|
| | | |
| Current maturities of long-term debt: | |
| 2018 (remaining) | $ | — |
|
| 2019 | — |
|
| 2020 | — |
|
| 2021 | 1,196,533 |
|
| Total | $ | 1,196,533 |
|
|
| | | |
| 2017 (remaining) | $ | 11,250 |
|
| 2018 | 60,625 |
|
| 2019 | 180,625 |
|
| 2020 | 76,250 |
|
| 2021 | 939,375 |
|
| 2022 and thereafter | 91,441 |
|
| Total | $ | 1,359,566 |
|
2016 Credit Facilities
The senior secured credit facilities, or 2016 Credit Facilities, provide senior secured financing up to $1,400.0 million, consisting of:
•a first lien term loan in an aggregate principal amount of up to $1,175.0 million; and
•revolving credit facilities, or the 2016 Revolver, in an aggregate principal amount of up to $225.0 million
As collateral for borrowings under the senior secured credit facilities, or 2016 Credit Facilities, the Company granted a pledge on primarily all of its assets, and the stock of wholly-owned U.S. restricted subsidiaries. The Company is subject to certain financial covenants, which require the Company to maintain certain debt-to-EBITDA and interest expense-to-EBITDA ratios. The 2016 Credit Facilities also contain covenants that, among other things, restrict the Company’s ability to create 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 make subsidiary distributions. After giving effect to the applicable restrictions on the payment of dividends under the 2016 Credit Facilities, subject to compliance with applicable law, as of September 30, 20172018 and December 31, 2016,2017, all amounts in retained earnings were free of restriction and were available for the payment of dividends. The Company does not expect to pay dividends in the foreseeable future. The Company does not expect these covenants to restrict its liquidity, financial condition or access to capital resources in the foreseeable future. The 2016 Credit Facilities also containscontain customary representations, warranties, affirmative covenants, and events of default.
On September 6, 2017, the Company borrowed $550.0 million under the 2016 Credit Facilities, or the Incremental Borrowing. The proceeds were primarily used to fund the acquisition of Symphony Health. In accordance with the guidance in FASB’s Accounting Standards Codification, or ASC, 470-50, "Debt - Modifications and Extinguishments," the Incremental Borrowing was accounted for as a debt modification. The Incremental Borrowing resulted in a $3.1 million loss on modification of debt, which consists of fees associated with the transaction for the nine months ended September 30, 2017.
The 2016 Credit Facilities' first lien term loan's scheduled, fixed quarterly principal payments, including the Incremental Borrowing, are as follows:
$11.3 million per quarter, to be made commencing September 30, 2017 and made on or prior to December 31, 2017;
$15.2 million per quarter, to be made on or after March 31, 2018, but on or prior to December 31, 2019;
$19.1 million per quarter, to be made on or after March 31, 2020, but on or prior to December 31, 2020;
$23.0 million per quarter, to be made on or after March 31, 2021, but prior to September 30, 2021; and
the remaining principal amount of the term loan on December 6, 2021.
The variable interest rate on the Incremental Borrowing is a rate equal to the London Interbank Offered Rate, or LIBOR, or the adjusted base rate, or ABR, rate, at the election of the Company, plus a margin based on the ratio of total indebtedness to EBITDA andEBITDA. The margin ranges from 1.00% to 2.00%, in the case of LIBOR rate loans,
and 0.00% to 1.00%, in the case of ABR rate loans. There were no other changes toThe Company has the 2016 Credit Facilities as a resultoption of the Incremental Borrowing.1, 2, 3 or 6 month base interest rates. For the nine months ended September 30, 2017,2018, the weighted average interest rate on the first lien term loan was 3.45%3.62%.
During the third quarter of 2018, the Company made an additional $92.8 million in voluntary principal payments. In accordance with the guidance in ASC 470-50, "Debt—Modifications and Extinguishments," the debt repayments were accounted for as a partial debt extinguishment. The repayments resulted in the write-off of $0.5 million in unamortized debt issuance costs which is included in loss on modification or extinguishment of debt in the consolidated condensed statement of operations during the three and nine months ended September 30, 2018.
Revolving Credit Facilities2016 Revolver
The Company’s revolving credit facilities provide2016 Revolver provides for $125.0$225.0 million of potential borrowings and expire on December 6, 2021. The interest rate on the revolving credit facilities2016 Revolver is based on the LIBOR with a 0% LIBOR floor or ABR, rate, at the election of the Company, plus an applicable margin, based on the leverage ratio of the Company. The Company, at its discretion, may elect interest periods of 1, 2, 3 or 6 months. The Company is required to pay to the lenders a commitment fee ranging fromfor unused commitments of 0.2% to 0.4% based on the Company’s debt-to-EBITDA ratio. At September 30, 2017 and December 31, 2016,2018, the Company had no outstanding borrowings under the revolving credit facilities.2016 Revolver. At December 31, 2017, the Company had $91.5 million outstanding borrowings under the 2016 Revolver. In addition, at September 30, 20172018 and December 31, 2016,2017, the Company had $4.5$5.1 million and $7.0$4.9 million, respectively, in letters of credit outstanding, which are secured by the revolving credit facilities.
Senior Notes
On March 17, 2016 the Company repaid $133.6 million aggregate principal amount of its 9.5% senior notes due 2023, or Senior Notes, as part of a cash tender offer. In accordance with the guidance in the ASC 470-50, "Debt—Modifications and Extinguishments," the debt repayment was accounted for as a partial debt extinguishment. The repayment resulted in a $21.5 million loss on extinguishment of debt, which consists of a $17.4 million early tender premium, a $3.7 million write-off of unamortized debt issuance costs and $0.4 million of fees associated with the transaction for the nine months ended September 30, 2016.
The Senior Notes agreement contains certain provisions that restrict the payment of dividends from the Company’s subsidiaries to the parent company. As a result, there are no material balances present within the parent company that are available for the payment of dividends as the parent company did not have any net income during 2016 or the nine months ended September 30, 2017, that was free of restrictions. The Company does not expect to pay dividends in the foreseeable future.Revolver.
Accounts Receivable Financing Agreement
In March 2016,On May 31, 2018, the Company entered into a $140.0amended its receivable financing agreement, which the Company refers to as the "accounts receivable financing agreement." The amendment increased the accounts receivable financing agreement's borrowing capacity to $200.0 million, decreased the applicable margin from 1.60% to 1.25%, and extended the termination date to May 31, 2021, unless terminated earlier pursuant to its terms. The Company had $170.0 million and $120.0 million outstanding on the accounts receivable financing agreement of which $120.0 million was outstanding as of September 30, 20172018 and December 31, 2016. The2017, respectively; the additional borrowings during 2018 were used to repay amounts outstanding on the Company’s revolving credit facility that were used to fund the cash tender offer for the Senior Notes.Company's 2016 Revolver.
Loans under the accounts receivable financing agreement accrue interest at either a reserve-adjusted LIBOR or a base rate, plus 1.6%1.25%. The Company may prepay loans upon one business dayday's prior notice and may terminate the accounts receivable financing agreement with 15 days’ prior notice. For the nine months ended September 30, 2017,2018, the weighted average interest rate on the accounts receivable financing agreement was 2.91%3.60%.
The accounts receivable financing agreement contains various customary representations and warranties and covenants, and default provisions whichthat provide for the termination and acceleration of the commitments and loans under the agreement in circumstances including, but not limited to, failure to make payments when due, breach of representations, warranties or covenants, certain insolvency events or failure to maintain the security interest in the trade receivables, and defaults under other material indebtedness.
The accounts receivable financing agreement terminates on March 22, 2019, unless terminated earlier pursuant to its terms. At September 30, 20172018 and December 31, 2016,2017, there was $30.0 million and $20.0 million, respectively, of remaining capacity available under the accounts receivable financing agreement.
Fair Value of Debt
The estimated fair value of the Company’s debt and outstanding borrowings under its 2016 Revolver was $1,368.8$1,194.0 million and $844.2$1,352.4 million at September 30, 20172018 and December 31, 2016,2017, respectively. The fair value of the Senior Notes, which totaled $100.7 million and $99.2 million at September 30, 2017 and December 31, 2016, respectively, was determined based on Level 2 inputs using the market approach, which is primarily based on rates at which the debt is traded among financial institutions. The fair valuevalues of the term loans, borrowings under credit facilities, and accounts receivable financing agreement which totaled $1,268.1 million and $745.0 million at September 30, 2017 and December 31, 2016, respectively, waswere determined based on Level 3 inputs, which isare primarily based on rates at which the debt is traded among financial institutions adjusted for the Company's credit standing.
(8)(9) 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.
Noncontrolling Interest
Below is a summary of noncontrolling interest for the nine months ended September 30 (in thousands):
|
| | | | | | | | |
| | | 2018 | | 2017 |
| Balance as of January 1, | | $ | 5,710 |
| | $ | — |
|
| Investment by noncontrolling interest | | — |
| | 5,440 |
|
| Comprehensive income | | | | |
| Net income | | 898 |
| | 513 |
|
| Foreign currency adjustments, net of income tax | | (75 | ) | | (90 | ) |
| Balance as of September 30, | | $ | 6,533 |
| | $ | 5,863 |
|
|
| | | | | | | | |
| | | 2017 | | 2016 |
| Balance as of January 1, | | $ | — |
| | $ | — |
|
| Investment by noncontrolling interest | | 5,440 |
| | — |
|
| Comprehensive income (loss) | | | | |
| Net income | | 513 |
| | — |
|
| Foreign currency adjustments, net of income tax | | (90 | ) | | — |
|
| Balance as of September 30, | | $ | 5,863 |
| | $ | — |
|
(9)(10) Stock-Based Compensation
Stock Option and RSA/RSU Activity
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 prior plan on May 31, 2018.
The Company granted 1,831,0001,468,000 service-based options and 131,044240,228 restricted stock awards and units, or RSAs/RSUs, with a total grant date fair value of $46.0$49.8 million and $8.3$22.7 million, respectively, during the nine months ended September 30, 2017.2018.
Aggregated information regarding the Company’s option plans is summarized below:
|
| | | | | | | | | | | | | |
| | | Options | | Wtd. Average Exercise Price | | Wtd. Average Remaining Contractual Life (in years) | | Intrinsic Value (millions) |
| Outstanding December 31, 2017 | | 5,245,625 |
| | $ | 39.14 |
| | 7.6 | | $ | 272.4 |
|
| Granted | | 1,468,000 |
| | 97.79 |
| | | | |
| Exercised | | (1,189,254 | ) | | 21.17 |
| | | | |
| Expired or forfeited | | (257,475 | ) | | 58.21 |
| | | | |
| Outstanding September 30, 2018 | | 5,266,896 |
| | $ | 58.61 |
| | 7.8 | | $ | 271.7 |
|
| Exercisable September 30, 2018 | | 2,067,067 |
| | $ | 22.69 |
| | 5.8 | | $ | 180.9 |
|
|
| | | | | | | | | | | | | |
| | | Options | | Wtd. Average Exercise Price | | Wtd. Average Remaining Contractual Life (in years) | | Intrinsic Value (millions) |
| Outstanding at December 31, 2016 | | 5,507,347 |
| | $ | 15.38 |
| | 6.7 | | $ | 218.9 |
|
| Granted | | 1,831,000 |
| | 74.93 |
| | | | |
| Exercised | | (1,758,846 | ) | | 9.47 |
| | | | |
| Expired or forfeited | | (73,072 | ) | | 26.94 |
| | | | |
| Outstanding at September 30, 2017 | | 5,506,429 |
| | $ | 36.91 |
| | 7.7 | | $ | 216.2 |
|
| Exercisable at September 30, 2017 | | 2,557,710 |
| | $ | 13.70 |
| | 6.3 | | $ | 159.8 |
|
The Company’s RSAs/RSUs activity in 20172018 is as follows:
|
| | | | | | | | | | | |
| | | Awards | | Wtd. Average Grant-Date Fair Value | | Intrinsic Value (millions) |
| Unvested December 31, 2017 | | 309,538 |
| | $ | 46.76 |
| | $ | 28.2 |
|
| Granted | | 240,228 |
| | 94.51 |
| | |
|
| Forfeited | | (32,500 | ) | | 81.14 |
| | |
|
| Vested | | (156,516 | ) | | 31.62 |
| | |
|
| Unvested September 30, 2018 | | 360,750 |
| | $ | 82.03 |
| | $ | 39.8 |
|
|
| | | | | | | | | | | |
| | | Awards | | Wtd. Average Grant-Date Fair Value | | Intrinsic Value (millions) |
| Unvested at December 31, 2016 | | 188,590 |
| | $ | 32.63 |
| | $ | 10.4 |
|
| Granted | | 131,044 |
| | 63.05 |
| | |
|
| Forfeited | | (2,000 | ) | | 58.95 |
| | |
|
| Vested | | (5,805 | ) | | 38.81 |
| | |
|
| Unvested at September 30, 2017 | | 311,829 |
| | $ | 45.14 |
| | $ | 23.8 |
|
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 any 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. Offering periods under the ESPP will generally be in six month increments, commencing on January 1 and July 1 of each calendar year with the Compensation Committee having the right to establish different offering periods. The Company recognized stock-based compensation expense of $0.9 million and $2.5 million associated with the ESPP during the three and nine months ended September 30, 2018, respectively. As of September 30, 2018, there have been 76,116 shares issued and 2,923,884 shares reserved for future issuance under the ESPP.
