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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 __________________________
FORM 8-K
__________________________
 
 CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date Earliest Event reported): May 21, 2020
  ___________________________
 PPD, Inc.
(Exact name of registrant as specified in its charter)
   ___________________________
Delaware
 
001-39212
 
45-3806427
(State or other jurisdiction
of incorporation)
 
(Commission
File Number)
 
(IRS Employer
Identification No.)
929 North Front Street
Wilmington, North Carolina 28401
(910) 251-0081
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
    ___________________________
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e- 4(c))
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common Stock, par value $0.01 per share
 
PPD
 
The NASDAQ Stock Market LLC
(Nasdaq Global Select Market)
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company  ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐









Item 8.01.
Other Events
PPD, Inc. (the “Company” or “we” or “our”) is filing this Current Report on Form 8-K to recast certain previously reported amounts to conform with the segment reporting changes made during the first quarter of 2020 based on how the Company's Chief Operating Decision Maker (“CODM”) reviews performance and allocates resources, with respect to the financial information contained in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”).
The Company's CODM assesses segment performance and makes resource allocation decisions based on segment revenues and segment operating income. During the first quarter of 2020, the CODM began assessing segment performance and making resource allocation decisions based on total segment revenue, including direct, third-party pass-through and out-of-pocket revenue and segment operating income, including reimbursed costs. Previously, certain revenue amounts and reimbursed costs were not allocated to segments, whereas following the change, all revenue and reimbursed costs are allocated to the respective segment.
As a result, the Company has updated its segment presentation for the years ended December 31, 2019 and 2018, which have been recast to reflect the change in the measurement of segment performance measures. No changes have been made to the segment presentation for the year ended December 31, 2017, as prior to the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, on January 1, 2018, third-party pass-through and out-of-pocket revenue, as well as reimbursed costs, were not allocated to the Company’s segments.
The Company is filing this Form 8-K voluntarily to recast its consolidated financial statements for each of the years ended December 31, 2019 and 2018, to reflect the changes in segment presentation as described above in order to be consistent with the segment presentation in its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020. The updates do not represent a restatement of previously issued financial statements. The recast information of Items contained in the 2019 Form 10-K is presented in Exhibits 99.1, 99.2 and 99.3 to this Form 8-K.
The information included in this Form 8-K is presented for informational purposes only in connection with the reporting changes described above and does not amend or restate other information within our audited consolidated financial statements, which were included in the 2019 Form 10-K. This Form 8-K does not reflect events occurring after we filed our 2019 Form 10-K and does not in any way modify or update the disclosures therein, other than to illustrate the changes made based on how the CODM assesses segment performance and makes resource allocation decisions as described above. For developments subsequent to the filing of the 2019 Form 10-K, refer to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020.
Item 9.01
Financial Statements and Exhibits.
(d) Exhibits. The following exhibits are filed within this document
 
Exhibit No.
 
Description
 
 
23.1*
 
99.1*
 
99.2*
 
99.3*
 
101.INS*
 
XBRL Instance Document
101.SCH*
 
XBRL Taxonomy Extension Schema
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase
*
Furnished herewith. 

2





Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
 
 
PPD, Inc.
 
 
By:
 
 /s/ B. Judd Hartman
Name:
 
B. Judd Hartman
Title:
 
Executive Vice President, General
 
 
Counsel and Secretary
Date: May 21, 2020

3
Exhibit



Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement No. 333-235860 on Form S-8 of our report dated March 5, 2020 (May 21, 2020 as to Note 19), relating to the financial statements of PPD, Inc. appearing in this Current Report on Form 8-K dated May 21, 2020.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
May 21, 2020


1
Exhibit
Exhibit 99.1
Part I
Item 1. Business

Note: The information contained in this Item has been updated for the changes made to our segment performance measures during the first quarter of 2020 as discussed in the recasted audited consolidated financial statements and notes thereto in Exhibit 99.3 included elsewhere in this Form 8-K which updates our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”). This Item has not been updated for any other changes since the filing of the 2019 Form 10-K. For developments subsequent to the filing of the 2019 Form 10-K, refer to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020.

Capitalize on our Growing Laboratory Segment
Our laboratory services offering is focused on the high-growth, innovative segment of laboratory services through its diverse range of high-value, advanced testing services. As an example, we have developed a significant and growing number of assays to address the testing needs of gene therapy. Our Laboratory Services segment represents approximately 16.8% of our 2019 total segment revenue and increased approximately 19.6% for the year ended December 31, 2019 as compared to the same period in 2018. It also affords us significant operating leverage and diversification, and provides higher backlog visibility and related conversion rates. Our Laboratory Services segment allows us to provide integrated offerings to customers that need both clinical development and laboratory services.

