponements due to travel restrictions and delays in study award decision-making. This has had an impact on new business awards in both the Clinical Research and Data Solutions segments, particularly during the first quarter of 2020.
•Clinical Research segment: During March 2020, we began to experience global site closures, including some of our clinic facilities, which has led to a decline in site-based monitoring and the enrollment of patients. We have been able to implement remote monitoring activities through the use of our technology platforms in an effort to mitigate the impact of these site closures. Limitations on travel and business closures recommended by federal, state, and local governments, has impacted and could continue to impact, among other things, our ability to enroll patients in clinical trials, recruit clinical site investigators, and obtain timely approvals from local regulatory authorities.
•Data Solutions segment: Our Data Solutions segment is and has been relatively more insulated from the effects of the virus, due to its high proportion of recurring license revenue. However, service offerings in this segment that rely on face-to-face interactions or are dependent on in-person gatherings, events, or conferences may experience significant disruption.
•Mitigation strategies: In light of the current situation, we have initiated proactive cost management strategies. These include, among other things, hiring restrictions, reductions in third-party costs, and certain compensation adjustments. We have also implemented proactive cash conservation initiatives, including delaying some capital expenditures and halting voluntary debt repayments.
•Liquidity position: We believe that we have a strong liquidity position, which includes cash on hand and access to our revolving credit facility. We are currently subject to two debt covenants in our Senior Secured Credit Facility:
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Requirement:
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As of December 31, 2020
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Total indebtedness to EBITDA
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≤ 4.25x
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1.15x
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Interest expense to EBITDA
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≥ 3.00x
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13.01x
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We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations, or cash flows in the future.
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, 2020 and 2019 were $3,320.8 million and $3,024.0 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, 2020 and 2019, we had $404.2 million and $360.4 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, 2020 and 2019 was $5.4 billion and $4.7 billion, respectively.
Industry Trends
ISR estimated in its 2020 Market Report that the size of the worldwide CRO market was approximately $41 billion in 2019 and will grow at a 6.9% CAGR to $57 billion in 2024. 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.
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 97.2% and 96.4% for the years ended December 31, 2020 and 2019, respectively. The cost of labor procured through staffing agencies is included in these percentages and represents 3.2% and 3.1% of the Clinical Research segment's total direct costs for the years ended December 31, 2020 and 2019, 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 was 2.8% and 3.6% for the years ended December 31, 2020 and 2019, respectively.
Historically, direct costs have increased with an increase in revenue. The future relationship between direct costs and revenue may vary from historical relationships. 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.
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 76.2% and 73.3% for the years ended December 31, 2020 and 2019, respectively. Labor-related charges, such as salaries, benefits, and incentive compensation for our employees, were 18.8% and 20.2% of the Data Solutions segment's total direct costs for the years ended December 31, 2020 and 2019, respectively. Our remaining direct costs are items such as travel, meals, and supplies, and were 5.0% and 6.5% of the Data Solutions segment's total direct costs for the years ended December 31, 2020 and 2019, respectively.
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, 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 January 2020, we acquired Care Innovations, Inc., or Care Innovations, which expanded our ability to serve customers with technologies that enhance our mobile health platform and provide expanded remote patient monitoring support. This acquisition expands our capabilities to deliver virtual and decentralized trials.
This transaction was accounted for as a business combination and the acquired results of operations are included in our consolidated financial information since the acquisition date.
See Note 4 to our audited consolidated financial statements found elsewhere in this Annual Report on Form 10-K for additional information with respect to this acquisition.
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 exchange rates:
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Average Rate
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Closing Rate
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2020
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2019
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2020
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2019
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U.S. dollars per:
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Euro
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1.14
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1.12
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1.23
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1.12
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British pound
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1.28
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1.28
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1.37
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1.32
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Results of Operations
Consolidated Results of Operations for the Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
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Years Ended December 31,
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2020
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2019
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(in thousands)
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Revenue
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$
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3,183,365
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$
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3,066,262
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Operating expenses:
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Direct costs (exclusive of depreciation and amortization)
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1,649,001
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1,539,541
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Reimbursable expenses
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665,761
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650,080
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Selling, general and administrative expenses
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453,032
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394,925
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Transaction-related costs
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(44,465)
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|
1,835
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Depreciation and amortization expense
|
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131,630
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|
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114,898
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Loss on disposal of fixed assets
|
|
317
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|
|
1,058
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Income from operations
|
|
328,089
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|
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363,925
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Interest expense, net
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(43,130)
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|
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(51,987)
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Loss on modification or extinguishment of debt
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(450)
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(3,928)
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Foreign currency losses, net
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(25,499)
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(2,257)
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Other (expense) income, net
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(1)
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|
|
174
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Income before income taxes
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|
259,009
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|
|
305,927
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Provision for income taxes
|
|
61,966
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|
|
62,808
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Net income
|
|
197,043
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|
|
243,119
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Net income attributable to noncontrolling interest
|
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—
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(99)
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Net income attributable to PRA Health Sciences, Inc.
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$
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197,043
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$
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243,020
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Revenue increased by $117.1 million, or 3.8%, from $3,066.3 million during the year ended December 31, 2019 to $3,183.4 million during the year ended December 31, 2020. Revenue for the year ended December 31, 2020 benefited from an increase in billable hours and a favorable impact of $4.4 million from foreign currency exchange rate fluctuations. Although we saw an increase in billable hours during the year ended December 31, 2020, our billable hours, particularly in the second quarter, were impacted by the inaccessibility of investigator sites and an inability to screen and enroll patients due to the continued disruption from the COVID-19 pandemic. 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.
Direct costs increased by $109.5 million, or 7.1%, from $1,539.5 million during the year ended December 31, 2019 to $1,649.0 million during the year ended December 31, 2020. Salaries and related benefits in our Clinical Research segment
increased $107.3 million as we continued to hire billable staff to support our portfolio of studies and to support growth in our business. Data costs in our Data Solutions segment increased by $19.9 million due to increased costs on the renewal of existing contracts and the addition of new sources of data to expand our data offerings. Both of these increases were offset by a decrease in travel and other project-related costs of $10.1 million due to the impact the COVID-19 pandemic had on our operations and a favorable impact of $8.8 million from foreign currency exchange rate fluctuations. Direct costs as a percentage of revenue increased from 50.2% during the year ended December 31, 2019 to 51.8% during the year ended December 31, 2020.
Reimbursable expenses increased by $15.7 million from $650.1 million during the year ended December 31, 2019 to $665.8 million during the year ended December 31, 2020. 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 $58.1 million, or 14.7%, from $394.9 million during the year ended December 31, 2019 to $453.0 million during the year ended December 31, 2020. The increase in selling, general and administrative expenses is primarily due to an increase in salaries and related benefits, including stock-based compensation expense, due to increased headcount and additional office space added prior to March 2020 when COVID-19 began to have an adverse impact on our operations. Selling, general and administrative expenses as a percentage of revenue increased from 12.9% during the year ended December 31, 2019 to 14.2% during the year ended December 31, 2020.
Transaction-related costs are primarily related to changes in the fair value of contingent consideration and other expenses incurred in conjunction with our recent acquisitions and fees associated with our secondary offerings. During the year ended December 31, 2020, we recorded a $44.5 million decrease in the fair value of the earn-out liability associated with the acquisition of Care Innovations, as it was determined that the two 2020 financial targets would not be met. Specifically, the revenue and earnings before interest, taxes, depreciation, and amortization of the acquired business were expected to be lower than initial forecasts. The initial growth estimates for the service offering were negatively impacted by changes in market conditions, which negatively impacted Care Innovations' ability to contract and deliver services on new commercial opportunities within the one-year earn-out period. During the year ended December 31, 2019, we incurred transaction-related costs of $1.8 million. These costs consisted of $0.6 million of third party costs incurred in connection with our secondary offering and $1.3 million of expenses related to the acquisition of Care Innovations.
Depreciation and amortization expense increased by $16.7 million, or 14.6%, from $114.9 million during the year ended December 31, 2019 to $131.6 million during the year ended December 31, 2020. Depreciation and amortization expense as a percentage of revenue was 3.7% during the year ended December 31, 2019 and 4.1% during the year ended December 31, 2020. The increase in depreciation and amortization expense is due to the amortization of the intangible assets acquired in connection with the acquisition of Care Innovations as well as an increase in depreciation expense due to an increase in our depreciable asset base.
Interest expense, net decreased by $8.9 million from $52.0 million during the year ended December 31, 2019 to $43.1 million during the year ended December 31, 2020. A decline in the weighted average interest rate on the unhedged portion of our debt resulted in an $8.2 million decrease in interest expense during the year ended December 31, 2020.
Loss on modification or extinguishment of debt was $0.5 million during the year ended December 31, 2020 compared to $3.9 million during the year ended December 31, 2019. The loss on modification or extinguishment of debt during the year ended December 31, 2020 is related to new fees incurred that were expensed as a result of the amendment of our accounts receivable financing agreement. 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.
Foreign currency losses, net increased by $23.2 million from $2.3 million during the year ended December 31, 2019 to $25.5 million during the year ended December 31, 2020. 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, 2020 is primarily due to movement of the U.S. dollar versus the British pound, Euro, Canadian dollar, and the Russian ruble.
Provision for income taxes decreased by $0.8 million from $62.8 million during the year ended December 31, 2019 to $62.0 million during the year ended December 31, 2020. Our effective tax rate was 23.9% for the year ended December 31, 2020 compared to 20.5% during the year ended December 31, 2019. The increase in the effective tax rate was primarily driven by increases in stock-based compensation, taxes on settled interest rate swaps, and the liability related to uncertain tax positions.