Stock-based Compensation Expense
Stock-based compensation expense related to employee stock options and RSAs/RSUs isplans are summarized below (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2018 | | 2017 | | 2018 | | 2017 |
| Direct costs | | $ | 2,451 |
| | $ | 956 |
| | $ | 6,900 |
| | $ | 2,208 |
|
| Selling, general and administrative | | 5,319 |
| | 2,493 |
| | 13,569 |
| | 5,478 |
|
| Transaction-related costs | | 773 |
| | 5,294 |
| | 773 |
| | 5,294 |
|
| Total stock-based compensation expense | | $ | 8,543 |
| | $ | 8,743 |
| | $ | 21,242 |
| | $ | 12,980 |
|
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Direct costs | | $ | 956 |
| | $ | 438 |
| | $ | 2,208 |
| | $ | 1,319 |
|
| Selling, general and administrative | | 2,493 |
| | 1,228 |
| | 5,478 |
| | 3,621 |
|
| Transaction-related costs | | 5,294 |
| | — |
| | 5,294 |
| | 29,421 |
|
| Total stock-based compensation expense | | $ | 8,743 |
| | $ | 1,666 |
| | $ | 12,980 |
| | $ | 34,361 |
|
All stock options granted under the 2013 Stock Incentive Plan for Key Employees of PRA Health Sciences, Inc. and its Subsidiaries, or the 2013 Plan, are subject to transfer restrictions of the stock option's underlying shares once vested and exercised. This lack of marketability was included as a discount when calculating the grant date value of these options. In conjunction with secondary offerings, the transfer restrictions on a portion of such shares issuable upon exercise of vested options granted under the 2013 Plan were released. The release of the transfer restrictions is considered a modification under ASC Topic 718, “Stock Compensation.” As a result of these modifications, the Company incurred approximately $5.3$0.8 million and $4.9$5.3 million of incremental compensation expense associated with service-based options during the nine months ended September 30, 20172018 and September 30, 2016,2017, respectively, which is included in transaction-related costs in the accompanying consolidated condensed statement of operations.
In December 2013, the Company granted certain employees market-based options under the Plan that vest only upon the achievement of a specified internal rate of return from a liquidity event (“2.0x Options”). At the time of grant, no compensation expense was recorded as the 2.0x Options vest upon a liquidity event, which is not considered probable until the date it occurs. On January 20, 2016, the Compensation Committee of the Board of Directors adopted a resolution to adjust the vesting criteria for all 2.0x Options granted and still outstanding on such date. Under the revised vesting criteria, the 2.0x Options vest upon the announcement of a secondary offering. This modification resulted in Type IV Improbable-to-Improbable modification. Since the secondary offering was deemed improbable due to the fact that it is outside of the Company’s control and cannot be considered probable until the date it occurs, no compensation expense was recognized on the January 20, 2016 modification date. On March 2, 2016, the Company announced a secondary offering of shares by KKR and certain management stockholders, and it became probable that the 2.0x Options would vest. In total, 835,551 2.0x Options held by current employees were modified. As a result of this modification, and the modification associated with the transfer restrictions releases noted above, the Company incurred approximately $24.5 million of incremental compensation expense associated with the 2.0x Options during the nine months ended September 30, 2016, which is included in transaction-related costs in the accompanying consolidated condensed statement of operations.
Employee Stock Purchase Plan
In April 2017, the Board of Directors approved the PRA Health Sciences, Inc. 2017 Employee Stock Purchase Plan (“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 10% 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.
Offering periods under the ESPP will generally be in six month increments, commencing on January 1 and July 1 of each calendar year with the compensation committee having the right to establish different offering periods.
(10)(11) Income Taxes
The Company’s effective income tax rate was 40.0% and (0.2)% for the nine months ended September 30, 2018 and 25.8%2017, respectively. The effective tax rate for the nine months ended September 30, 2017 and 2016, respectively.included the effect of a release of a valuation allowance on the Company’s net federal deferred tax assets, which was fully reversed within 2017. The variation between the Company’s effective income tax rate and the U.S. statutory rate of 35%21% for the nine months ended September 30, 20172018 is primarily due to (i) the benefit realized fromU.S. inclusion of amounts related to the estimated tax deductionon global intangible low-taxed income, or GILTI, (ii) the U.S. inclusion of stock awardsamounts related to the estimated base erosion anti abuse tax, or BEAT, and (iii) the increase in excessfair value of the amount recognizedearn-out liability related to the stock acquisition of Symphony Health, which is not deductible for tax but instead increases tax stock basis.
On December 22, 2017, the Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a modified territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative untaxed foreign earnings as of December 31, 2017. The Company has calculated its best estimate of the impact of the Act at the date of enactment and additional measurement period adjustments related to the 2017 transition tax in our quarterly income tax provision in accordance with our understanding of the Act including recently-released guidance. As a result, the Company has recorded $3.5 million as additional income tax expense for the nine months ended September 30, 2018 relating to the impact of adjustments to the Company’s December 31, 2017 transition tax provisional amounts, of which a $0.1 million benefit relates to adjustments made in the financial statements perthird quarter of 2018. The adjustment to the guidance under ASU No. 2016-09,provisional amount related to opting to offset the one-time transition tax on the mandatory deemed repatriation of untaxed foreign earnings with current losses and (ii)prior year net operating losses in lieu of utilizing foreign tax credits. The Company is continuing to analyze the releaseoverall impact of the valuation allowance againsttransition tax inclusion and will update the Company's federal netprovisional estimate as it completes its analysis during the measurement period. Due to the complexity of the new law, the Company is still in the process of investigating the related accounting implications. Specifically, for the GILTI tax the Company intends to make an accounting policy decision around whether to account for GILTI as a period cost in the relevant period, or to record deferred taxes related to the basis in the Company’s foreign subsidiaries. The Company is currently analyzing recently issued guidance and will make a determination regarding its accounting policy for GILTI tax amounts in the fourth quarter of 2018. Anticipated amounts for GILTI have been included as a component of current tax expense in the Company’s third quarter annual effective tax rate calculation. The Company is currently projecting to be subject to BEAT for 2018. Pursuant to relevant FASB guidance, the Company has accounted for BEAT as a current expense and recorded U.S. deferred tax assets as a resultand liabilities at the regular statutory rate for the period ended September 30, 2018. Adjustments to the recorded provisional amounts or changes resulting from the issuance of additional guidance will be reflected in the acquisition of Symphony Health.period when the Company's analysis is updated or in the period the additional guidance is issued, respectively.
GAAP requires a two-step approach when evaluating uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence demonstrates that it is more likely than not that the position will be sustained upon audit, including resolution of any related appeals or litigation processes. The second step is to quantify the amount of tax benefit to recognize as the amount that is cumulatively more than 50% likely to be realized upon ultimate settlement with the taxing authorities.
As of September 30, 2017, There were no material changes to the Company’s liability for unrecognized tax benefits was $13.0 million. If any portion of this $13.0 million is recognized that impactsduring the effective tax rate, the Company will then include that portion in the computation of its effective tax rate. Although the ultimate timing of the resolution of audits is highly uncertain, the Company believes it is reasonably possible that approximately $4.5 million of gross unrecognized tax benefits will change in the next 12three and nine months as a result of pending audit settlements or statute of limitations expirations.ended September 30, 2018.
The Company files federal, state, and foreign tax returns. For federal purposes, the Company is generally no longer subject to tax examinations for years ended December 31, 2013 and prior. For state tax returns, the Company is generally no longer subject to tax examinations for years prior to 2012. For foreign purposes, the Company is generally no longer subject to examination for tax periods 2009 and prior. Certain carryforward tax attributes generated in prior years remain subject to examination and adjustment.
(11)(12) Commitments and Contingencies
Legal Proceedings
The Company is involved in legal proceedings from time to time in the ordinary course of its business, including employment claims and claims related to other business transactions. Although the outcome of such claims is uncertain, management believes that these legal proceedings will not have a material adverse effect on the financial condition or results of future operations of the Company.
The Company is currently a party to litigation with the City of Sao Paulo, Brazil. The dispute relates to whether the export of services provided by the Company is subject to a local tax on services. The Company has not recorded a liability associated with the claim, which totaled $5.4$4.6 million at September 30, 2017,2018, given that it is not deemed probable the Company will incur a loss related to this case. However, a deposit totaling $5.4$4.6 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 condensed balance sheet. 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 2011,2005 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 period November 2013 through September 2017subsequent periods as the Judiciary Court of Justice of the State of Sao Paulo only reviewed the facts that pertained to the period before NovemberOctober 2013. The Company expects to recover the full amount of the deposit when the case is settled.
(12)(13) 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.risk arising from movement in market interest rates. Accordingly, the Company has instituted interest rate hedging programs that are accounted for in accordance with ASC 815, “Derivatives and Hedging.” Thean interest rate hedging program is athat uses interest rate swaps designated as cash flow hedge program designedhedges to minimizemitigate 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.
On January 5, 2018, the Company entered into two new interest rate swaps in order to manage its cash flow exposure to variable rate debt and also to replace an interest rate swap that was scheduled to mature in September 2018. The first interest rate swap has an aggregate notional amount of $375.0 million and a fixed payment rate of 2.2% offsetting a one-month LIBOR variable rate with an effective date of January 8, 2018, and a maturity date of December 6, 2020. The second interest rate swap has an aggregate notional amount of $250.0 million and a fixed payment rate of 2.3% offsetting a one-month LIBOR variable rate with an effective date of September 6, 2018, and a maturity date of September 6, 2020.
The following table presents the notional amounts and fair values (determined using Level 2 inputs) of the Company’s derivatives as of September 30, 20172018 and December 31, 20162017 (in thousands):
|
| | | | | | | | | | | | | | | | | | |
| | | | | September 30, 2018 | | December 31, 2017 |
| | | Balance Sheet Classification | | Notional amount | | Asset/ (Liability) | | Notional amount | | Asset/ (Liability) |
| Derivatives in an asset position: | | Other current assets | | $ | — |
| | $ | — |
| | $ | 250,000 |
| | $ | 428 |
|
| | | Other assets | | 625,000 |
| | 7,948 |
| | — |
| | — |
|
| | | | | $ | 625,000 |
| | $ | 7,948 |
| | $ | 250,000 |
| | $ | 428 |
|
|
| | | | | | | | | | | | | | | | | | |
| | | | | September 30, 2017 | | December 31, 2016 |
| | | Balance Sheet Classification | | Notional amount | | Asset/ (Liability) | | Notional amount | | Asset/ (Liability) |
| Derivatives in an asset position: | | | | | | | | | | |
| Interest rate swap | | Other assets | | $ | 250,000 |
| | $ | 73 |
| | $ | — |
| | $ | — |
|
| Derivatives in a liability position: | | | | | | | | | | |
| Interest rate swap | | Other long-term liabilities | | $ | — |
| | $ | — |
| | $ | 250,000 |
| | $ | (590 | ) |
The Company records the effective portion of any change in the fair value of derivatives designated as hedging instruments under ASC 815 to accumulated other accumulated comprehensive loss in the Company's consolidated condensed balance sheet, net of deferred taxes, and will later reclassify into earnings when the hedged item affects earnings or is no longer expected to occur. Gains and losses from the ineffective portion of any hedge are recognized in earnings immediately. For other derivative contracts that do not qualify or no longer qualify for hedge accounting, changes in the fair value of the derivatives are recognized in earnings each period.
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The table below presents the effect of the Company's derivatives on the consolidated condensed statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 20172018 and 20162017 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Derivatives in Cash Flow Hedging Relationships (Interest Rate Swaps) | | 2018 | | 2017 | | 2018 | | 2017 |
| Amount of pre-tax gain (loss) recognized in other comprehensive income | | $ | 1,422 |
| | $ | 35 |
| | $ | 7,617 |
| | $ | (32 | ) |
| Amount of loss reclassified from accumulated other comprehensive loss into interest expense, net | | (1,463 | ) | | (1,758 | ) | | (4,980 | ) | | (5,175 | ) |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Derivatives in Cash Flow Hedging Relationships (Interest Rate Contracts) | | 2017 | | 2016 | | 2017 | | 2016 |
| Amount of pre-tax gain (loss) recognized in other comprehensive income (loss) on derivatives | | $ | 35 |
| | $ | 127 |
| | $ | (32 | ) | | $ | (2,546 | ) |
| Amount of loss recognized in other income (expense), net on derivatives (ineffective portion) | | — |
| | — |
| | — |
| | — |
|
| Amount of loss reclassified from accumulated other comprehensive loss into interest expense, net on derivatives | | (1,758 | ) | | (1,617 | ) | | (5,175 | ) | | (4,242 | ) |
The Company expects that $6.6$4.1 million of unrealized losses will be reclassified out of accumulated other comprehensive loss and into interest expense, net over the next 12 months.