These increases were offset by the effect of a decrease in the fair value of the earn-out liability related to the stock acquisition of Care Innovations, which was not included in taxable income, but instead decreased the tax basis of the acquired company.
Segment Results of Operations for the Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
Clinical Research
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Years Ended December 31,
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2020
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2019
|
(in thousands)
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Revenue
|
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|
$
|
2,923,045
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|
|
$
|
2,812,969
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Segment profit
|
|
|
801,357
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|
|
796,823
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Segment profit %
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|
|
27.4
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%
|
|
28.3
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%
|
Revenue increased by $110.1 million, or 3.9%, from $2,813.0 million during the year ended December 31, 2019 to $2,923.0 million during the year ended December 31, 2020. Revenue for the year ended December 31, 2020 benefited from an increase in billable hours and the reimbursable portion of revenue. Although we saw an increase in billable hours during the year ended December 31, 2020, our billable hours, particularly during the second quarter, were impacted by the inaccessibility of investigator sites and an inability to screen and enroll patients due to the continued disruption from the COVID-19 pandemic. 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.
Segment profit increased by $4.5 million, or 0.6%, from $796.8 million during the year ended December 31, 2019 to $801.4 million during the year ended December 31, 2020 primarily due to an increase in revenue. Segment profit as a percentage of revenue decreased from 28.3% during the year ended December 31, 2019 to 27.4% for the same period in 2020. Segment profitability was impacted by the COVID-19 pandemic as we retained staff to ensure we could meet client deliverables.
Data Solutions
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Years Ended December 31,
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|
2020
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2019
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(in thousands)
|
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|
Revenue
|
$
|
260,320
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|
|
$
|
253,293
|
|
Segment profit
|
67,246
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|
|
79,818
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Segment profit %
|
25.8
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%
|
|
31.5
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%
|
Revenue increased by $7.0 million, or 2.8%, from $253.3 million during the year ended December 31, 2019 to $260.3 million during the year ended December 31, 2020. The increase in revenue was related to an increase in the volume of data services provided during the year ended December 31, 2020, offset by a decrease in the amount of consulting and in-kind services provided during the year ended December 31, 2020.
Segment profit decreased by $12.6 million, or 15.8%, from $79.8 million during the year ended December 31, 2019 to $67.2 million during the year ended December 31, 2020. The decrease in segment profit is attributable to increased costs on the renewal of existing contracts and the addition of new sources of data to expand our data offerings. Segment profit as a percentage of revenue decreased from 31.5% during the year ended December 31, 2019 to 25.8% for the same period in 2020 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, 2020, we had approximately $506.3 million of cash and cash equivalents of which $79.2 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 $3,272.4 million during the year ended December 31, 2020, including $487.0 million of funds received from customers to pay independent physician investigators, or investigators, as compared to $3,087.3 million during the year ended December 31, 2019, including $325.3 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, 2020, net cash provided by operations was $427.2 million, compared to $253.6 million in 2019. Cash provided by operating activities increased over the prior year primarily due to improvements in cash flows from working capital changes. The changes in working capital were driven by an improvement in our days sales outstanding as compared to the prior year. Additionally, the prior year included the impact of a cash outflow associated with an acquisition-related earn-out payment.
Cash Flow from Investing Activities
Net cash used in investing activities was $233.9 million during the year ended December 31, 2020, compared to $73.2 million in 2019. The increase in cash outflows is primarily attributable to the acquisition of Care Innovations.
Cash Flow from Financing Activities
Net cash provided by financing activities was $77.4 million during the year ended December 31, 2020 compared to net cash used in financing activities of $90.7 million for the same period of 2019. During the year ended December 31, 2020, our long-term debt balance, including borrowings under our revolving line of credit, increased by $20.0 million compared to a $172.3 million increase for the same period in 2019. Additionally, there was a $12.5 million increase in cash inflow from proceeds from stock issued under our employee stock purchase plan and stock option exercises during the year ended December 31, 2020 compared to the same period in 2019. The prior year included a $300.0 million cash outflow for the repurchase and retirement of common stock as well as a $4.1 million outflow for the acquisition of a non-controlling interest.
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.
No share repurchases were made during the year ended December 31, 2020. As of December 31, 2020, we have remaining authorization to repurchase up to $200.0 million of our 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:
•the First Lien Term Loan in an aggregate principal amount of $1,000.0 million; and
•the Revolver in an aggregate principal amount of up to $750.0 million.
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%
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1.50%
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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, 2020 and 2019, the interest rate on the First Lien Term Loan was 1.40% and 3.21%, respectively.
Prepayments
The Senior Secured Credit Facility requires us to prepay outstanding term loans, subject to certain exceptions, with:
•100% of the net cash proceeds of the incurrence or issuance of certain debt; and
•100% of the net cash proceeds of $5.0 million of certain non-ordinary course asset sales and casualty and condemnation events, subject to reinvestment rights and certain other exceptions.
The foregoing mandatory prepayments will be applied first to accrued interest and fees and second, to the scheduled installments of principal of the 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:
•create any 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 clauses restriction; and
•subsidiary distributions.
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 December 18, 2020, we amended our accounts receivable financing agreement. The amendment increased the agreement's borrowing capacity and extended the termination date to December 16, 2022, unless terminated earlier pursuant to its terms.
We may borrow up to $250.0 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, 2020, the outstanding balance was $212.5 million.
Interest Rate and Fees
Loans under the accounts receivable financing agreement will accrue interest at either a reserve-adjusted LIBOR, no less than 0.14%, or a base rate, plus 1.25%. As of December 31, 2020 and December 31, 2019, the interest rate on the accounts receivable financing agreement was 1.40% and 3.22%, 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, 2020:
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Payments Due by Period
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Less than 1 year
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1 - 3 years
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3 - 5 years
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More than 5 years
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Total
|
|
(in thousands)
|
Principal payments on long-term debt (1)
|
$
|
25,000
|
|
|
$
|
262,500
|
|
|
$
|
991,300
|
|
|
$
|
—
|
|
|
$
|
1,278,800
|
|
Interest payments on long-term debt (1)
|
18,051
|
|
|
31,908
|
|
|
11,556
|
|
|
—
|
|
|
61,515
|
|
Service purchase commitments (2)
|
154,282
|
|
|
123,957
|
|
|
67,863
|
|
|
763
|
|
|
346,865
|
|
Operating leases
|
46,202
|
|
|
72,051
|
|
|
38,030
|
|
|
75,995
|
|
|
232,278
|
|
Less: sublease income
|
(168)
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|
|
(127)
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|
|
—
|
|
|
—
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|
|
(295)
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|
Uncertain income tax positions (3)
|
—
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|
|
—
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|
|
—
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|
|
—
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|
|
—
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Total
|
$
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243,367
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|
|
$
|
490,289
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|
|
$
|
1,108,749
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|
|
$
|
76,758
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|
|
$
|
1,919,163
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|
(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, 2020.
(2)Service purchase commitments are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased.
(3)As of December 31, 2020, our liability related to uncertain income tax positions was approximately $31.0 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.
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 and historical experience 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.
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 $8.5 million was required as of December 31, 2020 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 Financial Accounting Standards Board's, or FASB, Accounting Standards Codification, or ASC, 740, “Income Taxes.” As of December 31, 2020, we had recorded a liability for uncertain tax positions of $31.0 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 $31.0 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:
•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.
•The risk‑free interest rate assumption is based upon observed interest rates appropriate for the term of our employee stock options.
•The dividend yield assumption is based on the history and expectation of dividend payouts.
•For those options valued using the Black-Scholes model, the expected life is based upon the guidance provided by the FASB. For those options with a market condition valued under the lattice model, the expected life varies depending on the target stock price that triggers vesting.
•We account for forfeitures as they occur.
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, 2020, 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.
If we do not perform a qualitative assessment, goodwill impairment is determined by using a quantitative assessment that compares the fair value of each goodwill reporting unit to its carrying amount, and to the extent the carrying amount exceeds the fair value, an impairment of goodwill is recognized for the excess up to the amount of goodwill allocated to the reporting unit. To determine the fair value of each reporting unit, we generally use a discounted cash flow technique corroborated by market multiples when available and as appropriate. During the fourth quarter of 2020, as part of our annual impairment analysis, we performed updated quantitative assessments for all reporting units, and for our indefinite-lived trade name intangible asset balances. It was concluded that the estimated fair value of the Data Solutions, EDS, PR, and SS operating segments exceeded their carrying values by a significant margin.
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 2020, 2019, and 2018.
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, 2020. 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, 2020 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
|
|
Executive Vice President and Chief Financial Officer
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(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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, 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 24, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
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.
•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 the cost incurred to date to the cost 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 24, 2021
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, 2020, 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, 2020, 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, 2020, of the Company and our report dated February 24, 2021 expressed an unqualified opinion on those financial statements.
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 24, 2021
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
506,303
|
|
|
$
|
236,232
|
|
Restricted cash
|
—
|
|
|
38
|
|
Accounts receivable and unbilled services, net of allowance for credit losses of $3,064 as of December 31, 2020
|
843,905
|
|
|
658,517
|
|
Prepaid expenses and other current assets
|
99,006
|
|
|
88,141
|
|
Income taxes receivable
|
11,300
|
|
|
2,639
|
|
Total current assets
|
1,460,514
|
|
|
985,567
|
|
Fixed assets, net
|
194,620
|
|
|
180,716
|
|
Operating lease right-of-use assets
|
178,144
|
|
|
186,343
|
|
Goodwill
|
1,691,007
|
|
|
1,502,756
|
|
Intangible assets, net
|
599,885
|
|
|
638,577
|
|
Deferred tax assets
|
14,725
|
|
|
10,282
|
|
Deferred financing fees
|
2,677
|
|
|
3,377
|
|
Other assets
|
36,929
|
|
|
36,812
|
|
Total assets
|
$
|
4,178,501
|
|
|
$
|
3,544,430
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Current portion of borrowings under credit facilities
|
$
|
91,300
|
|
|
$
|
88,800
|
|
Current portion of long-term debt
|
25,000
|
|
|
25,000
|
|
Accounts payable
|
56,935
|
|
|
55,293
|
|
Accrued expenses and other current liabilities
|
317,183
|
|
|
302,705
|
|
Income taxes payable
|
3,192
|
|
|
2,094
|
|
Current portion of operating lease liabilities
|
39,631
|
|
|
37,603
|
|
Advanced billings
|
732,782
|
|
|
505,714
|
|
Total current liabilities
|
1,266,023
|
|
|
1,017,209
|
|
Deferred tax liabilities
|
63,451
|
|
|
78,511
|
|
Long-term debt, net
|
1,158,668
|
|
|
1,140,178
|
|
Long-term portion of operating lease liabilities
|
158,983
|
|
|
172,370
|
|
Other long-term liabilities
|
52,191
|
|
|
46,171
|
|
Total liabilities
|
2,699,316
|
|
|
2,454,439
|
|
Commitments and contingencies (Note 14)
|
|
|
|
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 -- 64,538,729 and 63,491,550 at December 31, 2020 and 2019, respectively
|
645
|
|
|
635
|
|
Additional paid-in capital
|
1,137,028
|
|
|
1,006,182
|
|
Accumulated other comprehensive loss
|
(98,813)
|
|
|
(160,108)
|
|
Retained earnings
|
440,325
|
|
|
243,282
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
1,479,185
|
|
|
1,089,991
|
|
Total liabilities and stockholders' equity
|
$
|
4,178,501
|
|
|
$
|
3,544,430
|
|
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,
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
3,183,365
|
|
|
$
|
3,066,262
|
|
|
$
|
2,871,922
|
|
Operating expenses:
|
|
|
|
|
|
Direct costs (exclusive of depreciation and amortization)
|
1,649,001
|
|
|
1,539,541
|
|
|
1,500,226
|
|
Reimbursable expenses
|
665,761
|
|
|
650,080
|
|
|
570,405
|
|
Selling, general and administrative expenses
|
453,032
|
|
|
394,925
|
|
|
371,795
|
|
Transaction-related costs
|
(44,465)
|
|
|
1,835
|
|
|
35,817
|
|
Depreciation and amortization expense
|
131,630
|
|
|
114,898
|
|
|
112,247
|
|
Loss on disposal of fixed assets
|
317
|
|
|
1,058
|
|
|
120
|
|
Income from operations
|
328,089
|
|
|
363,925
|
|
|
281,312
|
|
Interest expense, net
|
(43,130)
|
|
|
(51,987)
|
|
|
(57,399)
|
|
Loss on modification or extinguishment of debt
|
(450)
|
|
|
(3,928)
|
|
|
(952)
|
|
Foreign currency losses, net
|
(25,499)
|
|
|
(2,257)
|
|
|
(1,043)
|
|
Other (expense) income, net
|
(1)
|
|
|
174
|
|
|
(371)
|
|
Income before income taxes and equity in income of unconsolidated joint ventures
|
259,009
|
|
|
305,927
|
|
|
221,547
|
|
Provision for income taxes
|
61,966
|
|
|
62,808
|
|
|
67,232
|
|
Income before equity in income of unconsolidated joint ventures
|
197,043
|
|
|
243,119
|
|
|
154,315
|
|
Equity in income of unconsolidated joint ventures, net of tax
|
—
|
|
|
—
|
|
|
143
|
|
Net income
|
197,043
|
|
|
243,119
|
|
|
154,458
|
|
Net income attributable to noncontrolling interest
|
—
|
|
|
(99)
|
|
|
(553)
|
|
Net income attributable to PRA Health Sciences, Inc.
|
$
|
197,043
|
|
|
$
|
243,020
|
|
|
$
|
153,905
|
|
Net income per share attributable to common stockholders:
|
|
|
|
|
|
Basic
|
$
|
3.11
|
|
|
$
|
3.77
|
|
|
$
|
2.40
|
|
Diluted
|
$
|
3.04
|
|
|
$
|
3.68
|
|
|
$
|
2.32
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
Basic
|
63,352
|
|
|
64,506
|
|
|
64,123
|
|
Diluted
|
64,758
|
|
|
66,004
|
|
|
66,341
|
|
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,
|
|
2020
|
|
2019
|
|
2018
|
Net income
|
$
|
197,043
|
|
|
$
|
243,119
|
|
|
$
|
154,458
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
Foreign currency translation adjustments net of tax $(2,520), $(2,504), and $4,670
|
50,529
|
|
|
9,083
|
|
|
(41,042)
|
|
Unrealized (losses) gains on derivative instruments, net of income taxes of $(1,386), $(2,897), and $1,007
|
(3,719)
|
|
|
(3,031)
|
|
|
2,152
|
|
Reclassification adjustments:
|
|
|
|
|
|
Losses on derivatives included in net income, net of income taxes, $(1,846), $3,017, and $1,649
|
14,485
|
|
|
3,156
|
|
|
4,828
|
|
Comprehensive income
|
258,338
|
|
|
252,327
|
|
|
120,396
|
|
Comprehensive income attributable to noncontrolling interest
|
—
|
|
|
(175)
|
|
|
(680)
|
|
Comprehensive income attributable to PRA Health Sciences, Inc.
|
$
|
258,338
|
|
|
$
|
252,152
|
|
|
$
|
119,716
|
|
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 17)
|
|
Retained
Earnings
|
|
Non-controlling Interest
|
|
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
Total
|
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
|
|
Exercise of common stock options, stock award distributions, employee stock purchase plan purchases and other
|
1,003
|
|
|
10
|
|
|
58,848
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
58,858
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
69,413
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
69,413
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
197,043
|
|
|
—
|
|
|
197,043
|
|
Issuance of restricted stock for acquisition
|
44
|
|
|
—
|
|
|
2,585
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,585
|
|
Other comprehensive income, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
61,295
|
|
|
—
|
|
|
—
|
|
|
61,295
|
|
Balance at December 31, 2020
|
64,539
|
|
|
$
|
645
|
|
|
$
|
1,137,028
|
|
|
$
|
(98,813)
|
|
|
$
|
440,325
|
|
|
$
|
—
|
|
|
$
|
1,479,185
|
|
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,
|
|
2020
|
|
2019
|
|
2018
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
$
|
197,043
|
|
|
$
|
243,119
|
|
|
$
|
154,458
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization expense
|
131,630
|
|
|
114,898
|
|
|
112,247
|
|
Amortization of debt issuance costs and discount
|
1,691
|
|
|
1,814
|
|
|
2,111
|
|
Amortization of terminated interest rate swaps
|
4,559
|
|
|
6,538
|
|
|
7,146
|
|
Stock-based compensation expense
|
69,413
|
|
|
45,834
|
|
|
29,143
|
|
Non-cash transaction related stock-based compensation expense
|
—
|
|
|
—
|
|
|
773
|
|
Unrealized foreign currency losses (gains)
|
30,858
|
|
|
(6,467)
|
|
|
(3,307)
|
|
Loss on modification or extinguishment of debt
|
450
|
|
|
519
|
|
|
952
|
|
Loss on disposal of fixed assets
|
317
|
|
|
1,058
|
|
|
120
|
|
Change in fair value of acquisition-related contingent consideration
|
(44,500)
|
|
|
—
|
|
|
34,538
|
|
Equity in income of unconsolidated joint ventures
|
—
|
|
|
—
|
|
|
(143)
|
|
Deferred income taxes
|
(20,294)
|
|
|
(23,907)
|
|
|
11,665
|
|
Other reconciling items
|
8,953
|
|
|
606
|
|
|
30
|
|
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:
|
|
|
|
|
|
Accounts receivable and unbilled services
|
(172,222)
|
|
|
(89,304)
|
|
|
(17,017)
|
|
Prepaid expenses and other assets
|
(6,443)
|
|
|
(13,660)
|
|
|
(18,931)
|
|
Accounts payable and other liabilities
|
11,089
|
|
|
21,584
|
|
|
31,579
|
|
Income taxes
|
(61)
|
|
|
(31,029)
|
|
|
5,241
|
|
Advanced billings
|
214,695
|
|
|
65,213
|
|
|
14,216
|
|
Payment of acquisition-related contingent consideration
|
—
|
|
|
(83,249)
|
|
|
(35,029)
|
|
Net cash provided by operating activities
|
427,178
|
|
|
253,567
|
|
|
329,792
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchase of fixed assets
|
(66,808)
|
|
|
(74,294)
|
|
|
(55,880)
|
|
Proceeds from the sale of fixed assets
|
32
|
|
|
26
|
|
|
43
|
|
Cash (paid) received for interest on interest rate swap
|
(8,300)
|
|
|
667
|
|
|
181
|
|
Return of joint venture capital contribution
|
—
|
|
|
418
|
|
|
—
|
|
Cash received from the sale of marketable securities
|
—
|
|
|
—
|
|
|
183
|
|
Acquisition of Care Innovations, Inc., net of cash acquired
|
(158,824)
|
|
|
—
|
|
|
—
|
|
Net cash used in investing activities
|
(233,900)
|
|
|
(73,183)
|
|
|
(55,473)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
—
|
|
|
1,300,000
|
|
|
—
|
|
Repayment of long-term debt
|
(25,000)
|
|
|
(1,216,533)
|
|
|
(224,394)
|
|
Proceeds from accounts receivable financing agreement
|
42,500
|
|
|
30,000
|
|
|
60,000
|
|
Repayment on accounts receivable financing agreement
|
—
|
|
|
(30,000)
|
|
|
(10,000)
|
|
Borrowings on line of credit
|
100,000
|
|
|
233,800
|
|
|
—
|
|
Repayments of line of credit
|
(97,500)
|
|
|
(145,000)
|
|
|
(91,500)
|
|
Payment for debt issuance costs
|
(920)
|
|
|
(4,541)
|
|
|
—
|
|
Acquisition of noncontrolling interest
|
—
|
|
|
(4,138)
|
|
|
—
|
|
Proceeds from stock issued under employee stock purchase plan and stock option exercises
|
58,349
|
|
|
45,819
|
|
|
31,382
|
|
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)
|
|
Net cash provided by (used in) financing activities
|
77,429
|
|
|
(90,707)
|
|
|
(319,512)
|
|
Effects of foreign exchange changes on cash, cash equivalents, and restricted cash
|
(674)
|
|
|
1,884
|
|
|
(2,988)
|
|
Change in cash, cash equivalents, and restricted cash
|
270,033
|
|
|
91,561
|
|
|
(48,181)
|
|
Cash, cash equivalents, and restricted cash, beginning of year
|
236,270
|
|
|
144,709
|
|
|
192,890
|
|
Cash, cash equivalents, and restricted cash, end of year
|
$
|
506,303
|
|
|
$
|
236,270
|
|
|
$
|
144,709
|
|
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
Goodwill simplification
In January 2017, the Financial Accounting Standards Board, or 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 did not 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 did not 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 did not have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Standards
Income Taxes
In December 2019, the FASB issued ASU No. 2019-12, "Simplifying the Accounting for Income Taxes". The provisions of ASU 2019-12 include eliminating certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
differences. The guidance is effective for the reporting period beginning after December 15, 2020, and the interim periods therein. The Company is currently assessing the potential impact of ASU 2019-12 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.