(13)(14) Accumulated Other Comprehensive Loss
Below is a summary of the components of accumulated other comprehensive loss (in thousands):
|
| | | | | | | | | | | | |
| | | Foreign Currency Translation | | Derivative Instruments, Net of Tax | | Total |
| Balance at December 31, 2017 | | $ | (117,180 | ) | | $ | (19,290 | ) | | $ | (136,470 | ) |
| Other comprehensive income before reclassifications | | (23,107 | ) | | 5,613 |
| | (17,494 | ) |
| Reclassification adjustments | | — |
| | 3,666 |
| | 3,666 |
|
| Balance at September 30, 2018 | | $ | (140,287 | ) | | $ | (10,011 | ) | | $ | (150,298 | ) |
|
| | | | | | | | | | | | |
| | | Foreign Currency Translation | | Derivative Instruments, Net of Tax | | Total |
| Balance at December 31, 2016 | | $ | (201,091 | ) | | $ | (23,595 | ) | | $ | (224,686 | ) |
| Other comprehensive income before reclassifications | | 75,167 |
| | (21 | ) | | 75,146 |
|
| Reclassification adjustments | | — |
| | 3,249 |
| | 3,249 |
|
| Balance at September 30, 2017 | | $ | (125,924 | ) | | $ | (20,367 | ) | | $ | (146,291 | ) |
Foreign Currency Translation
The change in the Company's foreign currency translation adjustment was due primarily to the movements in the British pound and Euro exchange rates against the U.S. dollar. The U.S. dollar weakenedstrengthened by 8.6%3.3%, 3.0%, 3.3%, and 12.0%12.2% versus the British pound, Euro, Canadian dollar, and Euro,Russian ruble, respectively, between December 31, 20162017 and September 30, 2017.2018. The movement in the British pound, Euro, Canadian dollar, and EuroRussian ruble represented $42.1$2.7 million, $10.3 million, $1.9 million, and $26.8$3.3 million, respectively, out of the $75.2$23.1 million foreign currency translation adjustment during the nine months ended September 30, 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 remainingCompany 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 is primarily attributableduring the nine months ended September 30, 2018.
Derivative Instruments
See Note 13 for further information on changes to accumulated other comprehensive income related to the U.S. dollar’s depreciation against other major world-wide currencies, including the Canadian dollar and the Russian ruble.derivative instruments.
(14)(15) 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.plans.
The following table reconciles the basic to diluted weighted average shares outstanding (in thousands):
|
| | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2018 | | 2017 | | 2018 | | 2017 |
| Basic weighted average common shares outstanding | | 64,261 |
| | 62,730 |
| | 63,891 |
| | 62,185 |
|
| Effect of dilutive stock options and other awards under share-based compensation programs | | 2,245 |
| | 3,142 |
| | 2,367 |
| | 3,498 |
|
| Diluted weighted average common shares outstanding | | 66,506 |
| | 65,872 |
| | 66,258 |
| | 65,683 |
|
| | | | | | | | | |
| Anti-dilutive shares | | 987 |
| | 733 |
| | 1,670 |
| | 381 |
|
|
| | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Basic weighted average common shares outstanding | | 62,730 |
| | 60,937 |
| | 62,185 |
| | 60,579 |
|
| Effect of dilutive stock options and RSAs/RSUs | | 3,142 |
| | 3,584 |
| | 3,498 |
| | 3,689 |
|
| Diluted weighted average common shares outstanding | | 65,872 |
| | 64,521 |
| | 65,683 |
| | 64,268 |
|
| | | | | | | | | |
| Anti-dilutive shares | | 733 |
| | 359 |
| | 381 |
| | 314 |
|
The dilutive and 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.
(15)(16) Segments
In conjunction withSubsequent to the acquisition of Symphony Health, on September 6, 2017, the Company expanded its reporting segments. The Company is now managed through two reportable segments,segments: (i) the Clinical Research segment and Data Solutions. Clinical Research, which primarily serves biopharmaceutical clients, provides outsourced clinical research and clinical trial related services.(ii) the Data Solutions provides mission criticalsegment. 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 customers. |
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 technology solutions and real-world insights and services to the Company’s life science clients. Reimbursement revenue and reimbursable out-of-pocket costs areby segment is not presented, as this measure is not used by the chief operating decision makerdecision-maker to assess the Company's performance.
The Company’s reportable segment information is presented below (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Service revenue: | | | | | | | | |
| Clinical Research | | $ | 475,588 |
| | $ | 399,841 |
| | $ | 1,360,610 |
| | $ | 1,166,410 |
|
| Data Solutions | | 18,962 |
| | — |
| | 18,962 |
| | — |
|
| Total service revenue | | 494,550 |
| | 399,841 |
| | 1,379,572 |
| | 1,166,410 |
|
| Direct Costs: | | | | | | | | |
| Clinical Research | | 314,904 |
| | 259,910 |
| | 903,027 |
| | 758,333 |
|
| Data Solutions | | 11,961 |
| | — |
| | 11,961 |
| | — |
|
| Total direct costs | | 326,865 |
| | 259,910 |
| | 914,988 |
| | 758,333 |
|
| Gross Profit: | | | | | | | | |
| Clinical Research | | 160,684 |
| | 139,931 |
| | 457,583 |
| | 408,077 |
|
| Data Solutions | | 7,001 |
| | — |
| | 7,001 |
| | — |
|
| Total gross profit | | $ | 167,685 |
| | $ | 139,931 |
| | $ | 464,584 |
| | $ | 408,077 |
|
| Less expenses not allocated to segments: | | | | | | | | |
| Selling, general and administrative | | 79,307 |
| | 67,190 |
| | 229,770 |
| | 199,648 |
|
| Transaction-related costs | | 12,740 |
| | — |
| | 12,740 |
| | 31,785 |
|
| Depreciation and amortization | | 18,853 |
| | 17,708 |
| | 50,146 |
| | 52,246 |
|
| Loss on disposal of fixed assets, net | | 8 |
| | 219 |
| | 240 |
| | 290 |
|
| Consolidated income from operations | | 56,777 |
| | 54,814 |
| | 171,688 |
| | 124,108 |
|
| Interest expense, net | | (11,557 | ) | | (13,779 | ) | | (31,088 | ) | | (42,525 | ) |
| Loss on modification or extinguishment of debt | | (3,089 | ) | | — |
| | (3,089 | ) | | (21,485 | ) |
| Foreign currency (losses) gains, net | | (12,794 | ) | | 1,182 |
| | (35,004 | ) | | 9,264 |
|
| Other income (expense), net | | 1,004 |
| | 20 |
| | 724 |
| | (85 | ) |
| Consolidated income before income taxes and equity in income of unconsolidated joint ventures | | $ | 30,341 |
| | $ | 42,237 |
| | $ | 103,231 |
| | $ | 69,277 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, 2018 | | Three Months Ended September 30, 2017 |
| | | Clinical Research | | Data Solutions | | Total | | Clinical Research | | Data Solutions | | Total |
| Revenue | | $ | 656,979 |
| | $ | 60,617 |
| | $ | 717,596 |
| | $ | 563,047 |
| | $ | 18,962 |
| | $ | 582,009 |
|
| | | | | | | | | | | | | |
| Direct costs (exclusive of depreciation and amortization) | | 330,037 |
| | 41,385 |
| | 371,422 |
| | 314,904 |
| | 11,961 |
| | 326,865 |
|
| Reimbursable out-of-pocket costs | | 77,584 |
| | — |
| | 77,584 |
| | 87,459 |
| | — |
| | 87,459 |
|
| Reimbursable investigator fees | | 65,133 |
| | — |
| | 65,133 |
| | — |
| | — |
| | — |
|
| Segment profit | | 184,225 |
| | 19,232 |
| | 203,457 |
| | 160,684 |
| | 7,001 |
| | 167,685 |
|
| Less expenses not allocated to segments: | | | | | | | | | | | | |
| Selling, general and administrative expenses | | | | | | 92,553 |
| | | | | | 79,307 |
|
| Transaction-related costs | | | | | | 43,837 |
| | | | | | 11,741 |
|
| Depreciation and amortization | | | | | | 28,270 |
| | | | | | 18,853 |
|
| (Gain) loss on disposal of fixed assets, net | | | | | | (15 | ) | | | | | | 8 |
|
| Income from operations | | | | | | 38,812 |
| | | | | | 57,776 |
|
| Interest expense, net | | | | | | (14,423 | ) | | | | | | (11,557 | ) |
| Loss on modification or extinguishment of debt | | | | | | (454 | ) | | | | | | (3,089 | ) |
| Foreign currency losses, net | | | | | | (1,809 | ) | | | | | | (12,794 | ) |
| Other (expense) income, net | | | | | | (68 | ) | | | | | | 5 |
|
| Income before income taxes and equity in income of unconsolidated joint ventures | | | | | | $ | 22,058 |
| | | | | | $ | 30,341 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Nine Months Ended September 30, 2018 | | Nine Months Ended September 30, 2017 |
| | | Clinical Research | | Data Solutions | | Total | | Clinical Research | | Data Solutions | | Total |
| Revenue | | $ | 1,966,762 |
| | $ | 175,512 |
| | $ | 2,142,274 |
| | $ | 1,584,531 |
| | $ | 18,962 |
| | $ | 1,603,493 |
|
| | | | | | | | | | | | | |
| Direct costs (exclusive of depreciation and amortization) | | 1,010,915 |
| | 123,594 |
| | 1,134,509 |
| | 903,027 |
| | 11,961 |
| | 914,988 |
|
| Reimbursable out-of-pocket costs | | 237,307 |
| | — |
| | 237,307 |
| | 223,921 |
| | — |
| | 223,921 |
|
| Reimbursable investigator fees | | 193,585 |
| | — |
| | 193,585 |
| | — |
| | — |
| | — |
|
| Segment profit | | 524,955 |
| | 51,918 |
| | 576,873 |
| | 457,583 |
| | 7,001 |
| | 464,584 |
|
| Less expenses not allocated to segments: | | | | | | | | | | | | |
| Selling, general and administrative expenses | | | | | | 275,424 |
| | | | | | 229,770 |
|
| Transaction-related costs | | | | | | 32,709 |
| | | | | | 11,816 |
|
| Depreciation and amortization | | | | | | 84,163 |
| | | | | | 50,146 |
|
| Loss on disposal of fixed assets, net | | | | | | 21 |
| | | | | | 240 |
|
| Income from operations | | | | | | 184,556 |
| | | | | | 172,612 |
|
| Interest expense, net | | | | | | (43,860 | ) | | | | | | (31,088 | ) |
| Loss on modification or extinguishment of debt | | | | | | (454 | ) | | | | | | (3,089 | ) |
| Foreign currency losses, net | | | | | | (1,416 | ) | | | | | | (35,004 | ) |
| Other expense, net | | | | | | (201 | ) | | | | | | (200 | ) |
| Income before income taxes and equity in income of unconsolidated joint ventures | | | | | | $ | 138,625 |
| | | | | | $ | 103,231 |
|
Revenue by geographic location for each segment is as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, 2018 | | Nine Months Ended September 30, 2018 |
| | | Clinical Research | | Data Solutions | | Total | | Clinical Research | | Data Solutions | | Total |
| Revenue | | | | | | | | | | | | |
| Americas: | | | | | | | | | | | | |
| United States | | $ | 433,050 |
| | $ | 60,617 |
| | $ | 493,667 |
| | $ | 1,284,678 |
| | $ | 175,512 |
| | $ | 1,460,190 |
|
| Other | | 11,396 |
| | — |
| | 11,396 |
| | 35,346 |
| | — |
| | 35,346 |
|
| Total Americas | | 444,446 |
| | 60,617 |
| | 505,063 |
| | 1,320,024 |
| | 175,512 |
| | 1,495,536 |
|
| Europe, Africa, and Asia-Pacific | | | | | |
|
| | | | | | |
| United Kingdom | | 170,252 |
| | — |
| | 170,252 |
| | 516,442 |
| | — |
| | 516,442 |
|
| Netherlands | | 28,334 |
| | — |
| | 28,334 |
| | 87,340 |
| | — |
| | 87,340 |
|
| Other | | 13,947 |
| | — |
| | 13,947 |
| | 42,956 |
| | — |
| | 42,956 |
|
| Total Europe, Africa, and Asia-Pacific | | 212,533 |
| | — |
| | 212,533 |
| | 646,738 |
| | — |
| | 646,738 |
|
| Total revenue | | $ | 656,979 |
| | $ | 60,617 |
| | $ | 717,596 |
| | $ | 1,966,762 |
| | $ | 175,512 |
| | $ | 2,142,274 |
|
Item 2. 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 in conjunction with our consolidated condensed financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 20162017 and with the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2017.
We use the terms “we,” “us,” “our,” or the “Company”"Company” in this report to refer to PRA Health Sciences, Inc. and its subsidiaries.
Overview
We are one of the world’s leading global contract research organizations, or CROs, by revenue, providing outsourced clinical research and development services and data solutions to the biotechnology and pharmaceutical industries. We believe we are one of a select group of CROs with the expertise and capability to conduct clinical trials across major therapeutic areas on a global basis. Our therapeutic expertise includes areas that are among the largest in pharmaceutical development, and we focus in particular on oncology, central nervous system inflammation, respiratory, cardiometabolic and infectious diseases. We believe that we further differentiate ourselves from our competitors through our investments in data, medical informatics and clinical technologies designed to enhance efficiencies, improve study predictability and provide better transparency for our clients throughout their clinical development processes.
In September 2017, we completed the acquisition of Symphony Health Our Data Solutions Corporation, or Symphony Health,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 companiescompanies' commercial organizations through enhanced analytics and outsourcing services. The acquisition of Symphony Health was accounted for as a business combination and the acquired results of operations are included in our consolidated financial information since the date of the acquisition. See Note 2 to our consolidated condensed financial statements included elsewhere in this Form 10-Q for additional details regarding our business combinations.
Historically, we reported one segment focused on providing outsourced clinical research and clinical trial related services. These operations are now being reported as the Clinical Research segment. The acquisition of Symphony Health resulted in a new segment, referred to as the Data Solutions segment, which is focused on providing mission critical information, technology solutions and real-world insights and services to the Company’s life sciences clients.
Contracts define the relationships with our clients and establish the way we earn revenue. Three types of relationships are most common: a fixed-fee contract, a time and materials contract and fee-for-service arrangements. In cases where the contracts are fixed price, we may bear the cost of overruns for the contracted scope, or we may benefit if the costs are lower than we anticipated for the contracted scope. In cases where our contracts are fee-for-service, the contracts contain an overall budget for contracted resources. If actual resources used are lower than anticipated, the client generally keeps the savings and we may be responsible for covering the cost of the unused resource if we are unable to redeploy the resource. For time and material contracts, we bill the client only for the actual hours we spend to complete the contracted scope based upon stated hourly rates by position. The duration of our contracts range from a few months to several years. Revenue for services is recognized only after persuasive evidence of an arrangement exists, the sales price is determinable, services have been rendered, and collectability is reasonably assured. Once these criteria have been met, we recognize revenue for the services provided on fixed-fee contracts in our Clinical Research segment based on the proportional performance methodology, which determines the proportion of outputs or performance obligations, which have been completed or delivered compared to the total contractual outputs for performance obligations. To measure performance, we compare the contract costs incurred to estimated total contract costs through completion. As part of the client proposal and contract negotiation process, we develop a detailed project budget for the direct costs based on the scope of the work, the complexity of the study, the geographical locations involved and our historical experience. We then establish the individual contract pricing based on our internal pricing guidelines, discount agreements, if any, and negotiations with the client. The estimated total contract costs are reviewed and revised periodically throughout the lives of the contracts, with adjustments to revenue resulting from such revisions being recorded on a cumulative basis in the period in which the revisions are first identified. Our costs consist of expenses necessary to carry out the clinical development project undertaken by us on behalf of the client. These costs primarily include the expense of obtaining appropriately qualified labor to administer the project, which we refer to as direct cost headcount. Other costs we incur are attributable to the expense of operating our business generally, such as leases and maintenance of information technology and equipment. We recognize revenue for services provided on fixed-fee contracts in our Data Solutions segment
either ratably as earned over the contract period (for subscription-based services) or upon delivery (for one-time delivery of data solutions or reports). Revenue from time and materials contracts is recognized as hours are incurred. Revenues and the related costs of fee-for-service contracts are recognized in the period in which services are performed.
How We Assess the Performance of Our Business
The Company is managed through two reportable segments: (i) the Clinical Research segment; and (ii) the Data Solutions segment. 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 financial measures in conformity with U.S. generally accepted accounting principles, or GAAP, financialincluding revenue, costs and expenses and other measures discussed below, we review various financial and operational metrics, includingmetrics. For our Clinical Research segment, we review new business awards, cancellations, and backlog. Many of our current contracts include clinical trials covering multiple geographic locations. We utilize the same management systems
and reporting tools to monitor and manage these activities on the same basis worldwide.
Our gross new business awards for our Clinical Research segment for the nine months ended September 30, 2018 and 2017 and 2016 were $1,999.9$2,286.7 million and $1,686.4$1,999.9 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,Clinical Research segment, the value of a new award is the anticipated service revenue over the life of the contract, which does not include reimbursement activityreimbursable out-of-pocket costs or reimbursable 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 nine months ended September 30, 20172018 and 20162017 we had $233.4$309.3 million and $197.2$233.4 million, respectively, of cancellations for which we received correspondence from the client for our Clinical Research segment. 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 for our Clinical Research segment. 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 September 30, 2018 and 2017 and 2016 was $3.4$4.1 billion and $2.8$3.4 billion, respectively.
Sources of Revenue
Total revenues are comprised of service revenue and reimbursement revenue, each of which is described below.
Service Revenue
We generally enter into contracts with customers to provide services with payments based on either fixed-fee, time and materials, or fee-for-service arrangements. Revenue for services is recognized only after persuasive evidence of an arrangement exists,revenues from the sales price is determinable, services have been rendered, and collectability is reasonably assured.
Once these criteria have been met, we recognize revenue for the services provided on fixed-fee contracts in our Clinical Research segment based on the proportional performance methodology, which determines the proportion of outputs or performance obligations which have been completed or delivered compared to the total contractual outputs for performance obligations. To measure performance, we compare the contract costs incurred to estimated total contract costs through completion. As part of the client proposal and contract negotiation process, we develop a detailed project budget for the direct costs based on the scope of the work, the complexity of the study, the geographical location involved and our historical experience. We then establish the individual contract pricing based on our internal pricing guidelines, discount agreements, if any, and negotiations with the client. The estimated total contract costs are reviewed and revised periodically throughout the lives of the contracts, with adjustments to revenue resulting from such revisions being recorded on a cumulative basis in the period in which the revisions are first identified. We recognize revenue for services provided on fixed-fee contracts in our Data Solutions segment either ratably as earned over the contract period (for subscription-based services) or upon delivery (for one-time delivery of data solutions or reports). Revenue from time and materials contracts is recognized as hours are incurred. Billable hours typically fluctuate during the terms of individual contracts, as services we provide generally increase at the beginning of a study and decrease toward the end of a study. Revenues and the related costs of fee-for-service contracts are recognized in the period in which services are performed.
A majorityprovision of our contracts undergo modifications over the contract periodservices and our contracts provide for these modifications. During the modification process, we recognize revenue to the extent we incur costs, provided client acceptance and payment is deemed reasonably assured.
We often offer volume discounts to our large customers based on annual volume thresholds. We record an estimate of the annual volume rebate as a reduction of revenue throughout the period based on the estimated total rebate to be earned for the period.
Most of our contracts can be terminated by the client either immediately or after a specified period, typically 30 to 60 days, following notice. In the case of early termination, these contracts typically require payment to us of fees earned to date, and in some cases, a termination fee or some portion of the fees or profit that we could have earned under the contract if it had not been terminated early. Based on ethical, regulatory, and health considerations, this wind-down activity may continue for several quarters or years. Therefore, revenue recognized prior to cancellation generally does not require a significant adjustment upon cancellation.
Increases in the estimated total direct costs to complete a contract without a corresponding proportional increase to the total contract price result in a cumulative adjustment to the amount of revenue recognized in the period the change in estimate is determined.
Our service revenue was $1,379.6 million and $1,166.4 million during the nine months ended September 30, 2017 and 2016, respectively. Changes in service revenuerevenues from period to period are driven primarily by changes in backlog at the beginning of a period, as well as new business awards during such period. Additionally, service revenue and billable hours will generally be impacted by the mix of studiesreimbursed expenses that are active during a period, as different studiesincurred while providing our services. We do not have different staffing requirements, as well as the life cyclesany material product revenues.
See Note 1, Basis of projects that are active during a period.
Reimbursement RevenuePresentation, and Reimbursable Out-of-Pocket Costs
We incur out-of-pocket costs, which are reimbursable by our customers. We include these out-of-pocket costs as reimbursement revenue and reimbursable out-of-pocket expenses inNote 2, Significant Account Policies Updates, to our consolidated condensed statementfinancial statements included elsewhere in this Form 10-Q for additional details regarding our sources of operations.
As is customary in our industry, we also routinely enter into separate agreements on behalf of our clients with independent physician investigators in connection with clinical trials. We also receive funds from our clients for investigator fees, which are netted against the related costs, since such fees are the obligation of our clients, without risk or reward to us. We are not obligated either to perform the service or to pay the investigator in the event of default by the client. In addition, we do not pay the independent physician investigator until funds are received from the client. Accordingly, unlike reimbursable out-of-pocket costs, we do not recognize these investigator fees in revenue.
Reimbursement costs and investigator fees are not included in our backlog because they are pass-through costs to our clients.
We believe that the fluctuations in reimbursement costs and reimbursement revenue from period to period are not meaningful to our underlying performance.
Costs and Expenses
Our costs and expenses are comprised primarily of our direct costs, selling, general and administrative costs, depreciation and amortization and income taxes. In addition, we incur reimbursable out-of-pocket expenses; however, as noted above, our reimbursable out-of-pocket expenses are directly offset by our reimbursement revenue. Since reimbursement revenue is offset by our out-of-pocket reimbursable expenses, we monitor and measure costs as a percentage of service revenue, excluding reimbursement revenue from out-of-pocket costs and investigator fees, 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)
Direct Costs
OurFor our Clinical Research segment, direct costs consist primarily of labor-relatedlabor‑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. ForLabor-related charges as a percentage of the Clinical Research segment's total direct costs were 95.9% and 96.4% for the nine months ended September 30, 20172018 and 2016, the labor-related charges were 95.5% and 96.6% of our total direct costs,2017, respectively. The cost of labor procured through staffing agencies is included in these percentages and representedrepresents 4.5% and 5.6% and 5.0% of the Clinical Research segment's total direct costs for the nine months ended September 30, 20172018 and 2016,2017, 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 was 4.5%as a percentage of the Clinical Research segment's total direct costs were 4.1% and 3.4%3.6% for the nine months ended September 30, 2018 and 2017, respectively.
For our Data Solutions segment, direct costs consist primarily of data costs. Data costs as a percentage of the Data Solutions segment's total direct costs were 73.0% and 71.1% for the nine months ended September 30, 2018 and 2017, respectively. Labor-related charges, such as salaries, benefits and incentive compensation for our employees, were 20.2% and 23.0% of the Data Solutions segment's total direct costs for the nine months ended September 30, 2018 and 2017, respectively. Our remaining direct costs are items such as travel, meals, and 2016,supplies and were 6.8% and 5.8% of the Data Solutions segment's total direct costs for the nine months ended September 30, 2018 and 2017, respectively.
Historically, direct costs have increased with an increase in service revenues. The future relationship between direct costs and service revenues may vary from historical relationships. Several factors will cause direct costs to decrease as a percentage of service revenues. Deployment of our billable staff in an optimally efficient manner has the greatestmost impact on our ratio of direct cost to service revenue. The most effective deployment of our staff is when they are fully engaged in billable work and are accomplishing contract related activities at a rate that meets or exceeds budgeted targets. We also seek to optimize our efficiency by performing work using the employee with the lowest cost. Generally, the following factors may cause direct costs to increase as a percentage of service revenues: our staff are not fully deployed, as is the case when there are unforeseen cancellations or delays, or when our staff are accomplishing tasks at levels of effort that exceed budget, such as rework, as well as pricing pressure from increased competition.
Reimbursable Out-of-Pocket Costs and Reimbursable Investigator Fees
We incur out-of-pocket costs, which are reimbursable by our customers. We include these out-of-pocket costs as reimbursable out-of-pocket expenses in our consolidated condensed statements of operations.
As is customary in our industry, we also routinely enter into separate agreements on behalf of our clients with independent physician investigators in connection with clinical trials. We also receive funds from our clients for investigator fees. We are not obligated either to perform the service or to pay the investigator in the event of default by the client. In addition, we do not pay the independent physician investigator until funds are received from the client. We include these investigator fees as reimbursable investigator fees in our consolidated condensed statements of operations.
Reimbursable costs and investigator fees are not included in our backlog because they are pass-through costs to our clients.
We believe that the fluctuations in reimbursement costs and the associated revenue are not meaningful to the economic performance given that such costs are passed through to the client. The reimbursable costs 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.
Loss on Modification or Extinguishment of Debt
Loss on modificationextinguishment of debt for the nine months ended September 30, 2017 consists of previously capitalized unamortized debt financing costs that were expensed as a result of voluntary debt repayments and fees associated with the incremental borrowing under the 2016 Credit Facilities, or Incremental Borrowing. Loss on extinguishment of debt for the nine months ended September 30, 2016 consists of an early tender premium, the write-off of unamortized debt issuance costs and miscellaneous costs incurred as a result of our repayment of $133.6 million of our 9.5% senior notes due 2023, or Senior Notes.
Transaction-RelatedTransaction-related Costs
Transaction-related costs for the nine months ended September 30, 2017 consists of expenses incurredincludes fees associated with our secondary offering acquisition of Symphony Health Solutions Corporation, or Symphony Health, andcommon stock, stock-based compensation expense related to the release of a portion of the transfer restrictions on vested options. Transaction-related costs foroptions, the nine months ended September 30, 2016 consists of expenses incurred with our secondary offerings, transaction-related stock-based compensation awards and the closing ofamendment to our accounts receivable financing agreement.agreement, costs associated with earn-out liabilities, and expenses associated with our acquisitions.
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 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 depended and will continue to depend upon the geographic distribution of our pre-taxpre‑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-deductiblenon‑deductible items such as portions of transaction-relatedtransaction‑related costs.
In addition, our effective income tax rate is influenced by U.S. tax law which has been substantially modified by the U.S. Tax Cuts and Jobs Act of 2017, or the Act. The following provisions of the Act could have an adverse effect on our tax rate if it is determined that the provisions are applicable to the Company:
global intangible low-taxed income;
limitations on the U.S. deductions for net business interest;
base erosion anti-abuse provisions; and
performance-based compensation subject to $1 million limit.