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 and December 18, 2020. 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 $250.0 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 10, 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.
A novel strain of coronavirus (COVID-19) was first identified in Wuhan, China in December 2019, and subsequently declared a global pandemic by the World Health Organization on March 11, 2020. As a result of the outbreak, during the year ended December 31, 2020, the Company experienced disruptions in its global operations as the COVID-19 virus continued to
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
spread and impact countries in which the Company operates. During the year ended December 31, 2020, the Company's operations continued to be impacted by limited accessibility to investigator sites and limited ability to screen and enroll patients due to travel restrictions. A prolonged outbreak could continue to interrupt the operations of the Company and its customers and suppliers.
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 credit losses, 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 Accounting Standards Codification, or 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.
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.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2020 and 2019, 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.
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,
|
|
2020
|
|
2019
|
|
2018
|
Cash and cash equivalents
|
$
|
506,303
|
|
|
$
|
236,232
|
|
|
$
|
144,221
|
|
Restricted cash
|
—
|
|
|
38
|
|
|
488
|
|
Total cash, cash equivalents, and restricted cash
|
$
|
506,303
|
|
|
$
|
236,270
|
|
|
$
|
144,709
|
|
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 5, Accounts Receivable, Unbilled Services, and Advanced Billings.
Allowances for Credit Losses
On January 1, 2020, the Company adopted ASC 326, "Credit Losses," or ASC 326. The adoption of ASC 326 did not require the Company to make significant changes to its current methodology. The Company maintains an allowance for credit 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
|
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
Historically, the Company has utilized 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 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.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recurring Fair Value Measurements
There were no financial assets or liabilities that measured at fair value on a recurring basis as of December 31, 2020.
The following table summarizes the fair value of the Company’s financial assets 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps are measured at fair value using a market approach valuation technique. The valuation is based on an estimate of net present value of the expected cash flows using relevant mid-market observable data inputs and based on the assumption of no unusual market conditions or forced liquidation.
The following table summarizes the changes in Level 3 financial liabilities measured on a recurring basis (in thousands):
|
|
|
|
|
|
|
Contingent consideration - Accrued expenses and other current liabilities
|
Balance at December 31, 2019
|
$
|
—
|
|
Initial estimate of Care Innovations contingent consideration
|
44,500
|
|
Change in fair value recognized in transaction-related costs
|
(44,500)
|
|
Balance at December 31, 2020
|
$
|
—
|
|
The fair value of the Care Innovations, Inc., or Care Innovations, earn-out payments as of the acquisition date was $44.5 million, which was valued using a Monte Carlo simulation. It was based on the achievement of certain 2020 financial targets that were not ultimately achieved. As the fair value was based on significant inputs not observed in the market, it represented a Level 3 measurement. During the third quarter of 2020, the Company determined that the 2020 financial targets would not be met; therefore the Company released the contingent consideration liability. Specifically, the revenue and earnings before interest, taxes, depreciation, and amortization of the acquired business were expected to be lower than initial forecasts. The initial growth estimates for the service offering were negatively impacted by changes in market conditions, which negatively impacted Care Innovations’ ability to contract and deliver services on new commercial opportunities within the one-year earn-out period. Refer to "Note 4 - Business Combinations" for additional information regarding the Care Innovations acquisition.
Non-recurring Fair Value Measurements
Certain assets and liabilities are carried on the accompanying consolidated balance sheets at cost and are not remeasured to fair value on a recurring basis. These assets include finite-lived intangible assets, which are tested when a triggering event occurs, and goodwill and identifiable indefinite-lived intangible assets, which are tested for impairment annually on October 1 or when a triggering event occurs.
As of December 31, 2020, assets carried on the balance sheet and not remeasured to fair value on a recurring basis totaling approximately $2,290.9 million were identified as Level 3. These assets are comprised of goodwill of $1,691.0 million and identifiable intangible assets, net of $599.9 million.
Refer to Note 10, Debt, for additional information regarding the fair value of long-term debt balances.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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.
If the Company does not perform a qualitative assessment, goodwill impairment is determined by using a quantitative assessment that compares the fair value of each goodwill reporting unit to its carrying amount, and to the extent the carrying amount exceeds the fair value, an impairment of goodwill is recognized for the excess up to the amount of goodwill allocated to the reporting unit. To determine the fair value of each reporting unit, the Company generally uses a discounted cash flow technique corroborated by market multiples when available and as appropriate. During the fourth quarter of 2020, as part of the Company’s annual impairment analysis, the Company performed updated quantitative assessments for all reporting units and for its indefinite-lived trade name intangible asset balances. It was concluded that the estimated fair value of the Data Solutions, EDS, PR, and SS operating segments significantly exceeded their carrying values and therefore no impairment existed.
Revenue Recognition
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
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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 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.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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 based on the fair value of the data obtained. 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 recognized as services are delivered as described above. 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, 2020, 2019 and 2018, the Company recognized service in kind revenue of $17.4 million, $20.5 million and $21.8 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.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Performance Obligations
Revenue recognized for the years ended December 31, 2020 and 2019 from reimbursable expenses and services completed in prior periods was $50.2 million and $83.4 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.
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 $6.2 billion as of December 31, 2020. This amount includes reimbursement revenue and investigator fees and contracts are generally cancelable by the customer and often subject to modification as the services progress. 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.
Credit Risk and Expected Credit Losses
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, 2020, substantially all of the Company’s cash was held in or invested with large financial institutions. Accounts receivable include amounts due from pharmaceutical and biotechnology companies. The Company establishes an allowance for credit losses. In management’s opinion, there is no additional material risk of credit risk beyond amounts provided for expected losses.
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,
|
|
2020
|
|
2019
|
Customer A
|
10.1
|
%
|
|
11.2
|
%
|
Customer B
|
*
|
|
15.6
|
%
|
Customer C
|
14.1
|
%
|
|
*
|
Customer D
|
11.4
|
%
|
|
*
|
* Less than 10%
There were no individual customers for which revenue was greater than 10% of consolidated revenue in the years ended December 31, 2020, 2019, and 2018.
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, net in the consolidated statements of operations.
Income Taxes
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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,
|
|
2020
|
|
2019
|
|
2018
|
Risk-free interest rate
|
0.4
|
%
|
|
1.8
|
%
|
|
2.8
|
%
|
Expected life, in years
|
6.0
|
|
6.1
|
|
6.3
|
Dividend yield
|
N/A
|
|
N/A
|
|
N/A
|
Volatility
|
36.2
|
%
|
|
30.7
|
%
|
|
28.9
|
%
|
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
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Operating Leases
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. The adoption of ASC 842 did not impact the Company's recognition of lease costs as compared to the application of ASC 840 as lease expenses for operating leases were recognized on a straight line basis under ASC 840.
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 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
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Transaction-related Costs
Transaction-related costs consist primarily of: (i) the change in the fair value of acquisition-related contingent consideration; (ii) costs incurred in connection with due diligence performed in connection with acquisitions; (iii) third-party fees incurred in connection with secondary offerings and share repurchases; and (iv) stock-based compensation expense related to the release of the transfer restrictions on vested options.
(4) Business Combinations
Care Innovations, Inc.
In January 2020, the Company acquired all of the outstanding equity interests of Care Innovations, an entity that provides digital health services. The purchase price was $208.6 million, which consisted of $161.5 million of cash, $2.6 million of restricted stock, and $44.5 million of estimated contingent consideration in the form of a potential earn-out payment. With this acquisition, the Company expanded its ability to serve customers with technologies that deliver enhancements to the Company’s mobile health platform and provide expanded remote patient monitoring support to expand the Company's ability to deliver virtual and decentralized trials. This business is included with the Company’s PR reporting unit.
The earn-out payment, which was capped at $50.0 million, was contingent on the achievement of two 2020 financial targets. The fair value of the contingent consideration was based on significant inputs not observed in the market and thus represented a Level 3 fair value measurement. During the year ended December 31, 2020, as a result of changes in market conditions within the earn-out period, the Company determined that the two 2020 financial targets would not be met; therefore the Company released the contingent consideration liability. Accordingly, a $44.5 million adjustment to the contingent consideration was recorded within transaction-related costs in the consolidated statements of operations.
The acquisition of Care Innovations 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. The consideration paid was allocated as follows: (i) $33.5 million to definite-lived intangible assets primarily consisting of developed technology with a weighted average amortization period of five years, (ii) $175.3 million to goodwill, and (iii) $(0.2) million to other net assets. The acquisition costs are included in transaction-related costs in the consolidated statement of operations and were immaterial.
Since the acquisition date, goodwill increased by $1.0 million, primarily as a result of adjustments to acquired income tax balances. The Company has not disclosed post-acquisition or pro-forma revenue and earnings attributable to Care Innovations as they did not have a material effect on the Company’s consolidated results.
(5) 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):
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Accounts receivable
|
$
|
661,036
|
|
|
$
|
512,061
|
|
Unbilled services
|
185,933
|
|
|
149,194
|
|
Total accounts receivable and unbilled services
|
846,969
|
|
|
661,255
|
|
Less allowance for credit losses
|
(3,064)
|
|
|
(2,738)
|
|
Total accounts receivable and unbilled services, net
|
$
|
843,905
|
|
|
$
|
658,517
|
|
Unbilled services as of December 31, 2020 and 2019 included $93.2 million and $76.0 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, 2020 and 2019.
A rollforward of the allowance for credit losses is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Beginning balance
|
$
|
2,738
|
|
|
$
|
2,049
|
|
|
$
|
1,433
|
|
Charged to income from operations
|
1,607
|
|
|
1,294
|
|
|
605
|
|
Write-offs, recoveries and the effects of foreign currency exchange
|
(1,281)
|
|
|
(605)
|
|
|
11
|
|
Ending balance
|
$
|
3,064
|
|
|
$
|
2,738
|
|
|
$
|
2,049
|
|
Advanced billings were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
Advanced billings
|
|
$
|
732,782
|
|
|
$
|
505,714
|
|
|
|
|
|
|
|
|
|
|
|
Advanced billings increased by $227.1 million and $64.4 million during the years ended December 31, 2020 and 2019, respectively, primarily due to the timing of customer payments. During the years ended December 31, 2020 and 2019, the Company recognized revenue of $476.4 million and $413.1 million related to advanced billings recorded as of January 1, 2020 and 2019, respectively.
(6) Fixed Assets
The carrying amount of fixed assets is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Computer hardware and software
|
$
|
249,459
|
|
|
$
|
207,931
|
|
Leasehold improvements
|
95,538
|
|
|
82,482
|
|
Furniture and equipment
|
58,744
|
|
|
48,305
|
|
Total fixed assets
|
403,741
|
|
|
338,718
|
|
Accumulated depreciation
|
(209,121)
|
|
|
(158,002)
|
|
Total fixed assets, net
|
$
|
194,620
|
|
|
$
|
180,716
|
|
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 $55.4 million, $46.3 million, and $40.6 million for the years ended December 31, 2020, 2019, and 2018, respectively.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) 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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2020
|
|
2019
|
Lease cost:
|
|
|
|
|
Operating lease cost
|
|
44,887
|
|
|
41,573
|
|
Short-term lease cost
|
|
1,326
|
|
|
2,591
|
|
Variable lease cost
|
|
7,410
|
|
|
7,626
|
|
Sublease income
|
|
(192)
|
|
|
(178)
|
|
Net lease cost
|
|
$
|
53,431
|
|
|
$
|
51,612
|
|
Total lease expense, net of sublease income, for the year ended December 31, 2018 was $39.6 million.
Supplemental cash flow information related to leases was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2020
|
|
2019
|
Cash paid for amounts included in the measurements of lease liabilities, all included in operating cash flows
|
|
$
|
45,840
|
|
|
$
|
41,594
|
|
Right-of-use assets obtained in exchange for lease obligations
|
|
23,901
|
|
|
32,423
|
|
Other supplemental information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
As of December 31, 2019
|
Weighted average remaining lease term
|
|
8.1 years
|
|
7.7 years
|
Weighted average discount rate
|
|
4.1%
|
|
4.3%
|
Maturities of operating lease liabilities were as follows as of December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
2021
|
|
$
|
46,202
|
|
2022
|
|
40,229
|
|
2023
|
|
31,822
|
|
2024
|
|
21,644
|
|
2025
|
|
16,386
|
|
Thereafter
|
|
75,995
|
|
Total lease payments
|
|
232,278
|
|
Less imputed interest
|
|
(33,664)
|
|
Total
|
|
$
|
198,614
|
|
As of December 31, 2020, the Company had no material additional non-cancelable operating leases that have not yet commenced.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) 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, 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
|
|
Acquisition of Care Innovations, Inc.
|
175,328
|
|
|
—
|
|
|
175,328
|
|
Currency translation
|
12,923
|
|
|
—
|
|
|
12,923
|
|
Balance at December 31, 2020
|
$
|
1,214,148
|
|
|
$
|
476,859
|
|
|
$
|
1,691,007
|
|
There are no accumulated impairment charges as of December 31, 2020 and 2019.
Intangible Assets
Intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Gross Amount
|
|
Accumulated Amortization
|
|
Net Amount
|
|
Gross Amount
|
|
Accumulated Amortization
|
|
Net Amount
|
Customer relationships
|
$
|
568,081
|
|
|
$
|
(173,902)
|
|
|
$
|
394,179
|
|
|
$
|
559,768
|
|
|
$
|
(137,728)
|
|
|
$
|
422,040
|
|
Trade names (finite-lived)
|
27,889
|
|
|
(17,639)
|
|
|
10,250
|
|
|
28,536
|
|
|
(16,582)
|
|
|
11,954
|
|
Patient list and other intangibles
|
50,774
|
|
|
(22,617)
|
|
|
28,157
|
|
|
44,474
|
|
|
(35,654)
|
|
|
8,820
|
|
Database
|
137,100
|
|
|
(87,811)
|
|
|
49,289
|
|
|
137,100
|
|
|
(59,347)
|
|
|
77,753
|
|
Total finite-lived intangible assets
|
783,844
|
|
|
(301,969)
|
|
|
481,875
|
|
|
769,878
|
|
|
(249,311)
|
|
|
520,567
|
|
Trade names (indefinite-lived)
|
118,010
|
|
|
—
|
|
|
118,010
|
|
|
118,010
|
|
|
—
|
|
|
118,010
|
|
Total intangible assets
|
$
|
901,854
|
|
|
$
|
(301,969)
|
|
|
$
|
599,885
|
|
|
$
|
887,888
|
|
|
$
|
(249,311)
|
|
|
$
|
638,577
|
|
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, 2020, 2019, and 2018, the Company concluded that the fair value of indefinite‑lived intangibles exceeded the carrying value and, therefore, no impairment exists. Amortization expense was $76.3 million, $68.6 million, and $71.6 million for the years ended December 31, 2020, 2019, and 2018, respectively.
Estimated amortization expense related to finite‑lived intangible assets for the next five years and thereafter is as follows (in thousands):
|
|
|
|
|
|
2021
|
$
|
71,171
|
|
2022
|
56,532
|
|
2023
|
44,304
|
|
2024
|
35,094
|
|
2025
|
26,502
|
|
2026 and thereafter
|
248,272
|
|
Total
|
$
|
481,875
|
|
(9) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Compensation, including bonuses, fringe benefits and payroll taxes
|
$
|
150,390
|
|
|
$
|
118,762
|
|
Accrued reimbursable expenses
|
99,578
|
|
|
107,145
|
|
Accrued data costs
|
22,311
|
|
|
27,150
|
|
Interest
|
1,516
|
|
|
4,783
|
|
Other
|
43,388
|
|
|
44,865
|
|
Total accrued expenses and other current liabilities
|
$
|
317,183
|
|
|
$
|
302,705
|
|
(10) Debt
The Company had the following debt outstanding as of December 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate as of December 31, 2020
|
|
Principal amount
|
|
Maturity Date
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Senior Secured Credit Facility:
|
|
|
|
|
|
|
|
|
First Lien Term Loan
|
|
1.4
|
%
|
|
$
|
975,000
|
|
|
$
|
1,000,000
|
|
|
October 2024
|
Revolver
|
|
1.4
|
%
|
|
91,300
|
|
|
88,800
|
|
|
October 2024
|
Accounts receivable financing agreement
|
|
1.4
|
%
|
|
212,500
|
|
|
170,000
|
|
|
December 2022
|
Total debt
|
|
|
|
1,278,800
|
|
|
1,258,800
|
|
|
|
Less current portion of Revolver(1)
|
|
|
|
(91,300)
|
|
|
(88,800)
|
|
|
|
Less current portion of long-term debt
|
|
|
|
(25,000)
|
|
|
(25,000)
|
|
|
|
Total long-term debt
|
|
|
|
1,162,500
|
|
|
1,145,000
|
|
|
|
Less debt issuance costs
|
|
|
|
(3,832)
|
|
|
(4,822)
|
|
|
|
Total long-term debt, net
|
|
|
|
$
|
1,158,668
|
|
|
$
|
1,140,178
|
|
|
|
(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 from the balance sheet date are classified as current.