Foreign subsidiaries are taxed separately in their respective jurisdictions. We have foreign net operating loss carryforwards in some jurisdictions. The carryforward periods for these losses vary from five years to an indefinite carryforward period depending on the jurisdiction. Our ability to offset future taxable income with the net operating loss carryforwards may be limited in certain instances, including changes in ownership.
On December 22, 2017, the Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after
December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a modified territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative untaxed foreign earnings as of December 31, 2017. We have calculated our best estimate of the impact of the Act at the date of enactment and additional measurement period adjustments related to the 2017 transition tax in our quarterly income tax provision in accordance with our understanding of the Act including recently-released guidance. As a result, we have recorded $3.5 million as additional income tax expense for the nine months ended September 30, 2018 relating to the impact of adjustments to our December 31, 2017 transition tax provisional amounts, of which $0.1 million benefit related to adjustments made in the third quarter of 2018. The adjustment to the provisional amount related to opting to offset the one-time transition tax on the mandatory deemed repatriation of untaxed foreign earnings with current losses and prior year net operating losses in lieu of utilizing foreign tax credits. We are continuing to analyze the overall impact of the transition tax inclusion and will update the provisional estimate as we complete our analysis during the measurement period. Due to the complexity of the new law, we are still in the process of investigating the related accounting implications. Specifically, for the global intangible low-taxed income, or GILTI, tax we intend to make an accounting policy decision around whether to account for GILTI as a period cost in the relevant period, or to record deferred taxes related to the basis in our foreign subsidiaries. We are currently analyzing recently issued guidance and will make a determination regarding our accounting policy for GILTI tax amounts in the fourth quarter of 2018. Anticipated amounts for GILTI have been included as a component of current tax expense in our third quarter annual effective tax rate calculation. We are currently projecting to be subject to the estimated base erosion anti abuse tax, or BEAT, for 2018. Pursuant to relevant FASB guidance, we have accounted for BEAT as a current expense and recorded U.S. deferred tax assets and liabilities at the regular statutory rate for the period ended September 30, 2018. Adjustments to the recorded provisional amounts or changes resulting from the issuance of additional guidance will be reflected in the period when the Company's analysis is updated or in the period the additional guidance is issued, respectively.
Exchange Rate Fluctuations
The majority of our foreign operations transact in the Euro, or EUR, or British pound, or GBP. As a result, our revenue and expenses are subject to exchange rate fluctuations with respect to these currencies. We have translated these currencies into U.S. dollars using the following average exchange rates:
| | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
| U.S. dollars per: | | | | | | | | | | | | | | | | |
| Euro | | 1.17 |
| | 1.12 |
| | 1.11 |
| | 1.12 |
| | 1.16 |
| | 1.17 |
| | 1.19 |
| | 1.11 |
|
| British pound | | 1.31 |
| | 1.31 |
| | 1.27 |
| | 1.39 |
| | 1.30 |
| | 1.31 |
| | 1.35 |
| | 1.27 |
|
Results of Operations
Consolidated Results of Operations for the Three Months Ended September 30, 20172018 Compared to the Three Months Ended September 30, 2016
2017
| | | | | Three Months Ended September 30, | | | | Change | | |
| | | 2017 | | 2016 | | Three Months Ended September 30, 2017 | | $ Change | | Adoption of ASC 606 (1) | | Three Months Ended September 30, 2018 |
| (in thousands) | | | | | | | | | | | | |
| Revenue | | | | | | | | | | | | |
| Service revenue | | $ | 494,550 |
| | $ | 399,841 |
| | $ | 494,550 |
| | $ | 78,380 |
| | $ | — |
| | |
| Reimbursement revenue | | 87,459 |
| | 53,414 |
| |
| Reimbursement revenue - out-of-pocket costs | | | 87,459 |
| | (9,875 | ) | | — |
| | |
| Total revenue | | 582,009 |
| | 453,255 |
| | 582,009 |
| | 68,505 |
| | 67,082 |
| | $ | 717,596 |
|
| Operating expenses | | | | | | | | | | | | |
| Direct costs | | 326,865 |
| | 259,910 |
| |
| Direct costs (exclusive of depreciation and amortization) | | | 326,865 |
| | 44,557 |
| | — |
| | 371,422 |
|
| Reimbursable out-of-pocket costs | | 87,459 |
| | 53,414 |
| | 87,459 |
| | (9,875 | ) | | — |
| | 77,584 |
|
| Reimbursable investigator fees | | | — |
| | — |
| | 65,133 |
| | 65,133 |
|
| Selling, general and administrative | | 79,307 |
| | 67,190 |
| | 79,307 |
| | 13,246 |
| | — |
| | 92,553 |
|
| Transaction-related costs | | 12,740 |
| | — |
| | 11,741 |
| | 32,096 |
| | — |
| | 43,837 |
|
| Depreciation and amortization | | 18,853 |
| | 17,708 |
| | 18,853 |
| | 9,417 |
| | — |
| | 28,270 |
|
| Loss on disposal of fixed assets | | 8 |
| | 219 |
| |
| Loss (gain) on disposal of fixed assets | | | 8 |
| | (23 | ) | | — |
| | (15 | ) |
| Income from operations | | 56,777 |
| | 54,814 |
| | 57,776 |
| | (20,913 | ) | | 1,949 |
| | 38,812 |
|
| Interest expense, net | | (11,557 | ) | | (13,779 | ) | | (11,557 | ) | | (2,866 | ) | | — |
| | (14,423 | ) |
| Loss on modification of debt | | (3,089 | ) | | — |
| |
| Foreign currency (losses) gains, net | | (12,794 | ) | | 1,182 |
| |
| Other expense, net | | 1,004 |
| | 20 |
| |
| Loss on modification or extinguishment of debt | | | (3,089 | ) | | 2,635 |
| | — |
| | (454 | ) |
| Foreign currency losses, net | | | (12,794 | ) | | 10,985 |
| | — |
| | (1,809 | ) |
| Other income (expense), net | | | 5 |
| | (73 | ) | | — |
| | (68 | ) |
| Income before income taxes and equity in income of unconsolidated joint ventures | | 30,341 |
| | 42,237 |
| | 30,341 |
| | (10,232 | ) | | 1,949 |
| | 22,058 |
|
| (Benefit from) provision for income taxes | | (18,241 | ) | | 10,821 |
| | (18,241 | ) | | 36,700 |
| | 1,789 |
| | 20,248 |
|
| Income before equity in income of unconsolidated joint ventures | | 48,582 |
| | 31,416 |
| | 48,582 |
| | (46,932 | ) | | 160 |
| | 1,810 |
|
| Equity in income of unconsolidated joint ventures, net of tax | | 24 |
| | 33 |
| | 24 |
| | 20 |
| | — |
| | 44 |
|
| Net income | | 48,606 |
| | 31,449 |
| | 48,606 |
| | (46,912 | ) | | 160 |
| | 1,854 |
|
| Net income attributable to noncontrolling interest | | (401 | ) | | — |
| | (401 | ) | | 42 |
| | — |
| | (359 | ) |
| Net income attributable to PRA Health Sciences, Inc. | | $ | 48,205 |
| | $ | 31,449 |
| | $ | 48,205 |
| | $ | (46,870 | ) | | $ | 160 |
| | $ | 1,495 |
|
| (1) See Note 1, Basis of Presentation, to our consolidated condensed financial statements for information about the adoption of ASC 606. | | (1) See Note 1, Basis of Presentation, to our consolidated condensed financial statements for information about the adoption of ASC 606. |
Service revenueRevenue increased by $94.7$135.6 million, or 23.7%23.3%, from $399.8$582.0 million during the three months ended September 30, 20162017 to $494.6$717.6 million during the three months ended September 30, 2017. Service revenue2018. Revenue for the three months ended September 30, 20172018 includes $67.1 million in reimbursable investigator fees and adjustments to revenue as a result of the adoption of ASC 606. Excluding the impact of the adoption of ASC 606 and reimbursement revenue, revenue increased $78.4 million. Revenue for the three months ended September 30, 2018 benefited from an increase in billable hours, an increase in the effective rate of hours billed on our studies, a favorable impact of $2.9 million from foreign currency exchange rate fluctuations, and an increase of $19.0$41.7 million due to the acquisition of Symphony Health Solutions, Inc., Symphony Health, which was completed on September 6, 2017. This was offset by an unfavorable impact of $2.3 million from foreign currency exchange rate fluctuations. The growth in service revenue and the increase in billable hours were due largely to the increase in our backlog as we entered the year, the type of services we are providing on our active studies, which was driven by the life cycles of projects that were active during the period, the growth in
new business awards as a result of higher demand for our services across the industries we serve, and more effective sales efforts, and the growth in the overall CRO market. New business awards arise when a client selects us to execute its trial. The number of awards can vary significantly from period to period and our studies have terms ranging from several months to several years. The increase in our effective rate of the hours billed on our studies is attributable to the contract pricing terms on our current mix of active studies and the mix of clients and services that we provide to those clients.
Direct costs increased by $67.0$44.6 million, or 25.8%13.6%, from $259.9 million during the three months ended September 30, 2016 to $326.9 million during the three months ended September 30, 2017. Direct costs as a percentage of service revenue increased from 65.0%2017 to $371.4 million during the three months ended September 30, 2016 to 66.1% during the three months ended September 30, 2017. The increase in direct costs as a percentage of service revenue is primarily due to an increase in salaries2018. Salaries and related benefits of $51.3in our Clinical
Research segment increased $11.1 million as we continue to hire billable staff to ensure appropriate staffing levels for our current studies and our future growth an increase by $12.0 million due to the acquisition of Symphony Health, and an unfavorableincludes a favorable impact of $3.7$6.1 million from foreign currency exchange rate fluctuations. The addition of our Data Solutions segment resulted in $29.4 million of incremental direct costs during the third quarter of 2018. Excluding the impact of the adoption of ASC 606 and reimbursement revenue, direct costs as a percentage of revenue were 64.8% and 66.1% during the three months ended September 30, 2018 and 2017, respectively. The decrease in direct costs as a percentage of revenue was primarily due to the favorable impact on foreign currency exchange rate fluctuations and the increased utilization of our staff.
Reimbursable out-of-pocket costs decreased by $9.9 million from $87.5 million during the three months ended September 30, 2017 to $77.6 million during the three months ended September 30, 2018. Reimbursable investigator fees were $65.1 million during the three months ended September 30, 2018. Reimbursable investigator fees were recorded on a net basis prior to our adoption of ASC 606, and therefore we did not record any reimbursable investigator fees during the three months ended September 30, 2017. 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 $12.1$13.2 million, or 18.0%16.7%, from $67.2 million during the three months ended September 30, 2016 to $79.3 million during the three months ended September 30, 2017.2017 to $92.6 million during the three months ended September 30, 2018. The increase in selling, general and administrative expenses is primarily due to an increase in salaries and related benefits as we continue to hire staff to support our growing business and increased facility costs related to additional office space needed for our growth. Selling,Excluding the impact of the adoption of ASC 606 and reimbursement revenue, selling, general and administrative expenses as a percentage of service revenue decreased from 16.8% during the three months ended September 30, 2016 towere 16.2% and 16.0% during the three months ended September 30, 2017.2018 and 2017, respectively. The decreaseincrease in selling, general and administrative expenses as a percentage of service revenue is primarily related an increase in stock based compensation during the current year.
For the three months ended September 30, 2018, we incurred $43.8 million of transaction-related costs. These costs consisted of $42.6 million for changes in the estimated fair value of contingent consideration related to our continued effortsrecent acquisitions, $0.8 million of stock-based compensation expense related to effectively leveragethe release of the remaining portion of the transfer restrictions on vested options, and $0.5 million of expenses incurred in connection with our selling and administrative functions.
August 2018 secondary offering of common stock. For the three months ended September 30, 2017, we incurred transaction-related costs of $12.7$11.7 million. These costs consistconsisted of $6.4 million of fees incurred in connection with the acquisition of Symphony Health, $5.3 million of stock-based compensation expense related to the release of a portion of the transfer restrictions on vested options, and $1.0 million of expenses incurred in connection with our August 2017 secondary offering. No transaction-related expenses were incurred foroffering of common stock, and a $1.0 million reduction to the three months ended September 30, 2016.estimated Parallel 6, Inc., or Parallel 6, earn-out liability.
Depreciation and amortization expense increased by $1.1$9.4 million, or 6.5%49.9%, from $17.7 million during the three months ended September 30, 2016 to $18.9 million during the three months ended September 30, 2017. Depreciation and amortization expense as a percentage of service revenue was 4.4%2017 to $28.3 million during the three months ended September 30, 2016 and 3.8% during the three months ended September 30, 2017.2018. The decreaseincrease in depreciation and amortization expense as a percentage of service revenue is primarily due to the continued amortization of our acquired intangibles, which are amortized on an accelerated basis.increased as a result of the Symphony Health acquisition in September 2017.
Interest expense, net, decreasedincreased by $2.2$2.9 million, or 16.1%24.8%, from $13.8 million during the three months ended September 30, 2016 to $11.6 million during the three months ended September 30, 2017. The refinancing of our variable rate first lien term loans in December 2016 contributed2017 to a 1.0% decrease in the weighted average interest rate on our outstanding debt as compared to the three months ended September 30, 2016; this decrease in weighted average interest rate resulted in a $1.6 million reduction in interest expense, which was partially offset by a $1.3 million increase in interest expense due to the Incremental Borrowing during the three months ended September 30, 2017. Additionally, interest expense decreased by $0.7 million due to lower amortization of debt issuance costs, which was offset by an increase of $0.1 million related to the amortization of our terminated interest rate swaps and interest expense on our current interest rate swap.
Loss on modification of debt was $3.1$14.4 million during the three months ended September 30, 20172018. Interest expense on our first lien term loans increased by $4.4 million, primarily due to the Incremental Borrowing to fund the Symphony Health acquisition, and there were no lossesan additional $0.6 million increase in interest expense was attributable to additional borrowings under the accounts receivable financing agreement. This was offset by a decrease of $2.2 million in interest expense associated with repayment of our 9.5% senior notes due 2023, or Senior Notes, in 2017.
Loss on modification of debt duringwas $0.5 million for the three months ended September 30, 2016.2018 consisting of previously capitalized unamortized debt financing costs that were expensed as a result of voluntary debt repayments made during the quarter. The loss on modification of debt incurred during the three months ended September 30, 2017, totaling $3.1 million, was associated with the Incremental Borrowing to fund the acquisition of Symphony Health. The $3.1 million loss consists of fees associated with the transaction for the three months ended September 30, 2017.
Foreign currency (losses) gains,losses, net, changed by $14.0$11.0 million from gains of $1.2 million during the three months ended September 30, 2016 toforeign currency losses of $12.8 million during the three months ended September 30, 2017.2017 to foreign currency losses of $1.8 million during the three months ended September 30, 2018. Foreign exchange gains and losses are due to fluctuations in the U.S. dollar, gains or losses that arise in connection with the revaluation of short-term inter-company balances between our domestic and international subsidiaries, and gains or losses from foreign currency transactions, such as those resulting from the settlement of third-party accounts receivables and payables denominated in a currency other than the local currency of the entity making the payment. During the three months ended September 30, 2017, foreign currency losses were primarily due to the U.S. dollar weakening against the GBP, EUR, Canadian
dollar, or CAD, and the Russian ruble, or RUB by 3.1%, 3.3%, 4.2%, and 2.5%, respectively. During the three months ended September 30, 2016,
The decrease in foreign currency gains were primarily due the strengthening of the U.S. dollar against the GBP by 3.0%, partially offset by a weakening against the EUR by 1.3%,
Provision for income taxes decreased by $29.1 million from a provision of $10.8 millionlosses, net during the three months ended September 30, 20162018 is primarily due to the reclassification of certain intercompany balances that were deemed to be of a long-term investment nature.
Provision for income taxes increased by $38.5 million from a benefit of $18.2 million during the three months ended September 30, 2017. Our effective tax rate was 25.6% and (60.1)%2017 to a provision of $20.2 million during the three months ended September 30, 20162018. Our effective tax rate was (60.1)% and 91.8% during the three months ended September 30, 2017 and 2018, respectively. The decreaseincrease in the effective tax rate of 85.7%151.9% was primarily attributable to (i) the benefit realized fromU.S. inclusion of amounts related to the estimated tax deduction of stock awards in excesson GILTI, (ii) the U.S. inclusion of the amount recognized inestimated amounts related to BEAT, (iii) the financial statements perinclusion of the guidance under ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” and (ii)effect of the release of the valuation allowance againston the Company’s net federal net deferred tax assets as a resultduring the three months ended September 30, 2017, and (iv) the increase in fair value of the earn-out liability related to the stock acquisition of Symphony Health.Health, which is not deductible for tax but instead increases tax stock basis.
Consolidated Results of Operations for the Nine Months Ended September 30, 20172018 Compared to the Nine Months Ended September 30, 20162017
| | | | | Nine Months Ended September 30, | | | | Change | | |
| | | 2017 | | 2016 | | Nine Months Ended September 30, 2017 | | $ Change | | Adoption of ASC 606 (1) | | Nine Months Ended September 30, 2018 |
| (in thousands) | | | | | | | | | | | | |
| Revenue | | | | | | | | | | | | |
| Service revenue | | $ | 1,379,572 |
| | $ | 1,166,410 |
| | $ | 1,379,572 |
| | $ | 328,259 |
| | $ | — |
| | |
| Reimbursement revenue | | 223,921 |
| | 172,915 |
| |
| Reimbursement revenue - out-of-pocket costs | | | 223,921 |
| | 13,386 |
| | — |
| | |
| Total revenue | | 1,603,493 |
| | 1,339,325 |
| | 1,603,493 |
| | 341,645 |
| | 197,136 |
| | $ | 2,142,274 |
|
| Operating expenses | | | | | | | | | | | | |
| Direct costs | | 914,988 |
| | 758,333 |
| |
| Direct costs (exclusive of depreciation and amortization) | | | 914,988 |
| | 219,521 |
| | — |
| | 1,134,509 |
|
| Reimbursable out-of-pocket costs | | 223,921 |
| | 172,915 |
| | 223,921 |
| | 13,386 |
| | — |
| | 237,307 |
|
| Reimbursable investigator fees | | | — |
| | — |
| | 193,585 |
| | 193,585 |
|
| Selling, general and administrative | | 229,770 |
| | 199,648 |
| | 229,770 |
| | 45,654 |
| | — |
| | 275,424 |
|
| Transaction-related costs | | 12,740 |
| | 31,785 |
| | 11,816 |
| | 20,893 |
| | — |
| | 32,709 |
|
| Depreciation and amortization | | 50,146 |
| | 52,246 |
| | 50,146 |
| | 34,017 |
| | — |
| | 84,163 |
|
| Loss on disposal of fixed assets | | 240 |
| | 290 |
| | 240 |
| | (219 | ) | | — |
| | 21 |
|
| Income from operations | | 171,688 |
| | 124,108 |
| | 172,612 |
| | 8,393 |
| | 3,551 |
| | 184,556 |
|
| Interest expense, net | | (31,088 | ) | | (42,525 | ) | | (31,088 | ) | | (12,772 | ) | | — |
| | (43,860 | ) |
| Loss on modification or extinguishment of debt | | (3,089 | ) | | (21,485 | ) | | (3,089 | ) | | 2,635 |
| | — |
| | (454 | ) |
| Foreign currency (losses) gains, net | | (35,004 | ) | | 9,264 |
| |
| Other income (expense), net | | 724 |
| | (85 | ) | |
| Foreign currency losses, net | | | (35,004 | ) | | 33,588 |
| | — |
| | (1,416 | ) |
| Other expense, net | | | (200 | ) | | (1 | ) | | — |
| | (201 | ) |
| Income before income taxes and equity in income of unconsolidated joint ventures | | 103,231 |
| | 69,277 |
| | 103,231 |
| | 31,843 |
| | 3,551 |
| | 138,625 |
|
| (Benefit from) provision for income taxes | | (165 | ) | | 17,869 |
| | (165 | ) | | 54,137 |
| | 1,420 |
| | 55,392 |
|
| Income before equity in income of unconsolidated joint ventures | | 103,396 |
| | 51,408 |
| | 103,396 |
| | (22,294 | ) | | 2,131 |
| | 83,233 |
|
| Equity in income of unconsolidated joint ventures, net of tax | | 92 |
| | 2,742 |
| | 92 |
| | 26 |
| | — |
| | 118 |
|
| Net income | | 103,488 |
| | 54,150 |
| | 103,488 |
| | (22,268 | ) | | 2,131 |
| | 83,351 |
|
| Net income attributable to noncontrolling interests | | (513 | ) | | — |
| |
| Net income attributable to noncontrolling interest | | | (513 | ) | | (385 | ) | | — |
| | (898 | ) |
| Net income attributable to PRA Health Sciences, Inc. | | $ | 102,975 |
| | $ | 54,150 |
| | $ | 102,975 |
| | $ | (22,653 | ) | | $ | 2,131 |
| | $ | 82,453 |
|
| (1) See Note 1, Basis of Presentation, to our consolidated condensed financial statements for information about the adoption of ASC 606. | | (1) See Note 1, Basis of Presentation, to our consolidated condensed financial statements for information about the adoption of ASC 606. |
Service revenueRevenue increased by $213.2$538.8 million, or 18.3%33.6%, from $1,166.4$1,603.5 million during the nine months ended September 30, 20162017 to $1,379.6$2,142.3 million during the nine months ended September 30, 2017. Service revenue2018. Revenue for the nine months ended September 30, 20172018 includes $197.1 million in reimbursable investigator fees and adjustments to revenue as a result of the adoption of ASC 606. Excluding the impact of the adoption of ASC 606 and reimbursement revenue, revenue increased $328.3 million. Revenue for the nine months ended September 30, 2018 benefited from an increase in billable hours, an increase in the effective rate of
hours billed on our studies, a favorable impact of $0.2$14.2 million from foreign currency exchange rate fluctuations, and an increase of $19.0$156.6 million due to the acquisition of Symphony Health, which was completed on September 6, 2017. The growth in service revenue wasand the increase in billable hours were due largely to the increase in our backlog as we entered the year, the type of services we are providing on our active studies, which was driven by the life cycles of projects that were active during the period, the growth in new business awards as a result of higher demand for our services across the industries we serve, and more effective sales efforts and the growth in the overall CRO market. New business awards arise when a client selects us to execute its trial. The number of awards can vary significantly from period to period and our studies have terms ranging from several months to several years. The increase in our effective rate of the hours billed on our studies is attributable to the contract pricing terms on our current mix of active studies and the mix of clients and services that we provide to those clients.
Direct costs increased by $156.7$219.5 million, or 20.7%24.0%, from $758.3 million during the nine months ended September 30, 2016 to $915.0 million during the nine months ended September 30, 2017. Direct costs as a percentage of service revenue increased from 65.0%2017 to $1,134.5 million during the nine months ended September 30, 2016 to 66.3% during the nine months ended September 30, 2017. The increase in direct costs as a percentage of revenue is primarily due to an increase in salaries2018. Salaries and related benefits of $140.0in our Clinical Research segment increased $98.4 million as we continue to hire billable staff to ensure appropriate staffing levels for our current studies and our future growth and includes an increase of $12.0 million due to the acquisition of Symphony Health, partially offset by a favorableunfavorable impact of $1.5$13.2 million from foreign currency exchange rate fluctuations. The addition of our Data Solutions segment resulted in $111.6 million of incremental direct costs during the nine months ended September 30, 2018. Excluding the impact of the adoption of ASC 606 and reimbursement revenue, direct costs as a percentage of revenue were 66.4% and 66.3% during the nine months ended September 30, 2018 and 2017, respectively.
Reimbursable out-of-pocket costs increased by $13.4 million from $223.9 million during the nine months ended September 30, 2017 to $237.3 million during the nine months ended September 30, 2018. Reimbursable investigator fees were $193.6 million during the nine months ended September 30, 2018. Reimbursable investigator fees were recorded on a net basis prior to our adoption of ASC 606, and therefore we did not record any reimbursable investigator fees during the nine months ended September 30, 2017. 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 $30.1$45.7 million or 15.1%19.9%, from $199.6 million during the nine months ended September 30, 2016 to $229.8 million during the nine months ended September 30, 2017.2017 to $275.4 million during the nine months ended September 30, 2018. The increase in selling, general and administrative expenses is primarily due to an increase in salaries and related benefits as we continue to hire staff to support our growing business and increased facility costs related to additional office space needed for our growth. Selling,Excluding the impact of the adoption of ASC 606 and reimbursement revenue, selling, general and administrative expenses as a percentage of service revenue decreased from 17.1% during the nine months ended September 30, 2016 towere 16.1% and 16.7% during the nine months ended September 30, 2017.2018 and 2017, respectively. The decrease in selling, general and administrative expenses as a percentage of service revenue is primarily related to our continued efforts to effectively leverage our selling and administrative functions asfunctions.
For the nine months ended September 30, 2018, we continueincurred $32.7 million in transaction-related costs. These costs consisted of $30.9 million for changes in the estimated fair value of contingent consideration related to grow revenue.
our recent acquisitions, $0.8 million of stock-based compensation expense related to the release of a portion of the transfer restrictions on vested options, $0.5 million of third-party fees associated with the amendment to our accounts receivable financing agreement and $0.5 million of expenses incurred in connection with our August 2018 secondary offering of common stock. For the nine months ended September 30, 2017, we incurred transaction-related costs of $12.7 million. These costs consist of $6.4 million of fees incurred in connection with the acquisition of Symphony Health, $5.3 million of stock-based compensation expense related to the release of a portion of the transfer restrictions on vested options, and $1.0 million of third-party costs incurred in connection with our August 2017 secondary offering. During the nine months ended September 30, 2016, we incurred transaction-related expensesoffering of $31.8 million. These costs consist of $4.9common stock, and a $0.9 million of stock-based compensation expense associated with the release of the transfer restrictions on a portion of shares issuable upon exercise of vested service-based options in connection with the announcement of our March and May 2016 secondary offerings. These costs also include $24.5 million of stock-based compensation expense relatedreduction to the vestingParallel 6 and release of the transfer restrictions of certain performance-based stock options. In addition, we incurred $2.4 million of third-party fees associated with the secondary offering and the closing of our accounts receivable financing agreement.Nextrials, Inc. estimated earn-out liability.