As of December 31, 2020, the contractual maturities of the Company's debt obligations were as follows (in thousands):
|
|
|
|
|
|
2021
|
$
|
25,000
|
|
2022
|
237,500
|
|
2023
|
25,000
|
|
2024
|
991,300
|
|
2025 and thereafter
|
—
|
|
Total
|
$
|
1,278,800
|
|
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
The Senior Secured Credit Facility has an overall capacity of $1.75 billion (consisting of a $1.0 billion First Lien Term Loan and a $750.0 million Revolver) and a maturity date of October 2024. 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,
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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, 2020, the Company had $6.1 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, 2020, 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 December 18, 2020, the Company amended its Accounts Receivable Financing Agreement. The amendment increased the agreement's borrowing capacity to $250.0 million, held the applicable margin at 1.25%, and extended the maturity date to December 18, 2022, unless terminated earlier pursuant to its terms. The Company incurred $0.5 million of fees as a result of the amendment, which were recorded within loss on modification or extinguishment of debt in the consolidated statements of operations. As of December 31, 2020 and 2019, there was $37.5 million and $30.0 million, respectively, of remaining capacity available under the accounts receivable financing agreement. The amount of billed and unbilled receivables included as collateral for this facility were $657.6 million and $600.4 million as of December 31, 2020 and 2019, respectively.
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 $1,275.6 million and $1,255.8 million at December 31, 2020 and 2019, 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. The Revolver is based on current borrowing rates.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) Stockholders’ Equity
Authorized Shares
The Company is authorized to issue up to one billion shares of common stock, with a par value of $0.01. The Company is authorized to issue up to one hundred million shares of preferred stock, with a par value of $0.01.
Share Repurchase Program
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.
On September 6, 2019, the Company repurchased, 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.
No repurchases were made during the year ended December 31, 2020. As of December 31, 2020, the Company has remaining authorization to repurchase up to $200.0 million of its common stock under the Repurchase Program.
(12) Stock-Based Compensation
Stock Option and RSA/RSU Activity
On September 23, 2013, 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; therefore, no additional stock-based compensation expense was 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 secondary offerings, 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 of incremental compensation expense during the year ended December 31, 2018, which is included in transaction-related costs in the accompanying consolidated statements of operations.
On November 23, 2014, 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.
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).
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The 2020 Stock Incentive Plan, or the 2020 Plan, was approved by stockholders at the annual meeting on May 18, 2020. The 2020 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 2020 Plan authorized the issuance of 2,500,000 shares of common stock plus all shares that remained available under the prior plan on May 18, 2020.
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, 2019
|
4,861,606
|
|
|
$
|
72.45
|
|
|
7.5
|
|
$
|
188.3
|
|
Granted
|
528,740
|
|
|
103.15
|
|
|
|
|
|
Exercised
|
(698,721)
|
|
|
60.15
|
|
|
|
|
|
Expired/forfeited
|
(303,189)
|
|
|
95.43
|
|
|
|
|
|
Outstanding at December 31, 2020
|
4,388,436
|
|
|
$
|
76.52
|
|
|
6.9
|
|
$
|
214.7
|
|
Exercisable at December 31, 2020
|
2,255,337
|
|
|
$
|
58.81
|
|
|
5.7
|
|
$
|
150.3
|
|
The weighted average fair value of options granted during the years ended December 31, 2020, 2019, and 2018 was $36.29, $32.89, and $34.08, respectively. The total fair value of options vested during the years ended December 31, 2020, 2019, and 2018 was $33.2 million, $22.8 million, and $14.6 million, respectively.
Selected information regarding the Company’s stock options as of December 31, 2020 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
|
|
859,029
|
|
|
3.1
|
|
$
|
13.80
|
|
|
859,029
|
|
|
3.1
|
|
$
|
13.80
|
|
$
|
37.83 - 75.81
|
|
1,001,635
|
|
|
6.5
|
|
$
|
72.83
|
|
|
635,310
|
|
|
6.5
|
|
$
|
71.64
|
|
$
|
75.89 - 95.94
|
|
986,522
|
|
|
8.3
|
|
$
|
92.77
|
|
|
301,065
|
|
|
8.2
|
|
$
|
91.99
|
|
$
|
96.21 - 116.11
|
|
1,541,250
|
|
|
8.3
|
|
$
|
103.47
|
|
|
459,933
|
|
|
7.7
|
|
$
|
103.45
|
|
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 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards
|
|
Wtd. Average
Grant-Date
Fair Value
|
|
Intrinsic
Value
(millions)
|
Unvested at December 31, 2019
|
632,436
|
|
|
$
|
91.07
|
|
|
$
|
70.3
|
|
Granted
|
405,915
|
|
|
96.47
|
|
|
|
Forfeited
|
(46,330)
|
|
|
91.44
|
|
|
|
Vested
|
(266,787)
|
|
|
81.50
|
|
|
|
Unvested at December 31, 2020
|
725,234
|
|
|
$
|
97.59
|
|
|
$
|
91.0
|
|
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2020, there was $93.0 million of unrecognized compensation cost related to unvested stock-based awards, which is expected to be recognized over a weighted average period of one and a half 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 $5.9 million, $4.0 million, and $3.3 million associated with the ESPP during the years ended December 31, 2020, 2019, and 2018, respectively. As of December 31, 2020, there have been 514,888 shares issued and 2,485,112 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,
|
|
2020
|
|
2019
|
|
2018
|
Direct costs
|
$
|
16,122
|
|
|
$
|
14,177
|
|
|
$
|
9,508
|
|
Selling, general and administrative
|
53,291
|
|
|
31,657
|
|
|
19,635
|
|
Transaction-related costs
|
—
|
|
|
—
|
|
|
773
|
|
Total stock-based compensation expense
|
$
|
69,413
|
|
|
$
|
45,834
|
|
|
$
|
29,916
|
|
(13) 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,
|
|
2020
|
|
2019
|
|
2018
|
Domestic
|
$
|
102,085
|
|
|
$
|
145,863
|
|
|
$
|
45,672
|
|
Foreign
|
156,924
|
|
|
160,064
|
|
|
175,875
|
|
|
$
|
259,009
|
|
|
$
|
305,927
|
|
|
$
|
221,547
|
|
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of the provision for income taxes were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
|
Federal
|
$
|
26,394
|
|
|
$
|
38,333
|
|
|
$
|
14,793
|
|
State
|
11,583
|
|
|
13,216
|
|
|
776
|
|
Foreign
|
44,283
|
|
|
35,166
|
|
|
39,998
|
|
Total current income tax expense
|
82,260
|
|
|
86,715
|
|
|
55,567
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(11,055)
|
|
|
(15,999)
|
|
|
14,224
|
|
State
|
(4,233)
|
|
|
(5,073)
|
|
|
1,403
|
|
Foreign
|
(5,006)
|
|
|
(2,835)
|
|
|
(3,962)
|
|
Total deferred income tax (benefit) expense
|
(20,294)
|
|
|
(23,907)
|
|
|
11,665
|
|
Total income tax expense
|
$
|
61,966
|
|
|
$
|
62,808
|
|
|
$
|
67,232
|
|
Income taxes computed at the statutory U.S. federal income tax rate are reconciled to the provision for income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Statutory federal income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
State income taxes, net of federal benefit
|
1.8
|
%
|
|
1.6
|
%
|
|
0.8
|
%
|
Impact of the U.S. Tax Cuts and Jobs Act of 2017:
|
|
|
|
|
|
Rate change
|
—
|
%
|
|
—
|
%
|
|
(5.2)
|
%
|
U.S. minimum tax on foreign entities
|
(0.9)
|
%
|
|
1.6
|
%
|
|
3.3
|
%
|
Base erosion anti-abuse tax
|
—
|
%
|
|
—
|
%
|
|
8.4
|
%
|
Tax on foreign earnings:
|
|
|
|
|
|
Foreign rate differential
|
0.1
|
%
|
|
1.8
|
%
|
|
0.8
|
%
|
Foreign earnings taxed in the U.S.
|
—
|
%
|
|
(1.1)
|
%
|
|
7.9
|
%
|
Research and development credits
|
(1.3)
|
%
|
|
(1.5)
|
%
|
|
(2.6)
|
%
|
Stock-based compensation
|
0.4
|
%
|
|
(1.2)
|
%
|
|
(9.6)
|
%
|
Nondeductible contingent consideration
|
(3.6)
|
%
|
|
—
|
%
|
|
3.1
|
%
|
Valuation allowance
|
0.1
|
%
|
|
(0.1)
|
%
|
|
0.4
|
%
|
Change in liability for uncertain tax positions
|
1.3
|
%
|
|
(1.3)
|
%
|
|
0.4
|
%
|
Nondeductible expenses
|
0.8
|
%
|
|
0.3
|
%
|
|
1.0
|
%
|
Interest rate swaps
|
2.0
|
%
|
|
—
|
%
|
|
—
|
%
|
Other
|
2.2
|
%
|
|
(0.6)
|
%
|
|
0.6
|
%
|
Effective income tax rate
|
23.9
|
%
|
|
20.5
|
%
|
|
30.3
|
%
|
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The income tax effects from accumulated other comprehensive income are released on a portfolio approach basis. In the year ended December 31, 2020, the Company recognized income tax expense of $5.2 million related to the elimination of stranded tax effects related to the derivative gains and losses previously included within accumulated other comprehensive income.