Depreciation and amortization expense decreasedincreased by $2.1$34.0 million, or 4.0%67.8%, from $52.2 million during the nine months ended September 30, 2016 to $50.1 million during the nine months ended September 30, 2017. Depreciation and amortization expense as a percentage of service revenue was 4.5%2017 to $84.2 million during the nine months ended September 30, 2016 and 3.6% during the nine months ended September 30, 2017.2018. The decreaseincrease in depreciation and amortization expense as a percentage of service revenue is primarily due to the continued amortization of our acquired intangibles, which are amortized on an accelerated basis.increased as a result of the Symphony Health acquisition in September 2017.
Interest expense, net, decreasedincreased by $11.4$12.8 million, or 26.9%41.1%, from $42.5 million during the nine months ended September 30, 2016 to $31.1 million during the nine months ended September 30, 2017. The cash tender of our Senior Notes and refinancing of our variable rate first lien term loans contributed2017 to a 1.4% decrease in the weighted average interest rate on our outstanding debt as compared to the nine months ended September 30, 2016; this decrease in weighted average interest rate resulted in a $10.3 million reduction in interest expense. The Incremental Borrowing during the nine months ended September 30, 2017 contributed to a $1.3 million increase in interest expense. Additionally, interest expense decreased by $2.0 million due to lower amortization of debt issuance costs, which was partially offset by an increase of $0.9 million related to the amortization of our terminated interest rate swaps and interest expense on our current interest rate swap.
Loss on modification or extinguishment of debt was $3.1$43.9 million during the nine months ended September 30, 2017 compared2018. Interest expense on our first lien term loans increased by $16.5 million, primarily due to $21.5the Incremental Borrowing to fund the Symphony Health acquisition, and an additional $1.2 million duringincrease in interest expense was attributable to additional borrowings under the accounts receivable financing agreement. This was offset by a decrease of $6.5 million associated with repayment of our Senior Notes in 2017.
Loss on extinguishment of debt was $0.5 million for the nine months ended September 30, 2016 .2018 consisting of previously capitalized unamortized debt financing costs that were expensed as a result of voluntary debt repayments made during the year. The loss on modification of debt during the nine months ended September 30, 2017, consists oftotaling $3.1 million, in
consisted of fees associated with the Incremental Borrowing under the 2016 Credit Facilities to fund the acquisition of Symphony Health. The loss on extinguishment of debt during the nine months ended September 30, 2016 was associated with our cash tender offer on our Senior Notes. The loss consists of the $17.4 million early tender premium, the write-off of $3.7 million of unamortized debt issuance costs, and $0.4 million of other costs associated with the transaction.
Foreign currency (losses) gains,losses, net, changed by $44.3decreased $33.6 million from gains of $9.3 million during the nine months ended September 30, 2016 to losses of $35.0 million during the nine months ended September 30, 2017.2017 to $1.4 million during the nine months ended September 30, 2018. Foreign exchange gains and losses are due to fluctuations in the U.S. dollar, gains or losses that arise in connection with the revaluation of short-term inter-company balances between our domestic and international subsidiaries, and gains or losses from foreign currency transactions, such as those resulting from the settlement of third-party accounts receivables and payables denominated in a currency other than the local currency of the entity making the payment. During the nine months ended September 30, 2017, foreign currency losses were primarily due to the U.S. dollar weakening against the GBP, EUR, CAD, and RUB, by 8.6%, 12.0%, 7.9% and 6.0%, respectively. During the nine months ended September 30, 2016,The decrease in foreign currency gains were primarily
due to the weakening of the GBP against foreign currencies, including the U.S dollar, following Brexit. The U.S. dollar strengthened against the GBP by 12.3%, partially offset by a weakening against the EUR, CAD, and RUB, by 2.8%, 5.8%, and 15.8%, respectively.
Provision for income taxes decreased by $18.0 million from a provision of $17.9 millionlosses, net during the nine months ended September 30, 20162018 is primarily due to the reclassification of certain intercompany balances that were deemed to be of a long-term investment nature.
Provision for income taxes increased by $55.6 million from a benefit of $0.2 million during the nine months ended September 30, 2017. Our effective tax rate was 25.8% and (0.2)%2017 to a provision of $55.4 million during the nine months ended September 30, 20162018. Our effective tax rate was (0.2)% and 40.0% during the nine months ended September 30, 2017 and 2018, respectively. The decreaseincrease in the effective tax rate of 26.0%40.2% was primarily attributable to (i) the benefit realized fromU.S. inclusion of amounts related to the estimated tax deduction of stock awards in excesson GILTI, (ii) the U.S. inclusion of the amount recognized inestimated amounts related to BEAT, (iii) the financial statements perinclusion of the guidance under ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” and (ii)effect of the release of the valuation allowance againston the Company’s net federal net deferred tax assets as a resultduring the nine months ended September 30, 2017, and (iv) the increase in fair value of the earn-out liability related to the stock acquisition of Symphony Health.Health which is not deductible for tax but instead increases tax stock basis.
Segment Results of Operations for the Three Months Ended September 30, 20172018 Compared to the Three Months Ended September 30, 20162017
Clinical Research
|
| | | | | | | | | | | | |
| | | Three Months Ended September 30, | | | | |
| | | 2017 | | 2016 | | Increase/(Decrease) | | % Change |
| (in thousands) | | | | | | | | |
| Service Revenue | | 475,588 |
| | 399,841 |
| | 75,747 |
| | 18.9 | % |
| Gross profit | | 160,684 |
| | 139,931 |
| | 20,753 |
| | 14.8 | % |
| Gross profit % | | 33.8 | % | | 35.0 | % | | (1.2 | )% | | |
|
| | | | | | | | | | | | | | | | |
| | | | | Change | | |
| | | Three Months Ended September 30, 2017 | | $ Change | | Adoption of ASC 606 (See Note 1) | | Three Months Ended September 30, 2018 |
| (in thousands) | | | | | | | | |
| Service revenue | | $ | 475,588 |
| | $ | 36,725 |
| | $ | — |
| | |
| Reimbursement revenue - out-of-pocket costs | | 87,459 |
| | (9,875 | ) | | — |
| | |
| Total revenue | | 563,047 |
| | 26,850 |
| | 67,082 |
| | $ | 656,979 |
|
| Segment profit | | $ | 160,684 |
| | $ | 21,592 |
| | $ | 1,949 |
| | $ | 184,225 |
|
Service revenueRevenue increased by $75.7$93.9 million, or 18.9%16.7%, from $399.8$563.0 million during the three months ended September 30, 20162017 to $475.6$657.0 million during the three months ended September 30, 2017. Service revenue2018. Revenue for the three months ended September 30, 20172018 includes $67.1 million in reimbursement revenue as a result of the adoption of ASC 606. Excluding the impact of the adoption of ASC 606 and reimbursement revenue, revenue increased by $36.7 million. Revenue for the three months ended September 30, 2018 benefited from an increase in billable hours and an increase in the effective rate of hours billed on our studies. The growth in revenue and the increase in billable hours were due largely to the increase in our backlog as we entered the year, the type of services we are providing on our active studies, which was driven by the life cycles of projects that were active during the period, the growth in new business awards as a result of higher demand for our services across the industries we serve, and more effective sales efforts and the growth in the overall CRO market. New business awards arise when a client selects us to execute its trial. The number of awards can vary significantly from period to period and our studies have terms ranging from several months to several years. The increase in our effective rate of the hours billed on our studies is attributable to the contract pricing terms on our current mix of active studies and the mix of clients and services that we provide to those clients.
GrossSegment profit increased by $20.8$23.5 million, or 14.8%14.7%, from $139.9 million during the three months ended September 30, 2016 to $160.7 million during the three months ended September 30, 2017 to $184.2 million during the three months ended September 30, 2018 primarily due to an increase in revenue. GrossExcluding the impact of the adoption of ASC 606 and reimbursement revenue, segment profit as a percentage of revenue decreasedincreased from 35.0%33.8% during the three months ended September 30, 20162017 to 33.8%35.6% for the same period in 2017. Gross profit decreased primarily due to an increase in salaries and related benefits of $51.3 million, as we continue to hire billable staff to ensure appropriate staffing levels for our current studies and our future growth.2018.
Data Solutions
|
| | | | | | | | | | | |
| | | Three Months Ended September 30, | | | | |
| | | 2017 | | 2016 | | Increase/(Decrease) | | % Change |
| (in thousands) | | | | | | | | |
| Service Revenue | | 18,962 |
| | — |
| | 18,962 |
| | n/a |
| Gross profit | | 7,001 |
| | — |
| | 7,001 |
| | n/a |
| Gross profit % | | 36.9 | % | | — |
| | n/a |
| | |
|
| | | | | | | | | | | | | | | | |
| | | | | Change | | |
| | | Three Months Ended September 30, 2017 | | $ Change | | Adoption of ASC 606 (See Note 1) | | Three Months Ended September 30, 2018 |
| (in thousands) | | | | | | | | |
| Revenue | | $ | 18,962 |
| | $ | 41,655 |
| | $ | — |
| | $ | 60,617 |
|
| Segment profit | | $ | 7,001 |
| | $ | 12,231 |
| | $ | — |
| | $ | 19,232 |
|
The Company acquired Symphony Health on September 6, 2017. The Company recognized $19.0$60.6 million of revenue and $12.0$41.4 million in direct costs during the period between September 6, 2017 andthree months ended September 30, 2017.2018. See Note 23, Business Combinations, to our consolidated condensed financial statements for information about the acquisition.
Segment Results of Operations for the Nine Months Ended September 30, 20172018 Compared to the Nine Months Ended September 30, 20162017
Clinical Research
|
| | | | | | | | | | | | |
| | | Nine Months Ended September 30, | | | | |
| | | 2017 | | 2016 | | Increase/(Decrease) | | % Change |
| (in thousands) | | | | | | | | |
| Service Revenue | | 1,360,610 |
| | 1,166,410 |
| | 194,200 |
| | 16.6 | % |
| Gross profit | | 457,583 |
| | 408,077 |
| | 49,506 |
| | 12.1 | % |
| Gross profit % | | 33.6 | % | | 35.0 | % | | (1.4 | )% | | |
|
| | | | | | | | | | | | | | | | |
| | | | | Change | | |
| | | Nine Months Ended September 30, 2017 | | $ Change | | Adoption of ASC 606 (See Note 1) | | Nine Months Ended September 30, 2018 |
| (in thousands) | | | | | | | | |
| Service revenue | | $ | 1,360,610 |
| | $ | 171,709 |
| | $ | — |
| | |
| Reimbursement revenue - out-of-pocket costs | | 223,921 |
| | 13,386 |
| | — |
| | |
| Total revenue | | 1,584,531 |
| | 185,095 |
| | 197,136 |
| | $ | 1,966,762 |
|
| Segment profit | | $ | 457,583 |
| | $ | 63,821 |
| | $ | 3,551 |
| | $ | 524,955 |
|
Service Revenue increased by $194.2$382.2 million, or 16.6%24.1%, from $1,166.4$1,584.5 million during the nine months ended September 30, 20162017 to $1,360.6$1,966.8 million during the threenine months ended September 30, 2017. Service revenue2018. Revenue for the nine months ended September 30, 20172018 includes $197.1 million in reimbursement revenue as a result of the adoption of ASC 606. Excluding the impact of the adoption of ASC 606 and reimbursement revenue, revenue increased by $171.7 million. Revenue for the nine months ended September 30, 2018 benefited from an increase in billable hours and an increase in the effective rate of hours billed on our studies. The growth in revenue and the increase in billable hours were due largely to the increase in our backlog as we entered the year, the type of services we are providing on our active studies, which was driven by the life cycles of projects that were active during the period, the growth in new business awards as a result of higher demand for our services across the industries we serve, and more effective sales efforts and the growth in the overall CRO market. New business awards arise when a client selects us to execute its trial. The number of awards can vary significantly from period to period and our studies have terms ranging from several months to several years. The increase in our effective rate of the hours billed on our studies is attributable to the contract pricing terms on our current mix of active studies and the mix of clients and services that we provide to those clients.
GrossSegment profit increased by $49.5$67.4 million, or 12.1%14.7%, from $408.1 million during the nine months ended September 30, 2016 to $457.6 million during the nine months ended September 30, 2017 to $525.0 million during the nine months ended September 30, 2018 primarily due to an increase in revenue. GrossExcluding the impact of the adoption of ASC 606 and reimbursement revenue, segment profit as a percentage of revenue decreasedincreased from 35.0%33.6% during the nine months ended September 30, 20162017 to 33.6%34.0% for the same period in 2017. Gross profit decreased primarily due to an increase in salaries and related benefits of $140.0 million, as we continue to hire billable staff to ensure appropriate staffing levels for our current studies and our future growth.2018.
Data Solutions
|
| | | | | | | | | | | |
| | | Nine Months Ended September 30, | | | | |
| | | 2017 | | 2016 | | Increase/(Decrease) | | % Change |
| (in thousands) | | | | | | | | |
| Service Revenue | | 18,962 |
| | — |
| | 18,962 |
| | n/a |
| Gross profit | | 7,001 |
| | — |
| | 7,001 |
| | n/a |
| Gross profit % | | 36.9 | % | | — |
| | n/a |
| | |
|
| | | | | | | | | | | | | | | | |
| | | | | Change | | |
| | | Nine Months Ended September 30, 2017 | | $ Change | | Adoption of ASC 606 (See Note 1) | | Nine Months Ended September 30, 2018 |
| (in thousands) | | | | | | | | |
| Revenue | | $ | 18,962 |
| | $ | 156,550 |
| | $ | — |
| | $ | 175,512 |
|
| Segment profit | | $ | 7,001 |
| | $ | 44,917 |
| | $ | — |
| | $ | 51,918 |
|
The Company acquired Symphony Health on September 6, 2017. The Company recognized $19.0$175.5 million of revenue and $12.0$123.6 million in direct costs during the period between September 6, 2017 andnine months ended September 30, 2017.2018. See Note 23, Business Combinations, to our consolidated condensed financial statements for information about the acquisition.
Seasonality
Although our business is not generally seasonal, we typically experience a slight decrease in our revenue growth rate during the fourth quarter due to holiday vacations and a similar decrease in new business awards in the first quarter due to our clients’ budgetary cycles and vacations during the year-end holiday period.
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 September 30, 2017,2018, we had approximately $193.6
$127.5 million of cash and cash equivalents of which $54.8$48.2 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, acquisitions and other strategic transactions, 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 $1,780.9$2,133.0 million during the nine months ended September 30, 2017,2018, including $186.4$258.3 million of funds received from customers to pay independent physician investigators, or investigators, as compared to $1,513.6$1,780.9 million during the nine months ended September 30, 2016,2017, including $188.1$186.4 million of funds received from customers to pay investigators. The increase in cash collections during the nine months ended September 30, 20172018 is related to our increase in revenue, driven by an increase in new business awards and an increase in our backlog.
Discussion of Cash Flows
Cash Flow from Operating Activities
During the nine months ended September 30, 2017,2018, net cash provided by operations was $117.8$198.6 million, compared to $66.7$117.8 million for the same period of 2016.2017. Cash provided by operating activities increased over the prior year primarily due to increased cash flows from our operating performance, as well as a decrease in cash outflows from working capital.capital, offset by the portion of acquisition related earn-out payments being classified as an outflow from operating activities. The changes in working capital were driven by changes in our accounts receivable, unbilled services and advanced billings accounts, as a result of an improvement in our days sales outstanding as compared to the prior year.
Cash Flow from Investing Activities
Net cash used in investing activities was $39.7 million during the nine months ended September 30, 2018, compared to $599.6 million for the same period of 2017. There were no cash outflows from acquisitions during the nine months ended September 30, 2018 compared to $559.6 million of net cash outflows during the nine months ended September 30, 2017. Additionally, cash outflows from capital expenditures increased from $39.3 million during the nine months ended September 30, 2017 compared to $27.1 million for the same period of 2016. The net cash outflows from acquisitions increased from $4.3 million during the nine months ended September 30, 2016 to $559.6$40.1 million during the same period in 2017. Additionally, capital expenditures increased by $13.6 million compared to the prior year, which is partially offset by $3.7 million received from the sale of our ownership stake in the WuXiPRA joint venture during the nine months ended September 30, 2016.2018.
Cash Flow from Financing Activities
Net cash provided byused in financing activities was $523.7$221.6 million during the nine months ended September 30, 20172018 compared to net cash usedprovided by financing activities of $30.7$523.7 million for the same period of 2016. We borrowed $20.0 million2017. During the nine months ended September 30, 2018 our long-term debt balance, including borrowings under our accounts receivable financing agreement and $550.0revolving line of credit, decreased by $155.9 million due to payments on our debt compared to a $523.1 million increase in Incremental Borrowings under our 2016 Term Loandebt during the nine months ended September 30, 2017 compared to $120.0 million in borrowings under our accounts receivable2017. Cash outflows from financing agreementactivities during the same period in the prior year. During the nine months ended September 30, 2017, we repaid $26.9 million principal amount2018 also increased due to the portion of our term loan, $20.0 million principal on our accounts receivableacquisition related earn-out payments being classified as a financing agreement, and $5.5 million in debt issuance costs compared to $133.6 million aggregate principal amount of our Senior Notes and $17.8 million related to debt prepayment and debt extinguishment costs that were paid as part of the cash tender offer in the prior year. During the nine months ended September 30, 2017, we received $6.5 million in proceeds from stock option exercises compared to $0.6 million for the same period of 2016.activity.
Indebtedness
As of September 30, 2017,2018, we had $1,359.6$1,196.5 million of total indebtedness. Additionally, our senior secured credit agreement2016 Revolver provides for a $125.0$225.0 million revolving credit facilities. There were no amounts drawn on this revolving credit facilities as of potential borrowings. At September 30, 2017. In addition, at September 30, 2017,2018, we had $4.5no outstanding borrowings under our 2016 Revolver and had $5.1 million in letters of credit outstanding, which are secured by the revolving credit facilities.2016 Revolver. We do not expect to pay dividends in the foreseeable future. Our long-term debt arrangements contain usual and customary restrictive covenants, and, as of September 30, 2017,2018, we were in compliance with these covenants.
Incremental Borrowings under the 2016 Credit Facilities
On September 6, 2017, we borrowed $550.0 million under the 2016 Credit Facilities. The proceeds were primarily used to fund the acquisition of Symphony Health. As of September 30, 2017, the weighted average interest rate on the first lien term loan was 3.45%.
The variable interest rate on the Incremental Borrowing is a rate equal to the London Interbank Offered Rate, or LIBOR, or the adjusted base rate, or ABR rate, at the election of the Company, plus a margin based on the ratio of total indebtedness to EBITDA and ranges from 1.00% to 2.00%, in the case of LIBOR rate loans, and 0.00% to 1.00%, in the case of ABR rate loans.There were no other changes to the 2016 Credit Facilities as a result of the Incremental Borrowing.
See Note 78 to our consolidated condensed financial statements included in this report, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Liquidity and Capital Resources” and Note 9 to our audited consolidated financial statements, each included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2017, for additional details regarding our credit arrangements.
Contractual Obligations and Commercial Commitments
In September 2017,May 2018, we amended our receivable financing agreement to increase the Company borrowed an additional $550.0agreement's borrowing capacity to $200.0 million and extend the termination date from March 22, 2019 to May 31, 2021. Additional amounts drawn down under our receivable financing agreement were used to repay amounts outstanding under the 2016 Credit Facilities, orrevolving credit facilities. During the Incremental Borrowing. See Note 7 toyear, we have also made $92.8 million in additional voluntary principal payments on our consolidated condensed financial statements for information about the Incremental Borrowing.first lien term loan. As a result of these changes, our long-term debt obligations as of September 30, 20172018 are updated below. As part of the Symphony Health acquisition, the Company recognized a contingent consideration for the earn-out. As a result of this change an update of our contingent consideration as of September 30, 2017 is included below.
| | | | | | | | | | | | | | Payments Due by Period |
| | | Payments Due by Period | Remaining 2018 (3 Months) | | 2019 to 2020 | | 2021 to 2022 | | Thereafter | | Total |
| | | Remaining 2017 (3 Months) | | 2018 to 2019 | | 2020 to 2021 | | Thereafter | | Total | (in thousands) |
| Principal payments on long-term debt (1) | | $ | 11,250 |
| | $ | 241,250 |
| | $ | 1,015,625 |
| | $ | 91,441 |
| | $ | 1,359,566 |
| $ | — |
| | $ | — |
| | $ | 1,196,533 |
| | $ | — |
| | $ | 1,196,533 |
|
| Interest payments on long-term debt (1) | | 11,113 |
| | 104,283 |
| | 92,720 |
| | 15,203 |
| | 223,319 |
| 11,429 |
| | 90,824 |
| | 39,355 |
| | — |
| | 141,608 |
|
| Contingent consideration on acquisition (2) | | 67,789 |
| | 50,775 |
| | — |
| | — |
| | 118,564 |
| |
| Total | | $ | 90,152 |
| | $ | 396,308 |
| | $ | 1,108,345 |
| | $ | 106,644 |
| | $ | 1,701,449 |
| $ | 11,429 |
| | $ | 90,824 |
| | $ | 1,235,888 |
| | $ | — |
| | $ | 1,338,141 |
|
(1) Principal payments are based on the terms contained in our agreements. Interest payments are based on the interest rate in effect on September 30, 2017.2018.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition to historical consolidated condensed financial information, this Quarterly Report on Form 10-Q contains forward-looking statements that reflect, among other things, our current expectations and anticipated results of operations, all of which are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, market trends, or industry results to differ materially from those expressed or implied by such forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may constitute forward-looking statements. Without limiting the foregoing, words such as “anticipates,”
We caution you that actual results may differ materially from our expectations due to a number of factors, including, that most of our contracts may be terminated on short notice, and we may be unable to maintain large customer contracts or to enter into new contracts; the historical indications of the relationship of our backlog to revenues may not be indicative of their future relationship; the market for our services may not grow as we expect; we may underprice our contracts, overrun our cost estimates or fail to receive approval or experience delays in documenting change orders; the historical indications of the relationship of our backlog to revenues may not be indicative of their future relationship; if we are unable to achieve operating efficiencies or grow revenues faster than expenses, operating margins will be adversely affected; if we are unable to attract investigators and patients for our clinical trials, our clinical development business may suffer; we could be subject to employment liability with our embedded and functional outsourcing solutions as we place employees at the physical workplaces of our clients; we may be unable to recruit experienced personnel; changes in accounting standards may adversely affect our financial statements; our effective income tax rate may fluctuate, which may adversely affect our operations, earnings, and earnings per share; we may be unable to maintain information systems or effectively update them; customer or therapeutic concentration could harm our business; our business is subject to risks associated with international operations, including economic, political and other risks, such as compliance with a myriad of laws and regulations, complications from conducting clinical trials in multiple countries simultaneously and changes in exchange rates; due to the global nature of our business, we are subjectmay be exposed to a number of additional risks associated with doing business outside ofliabilities under the United States, including foreign currency exchange fluctuationsForeign Corrupt Practices Act and restrictive regulations, as well as the risks and uncertainties associated with the United Kingdom’s expected withdrawal from the European Union; government regulators or customers may limit the scope of prescription or withdraw products from the market, and government regulators may impose new regulations affecting the biopharmaceutical industry and our business;other similar non-U.S. laws; we may be unable to successfully develop and market new services or enter new markets; our failure to perform services in accordance with contractual requirements, regulatory standards and ethical considerations may subject us to significant costs or liability, damage our reputation and cause us to lose existing business or not receive new business; government regulators or customers may limit the scope of prescription or withdraw products from the market, and government regulators may impose new regulations affecting the biopharmaceutical industry and our business; our services are related to treatment of human patients, and we could face liability if a patient is harmed; our insurance may not cover all of our indemnification obligations and other liabilities; we are subject to a number of additional risks associated with doing business outside of the United States, including foreign currency exchange fluctuations and restrictive regulations, as well as the risks and uncertainties associated with the United Kingdom’s expected withdrawal from the European Union; if we do not keep pace with rapid technological changes, our services may become less competitive or obsolete; our relationships with existing or potential clients who are in competition with each other may adversely impact the degree to which other clients or potential clients use our services; we may be unable to successfully identify, acquire and integrate businesses, services and technologies; our balance sheet includes a significant amount of goodwill and intangible assets and our results of operations may be adversely affected if we fail to realize the Company'sfull value of our goodwill and intangible assets; our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited; if we are unable to manage our growth effectively our business could be harmed; our reliance on third parties for data, products, services and intellectual property licenses; the biopharmaceutical services industry is fragmented and highly competitive; biopharmaceutical industry outsourcing trends could change and adversely affect our operations and growth rate; current and proposed laws and regulations regarding the protection of personal data could result in increased risks of liability or increased cost or could limit our service offerings; patent and other intellectual property litigation; circumstances beyond our control could cause industry-wide reduction in demand for our services; we have substantial indebtedness and may incur additional indebtedness in the future, which could adversely affect our financial condition; and other factors that are set forth in our filings with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K filed on February 23, 2017 and this Quarterly Report on Form 10-Q.22, 2018.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our quantitative and qualitative disclosures about market risk as compared to the quantitative and qualitative disclosures about market risk described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2017.
Item 4. Controls and Procedures
recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required or necessary disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. In accordance with the SEC’s published guidance, the internal control over financial reporting of Symphony Health Solutions Corporation, or Symphony Health, which was acquired on September 6, 2017 and the Takeda PRA Development Center KK joint venture, or the TDC joint venture, formed between us and Takeda Pharmaceutical Company Ltd. on June 1, 2017, were excluded from our evaluation of the effectiveness of our disclosure controls and
There were no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 20172018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We are in the process of reviewing themay make appropriate changes to our internal control structureover the financial reporting of Symphony Health, and the TDC joint venture, if necessary, will make appropriate changeswhich was acquired on September 6, 2017, as we integrate Symphony Health and the TDC joint venture into our overall internal control over financial reporting process. See discussion of this acquisition in Note 3, Business Combinations, of the Notes to the Consolidated Condensed Financial Statements contained in Item 1 of this Quarterly Report on Form 10-Q.
Item 1. Legal Proceedings
The information required with respect to this item can be found under “Commitments and Contingencies” in Note 1112 to our consolidated condensed financial statements included elsewhere in this Form 10-Q and is incorporated by reference into this Item 1.
Item 1A. Risk Factors
For a discussion of our potential risks and uncertainties, see the information under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2017, or Annual Report. There have been no significant changes from the risk factors previously disclosed in our Annual Report, except as noted below.Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Item 5. Other Information
Not applicable.
Item 6. Exhibits
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.