Components of the deferred tax assets and liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Net operating loss carryforwards
|
$
|
9,475
|
|
|
$
|
9,544
|
|
Accruals and reserves
|
15,741
|
|
|
10,043
|
|
Equity based compensation
|
19,364
|
|
|
15,004
|
|
Operating lease liabilities
|
26,934
|
|
|
35,683
|
|
Prepaid expenses and other
|
14,672
|
|
|
9,429
|
|
Deferred and unbilled revenue
|
64,533
|
|
|
64,033
|
|
Tax credits
|
3,341
|
|
|
2,231
|
|
|
154,060
|
|
|
145,967
|
|
Valuation allowance
|
(8,527)
|
|
|
(8,072)
|
|
Total deferred tax assets (net of valuation allowance)
|
145,533
|
|
|
137,895
|
|
Identified intangibles
|
(151,591)
|
|
|
(156,321)
|
|
Operating lease right-of-use assets
|
(21,660)
|
|
|
(29,440)
|
|
Depreciable, amortizable, and other property
|
(21,008)
|
|
|
(20,363)
|
|
Deferred tax liabilities
|
(194,259)
|
|
|
(206,124)
|
|
Net deferred tax liability
|
$
|
(48,726)
|
|
|
$
|
(68,229)
|
|
Long-term deferred tax asset
|
$
|
14,725
|
|
|
$
|
10,282
|
|
Long-term deferred tax liability
|
$
|
(63,451)
|
|
|
$
|
(78,511)
|
|
The Company’s foreign subsidiaries are taxed separately in their respective jurisdictions. As of December 31, 2020, the Company has cumulative foreign net operating loss carryforwards of approximately $8.0 million. In addition, the Company has federal net operating loss carryforwards of approximately $6.8 million and state net operating loss carryforwards of approximately $238.7 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.
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, reversals of certain deferred tax liabilities, and other tax‑planning strategies.
A rollforward of the deferred tax asset valuation allowance accounts is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Beginning balance
|
$
|
8,072
|
|
|
$
|
9,824
|
|
|
$
|
25,226
|
|
Additions - charged to expense
|
1,011
|
|
|
153
|
|
|
1,428
|
|
Deductions - charged to expense (including translation adjustments)
|
(556)
|
|
|
(1,905)
|
|
|
(16,830)
|
|
Ending balance
|
$
|
8,527
|
|
|
$
|
8,072
|
|
|
$
|
9,824
|
|
The valuation allowance at December 31, 2020 is primarily related to state loss carryforwards, state credit carryforwards, certain foreign deferred tax assets, and loss carryforwards in various foreign jurisdictions.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company also has state income tax credit carryforwards available to potentially offset future state income tax of $3.0 million. The state credits begin expiring in 2022. The Company has a $2.5 million valuation allowance against the benefits of these credits.
A reconciliation of the beginning and ending amount of gross unrecognized income tax benefits is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Beginning balance
|
$
|
30,358
|
|
|
$
|
12,891
|
|
|
$
|
7,911
|
|
Additions based on tax positions related to current year
|
1,523
|
|
|
1,609
|
|
|
764
|
|
Additions for income tax positions of prior years
|
253
|
|
|
16,704
|
|
|
1,065
|
|
Impact of changes in exchange rates
|
9
|
|
|
(9)
|
|
|
(58)
|
|
Impact of change in federal tax rate
|
—
|
|
|
—
|
|
|
4,236
|
|
Settlements with tax authorities
|
—
|
|
|
(118)
|
|
|
(180)
|
|
Reductions for income tax positions for prior years
|
(894)
|
|
|
(356)
|
|
|
(456)
|
|
Reductions due to lapse of applicable statute of limitations
|
(269)
|
|
|
(363)
|
|
|
(391)
|
|
Ending balance
|
$
|
30,980
|
|
|
$
|
30,358
|
|
|
$
|
12,891
|
|
As of December 31, 2020, 2019, and 2018, the total gross unrecognized tax benefits were $31.0 million, $30.4 million, and $12.9 million, respectively. During the year ended December 31, 2020, the liability for uncertain tax positions increased by $0.7 million. As of December 31, 2020, the total amount of gross unrecognized tax benefits which, if recognized, would impact the Company’s effective tax rate is $31.0 million. The Company anticipates changes in total unrecognized tax benefits due to the expiration of the 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 $1.0 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 increases of $2.8 million, $2.2 million, and $0.6 million during the years ended December 31, 2020, 2019, and 2018, respectively. As of December 31, 2020, the Company has a total of $7.2 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 2011 through 2019 tax years.
As of December 31, 2020, the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately $733.9 million. Because $363.4 million of such earnings have previously been subject to the one-time transition tax on foreign earnings required by the 2017 Tax Act, and 2018 and 2019 earnings were subject to Global Intangible Low-taxed Income 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.
(14) 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
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 $4.4 million at December 31, 2020, given that it is not deemed probable the Company will incur a loss related to this case. However, a deposit totaling $4.4 million has been made to the Brazilian court in order to annul the potential tax obligation and to avoid the accrual of additional interest and penalties. This balance is recorded in other assets on the consolidated balance sheets. In June 2015, the Judiciary Court of Justice of the State of Sao Paulo ruled in the favor of the Company; however, the judgment was appealed by the City of Sao Paulo. The Company expects to recover the full amount of the deposit when the case is settled. In September 2017, a judge from the Superior Court of Justice of Brazil denied relief to the City of Sao Paulo's appeal and upheld the lower court's ruling in the favor of the Company for the years 2005 to 2012, and in the period from January to October 2013. The judge from the Superior Court of Justice of Brazil also ruled that the Company must appeal the lower court's verdict for October 2013 and the subsequent periods as the Judiciary Court of Justice of the State of Sao Paulo only reviewed the facts that pertained to the period before October 2013.
Insurance
The Company currently maintains insurance for risks associated with the operation of its business, provision of professional services, and ownership of property. These policies provide coverage for a variety of potential losses, including, without limitation, loss or damage to property, bodily injury, general commercial liability, professional errors and omissions, and medical malpractice.
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, 2020 and 2019, the Company maintained a reserve of approximately $5.5 million, included in accrued expense and other current liabilities on the consolidated balance sheets, to cover open claims and estimated claims incurred but not reported.
(15) 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 $16.0 million, $14.3 million, and $13.6 million for the years ended December 31, 2020, 2019, and 2018, respectively.
The Company maintains a defined benefit pension plan sponsored by a subsidiary in Germany. The unfunded status of the plan in Germany, which covers eight employees, totaled $1.3 million and $1.0 million at December 31, 2020 and 2019, respectively, and was recorded in other long-term liabilities on the consolidated balance sheets.
Additional disclosures regarding these defined benefit pension plans have been excluded due to their immateriality.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) 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 arising from movement in market interest rates. Accordingly, the Company has instituted an interest rate hedging program that is accounted for in accordance with ASC 815, “Derivatives and Hedging.” The interest rate hedging program uses interest rate swaps designated as cash flow hedges to mitigate 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’s interest rate contracts are designated as hedging instruments.
As of December 31, 2020, the Company has no interest rate swaps outstanding. Interest rate swaps with notional amounts of $250.0 million and $375.0 million matured on September 6, 2020 and December 6, 2020, respectively.
The following table presents the notional amounts and fair values (determined using level 2 inputs) of the Company’s derivatives as of December 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Classification
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
Notional amount
|
|
Liability
|
|
Notional amount
|
|
Liability
|
Derivatives in a liability position:
|
Accrued expenses and other current liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
625,000
|
|
|
$
|
(2,976)
|
|
The Company records the change in the fair value of derivatives designated as hedging instruments under ASC 815 to accumulated other comprehensive loss in the Company's consolidated balance sheets, net of deferred taxes, and will later reclassify into earnings, including the associated tax impact, 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 previously 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 $4.6 million, $6.5 million, and $6.8 million previously recorded in accumulated other comprehensive loss into interest expense during the years ended December 31, 2020, 2019, and 2018, respectively.
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)
|
2020
|
|
2019
|
|
2018
|
Amount of pre-tax (loss) gain recognized in other comprehensive income on derivatives
|
$
|
(5,105)
|
|
|
$
|
(5,928)
|
|
|
$
|
3,159
|
|
Amount of loss reclassified from accumulated other comprehensive loss into interest expense, net on derivatives
|
(12,639)
|
|
|
(6,173)
|
|
|
(6,477)
|
|
The following table presents the effect of cash flow hedge accounting on the consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Interest expense, net
|
$
|
(43,130)
|
|
|
$
|
(51,987)
|
|
|
(57,399)
|
|
Loss on cash flow hedging relationships in Subtopic 815-20 (interest contracts):
|
|
|
|
|
|
Loss reclassified from accumulated other comprehensive loss into interest expense, net
|
(12,639)
|
|
|
(6,173)
|
|
|
(6,477)
|
|
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(17) Accumulated Other Comprehensive Loss
The following table presents a summary of the components of accumulated other comprehensive loss (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
|
|
Derivative
Instruments
|
|
Total
|
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)
|
|
Other comprehensive income (loss) before reclassifications, net of tax
|
50,529
|
|
|
(3,719)
|
|
|
46,810
|
|
Reclassification adjustments, net of tax
|
—
|
|
|
14,485
|
|
|
14,485
|
|
Balance at December 31, 2020
|
$
|
(98,813)
|
|
|
$
|
—
|
|
|
$
|
(98,813)
|
|
Foreign Currency Translation
The change in the foreign currency translation adjustment during the year ended December 31, 2020 was primarily due to the movements in the British pound, or GBP, Euro, or EUR, Canadian dollar, or CAD, and Russian ruble, or RUB, exchange rates against the U.S. dollar, or USD. The USD depreciated by 3.5%, 9.4%, and 2.2% versus the GBP, EUR, and CAD, respectively, during the year ended December 31, 2020, and the USD strengthened by 16.6% versus the RUB during the same period. The movement in the GBP, EUR, and CAD represented $16.3 million, $36.6 million and $1.3 million, respectively, of the $50.5 million income recorded to accumulated other comprehensive loss during the year ended December 31, 2020. The overall change was partially offset by gains in the RUB, representing $5.5 million of the adjustment.
The change in the foreign currency translation adjustment during the year ended December 31, 2019 was primarily due to the movements in the GBP, EUR, CAD, and RUB exchange rates against the USD. 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.
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 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.
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 years ended December 31, 2020 and 2019.
Derivative Instruments
See Note 16 for further information on changes to accumulated other comprehensive loss related to the derivative instruments.
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(18) Net Income Per Share
Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding for the applicable period. Diluted net income per share is calculated after adjusting the denominator of the basic net income per share calculation for the effect of all potentially dilutive common shares, which in the Company’s case, includes shares issuable under the stock option and incentive award plan.
The following table reconciles the basic to diluted weighted average shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Basic weighted average common shares outstanding
|
63,352
|
|
|
64,506
|
|
|
64,123
|
|
Effect of dilutive stock options and RSAs/RSUs
|
1,406
|
|
|
1,498
|
|
|
2,218
|
|
Diluted weighted average common shares outstanding
|
64,758
|
|
|
66,004
|
|
|
66,341
|
|
Anti-dilutive shares
|
2,413
|
|
|
1,998
|
|
|
1,620
|
|
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.
(19) Supplemental Cash Flow Information
The following table presents the Company’s supplemental cash flow information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Cash paid during the period for:
|
|
|
|
|
|
Income taxes, net of refunds
|
$
|
77,505
|
|
|
$
|
111,283
|
|
|
$
|
43,127
|
|
Interest
|
40,337
|
|
|
42,198
|
|
|
48,911
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
Accrued fixed assets purchases
|
9,897
|
|
|
9,767
|
|
|
10,312
|
|
Cashless exercises of stock options
|
—
|
|
|
—
|
|
|
12,390
|
|
The acquisition date fair value of contingent consideration liabilities recorded during the year ended December 31, 2020 totaled $44.5 million. Refer to Note 3 - Significant Accounting Polices and Note 4 - Business Combinations.
Supplemental cash flow disclosures related to ASC 842 are included in Note 7 - Leases.
(20) Operations by Geographic Area
The table below presents certain enterprise‑wide information about the Company’s operations by geographic area for the years ended December 31, 2020, 2019, and 2018. 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,
|
|
2020
|
|
2019
|
|
2018
|
Revenue:
|
|
|
|
|
|
Americas:
|
|
|
|
|
|
United States (1)
|
$
|
2,153,271
|
|
|
$
|
2,082,204
|
|
|
$
|
1,962,509
|
|
Other
|
26,579
|
|
|
48,670
|
|
|
47,116
|
|
Americas
|
2,179,850
|
|
|
2,130,874
|
|
|
2,009,625
|
|
Europe, Africa, and Asia-Pacific
|
|
|
|
|
|
United Kingdom
|
837,202
|
|
|
758,432
|
|
|
689,345
|
|
Netherlands
|
96,438
|
|
|
113,029
|
|
|
115,778
|
|
Other
|
69,875
|
|
|
63,927
|
|
|
57,174
|
|
Europe, Africa, and Asia-Pacific
|
1,003,515
|
|
|
935,388
|
|
|
862,297
|
|
Total revenue
|
$
|
3,183,365
|
|
|
$
|
3,066,262
|
|
|
$
|
2,871,922
|
|
(1) All revenue earned by the Data Solutions segment is recorded in the United States.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Long-lived assets:
|
|
|
|
Americas:
|
|
|
|
United States
|
$
|
223,218
|
|
|
$
|
220,167
|
|
Other
|
5,787
|
|
|
6,944
|
|
Americas
|
229,005
|
|
|
227,111
|
|
Europe, Africa, and Asia-Pacific
|
|
|
|
United Kingdom
|
21,203
|
|
|
21,872
|
|
Netherlands
|
55,627
|
|
|
41,527
|
|
Other
|
66,929
|
|
|
76,549
|
|
Europe, Africa, and Asia-Pacific
|
143,759
|
|
|
139,948
|
|
Total long-lived assets
|
$
|
372,764
|
|
|
$
|
367,059
|
|
(21) 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,
|
|
2020
|
|
2019
|
|
2018
|
Revenue:
|
|
|
|
|
|
Clinical Research
|
$
|
2,923,045
|
|
|
$
|
2,812,969
|
|
|
$
|
2,622,409
|
|
Data Solutions
|
260,320
|
|
|
253,293
|
|
|
249,513
|
|
Total revenue
|
3,183,365
|
|
|
3,066,262
|
|
|
2,871,922
|
|
Direct costs (exclusive of depreciation and amortization):
|
|
|
|
|
|
Clinical Research
|
1,456,055
|
|
|
1,366,066
|
|
|
1,334,803
|
|
Data Solutions
|
192,946
|
|
|
173,475
|
|
|
165,423
|
|
Total direct costs (exclusive of depreciation and amortization)
|
1,649,001
|
|
|
1,539,541
|
|
|
1,500,226
|
|
Reimbursable expenses:
|
|
|
|
|
|
Clinical Research
|
665,633
|
|
|
650,080
|
|
|
570,405
|
|
Data Solutions
|
128
|
|
|
—
|
|
|
—
|
|
Total reimbursable expenses
|
665,761
|
|
|
650,080
|
|
|
570,405
|
|
Segment profit:
|
|
|
|
|
|
Clinical Research
|
801,357
|
|
|
796,823
|
|
|
717,201
|
|
Data Solutions
|
67,246
|
|
|
79,818
|
|
|
84,090
|
|
Total segment profit
|
$
|
868,603
|
|
|
$
|
876,641
|
|
|
$
|
801,291
|
|
Less expenses not allocated to segments:
|
|
|
|
|
|
Selling, general and administrative expenses
|
453,032
|
|
|
394,925
|
|
|
371,795
|
|
Transaction-related costs
|
(44,465)
|
|
|
1,835
|
|
|
35,817
|
|
Depreciation and amortization expense
|
131,630
|
|
|
114,898
|
|
|
112,247
|
|
Loss on disposal of fixed assets, net
|
317
|
|
|
1,058
|
|
|
120
|
|
Consolidated income from operations
|
328,089
|
|
|
363,925
|
|
|
281,312
|
|
Interest expense, net
|
(43,130)
|
|
|
(51,987)
|
|
|
(57,399)
|
|
Loss on modification or extinguishment of debt
|
(450)
|
|
|
(3,928)
|
|
|
(952)
|
|
Foreign currency losses, net
|
(25,499)
|
|
|
(2,257)
|
|
|
(1,043)
|
|
Other (expense) income, net
|
(1)
|
|
|
174
|
|
|
(371)
|
|
Consolidated income before income taxes and equity in income of unconsolidated joint ventures
|
$
|
259,009
|
|
|
$
|
305,927
|
|
|
$
|
221,547
|
|
(22) Quarterly Financial Data (unaudited)
The following table summarizes the Company’s unaudited quarterly results of operations (in thousands, except per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Revenue
|
$
|
783,708
|
|
|
$
|
729,891
|
|
|
$
|
796,307
|
|
|
$
|
873,458
|
|
Income from operations (2)
|
63,180
|
|
|
43,626
|
|
|
124,160
|
|
|
97,123
|
|
Provision for income taxes
|
16,871
|
|
|
7,112
|
|
|
13,058
|
|
|
24,925
|
|
Net income
|
40,660
|
|
|
13,874
|
|
|
91,252
|
|
|
51,257
|
|
Comprehensive (loss) income
|
(3,492)
|
|
|
28,349
|
|
|
127,479
|
|
|
106,002
|
|
Basic earnings per share (1)
|
$
|
0.65
|
|
|
$
|
0.22
|
|
|
$
|
1.44
|
|
|
$
|
0.80
|
|
Diluted earnings per share (1)
|
$
|
0.63
|
|
|
$
|
0.22
|
|
|
$
|
1.41
|
|
|
$
|
0.78
|
|
PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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
|
|
(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 March 31, 2020, the Company recorded $0.6 million of transaction-related costs associated with the change in fair value of contingent consideration. During the three months ended September 30, 2020, the Company recorded a $45.1 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)
(23) Subsequent Events
On February 24, 2021, the Company entered into a definitive merger agreement to be acquired by ICON plc (ICON). Under the terms of the merger agreement, the Company’s stockholders will receive $80 per share in cash and 0.4125 shares of ICON common stock for each share of PRA common stock upon the closing of the transaction. The obligation of the parties to complete the merger is subject to customary closing conditions, including, among others, approval by the Company’s stockholders and regulatory approvals.