1
Exhibit


Exhibit 99.2

Part II

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Note: The information contained in this Item has been updated for the changes made to our segment performance measures during the first quarter of 2020 as discussed in the recasted audited consolidated financial statements and notes thereto in Exhibit 99.3 included elsewhere in this Form 8-K which updates our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”). This Item has not been updated for any other changes since the filing of the 2019 Form 10-K. For developments subsequent to the filing of the 2019 Form 10-K, refer to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020.
Company Overview
We are a leading provider of drug development services to the biopharmaceutical industry, focused on helping our customers bring their new medicines to patients around the world. We have been in the drug development services business for more than 30 years, providing a comprehensive suite of clinical development and laboratory services to pharmaceutical, biotechnology, medical device and government organizations, as well as other industry participants. Over that time, we have developed a track record of consistent quality, delivery and continuous innovation that has enabled us to grow faster than our underlying market over the past five years and deliver strong financial results. In 2019, we served all of the top 50 biopharmaceutical companies in the world, as ranked by 2018 R&D spending, and, in 2018, were involved in 66 drug approvals. We also participated in the development of all of 2018’s top ten selling drugs, as ranked by 2018 revenue. Since 2014, we have also worked with over 300 companies in the growing biotechnology sector through our PPD Biotech model, which was built specifically to serve the unique needs of this customer segment.
Our purpose and mission are to improve health by helping our customers deliver life-changing therapies to patients. We pursue our purpose and mission through our clinical development and laboratory services and our strategy to bend the cost and time curve of drug development and optimize value for our customers. Our customers benefit from accelerated time to market because it results in lengthened periods of market exclusivity, and our real-world evidence solutions support the superior efficacy and value of their novel therapies. We believe our medical, scientific and drug development expertise, along with our innovative technologies and knowledge of global regulatory requirements, help our customers accelerate the development of safe and effective therapeutics and maximize returns on their R&D investments. We have two reportable segments, Clinical Development Services and Laboratory Services. For a description of our service offerings within our segments, see Part I, Item 1, “Business” of this Annual Report on Form 10-K.
Effective January 1, 2018, we adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective method for all contracts not completed as of the date of adoption. The audited consolidated financial statements as of and for the years ended December 31, 2019 and 2018 included elsewhere in this Annual Report on Form 10-K, reflect the application of the accounting guidance of ASC 606, while the consolidated financial statements and other financial information (as applicable) for the period commencing prior to January 1, 2018, reflect previous accounting guidance from the application of ASC Topic 605, Revenue Recognition (“ASC 605”).
Industry Outlook
For information about the industry outlook and markets that we operate in, refer to “Our Markets” within Part I, Item I of this Annual Report on Form 10-K.
Sources of Revenue
Under ASC 606, revenue is comprised of direct, third-party pass-through and out-of-pocket revenue from providing services to our customers. Direct revenue represents revenue associated with the direct services provided under our contracts. Third-party pass-through and out-of-pocket revenue represents the reimbursement by customers of third-party pass-through and out-of-pocket costs incurred by us under our contracts. Revenue typically fluctuates and may fluctuate significantly period to period based on the timing and types of services performed, staff utilization and hours worked, actual and estimated third-party pass-through and out-of-pocket costs and the volume of our net authorizations driving growth in backlog, among other factors.


1



With the adoption of ASC 606, we record the reimbursement of third-party pass-through and out-of-pocket revenue and the related costs incurred as revenue and reimbursed costs on the consolidated statements of operations. We record these reimbursed costs as revenue when we are the principal in the relationship, are primarily responsible for the services provided by third parties and significantly integrate the services of the third parties with our own services in delivering a combined output to the customer.
Previously under ASC 605, revenue only included direct revenue from providing services to our customers. Third-party pass-through revenue and costs were presented on a net basis and out-of-pocket revenue and costs were presented on a gross basis as reimbursed revenue and reimbursed costs on the consolidated statements of operations. Additionally, third-party pass-through and out-of-pocket costs were excluded from the costs used in the measure of progress for full-service clinical trial management contracts that utilized the proportional performance method to recognize revenue, and the related revenue was recognized for these reimbursed costs when the costs were incurred. Third-party pass-through and out-of-pocket revenue and costs did not have a significant impact on our financial performance, because they were ancillary to the clinical development and laboratory services provided by us, generally provided by us without profit or mark-up and variable from period to period without being important to our underlying business performance. Therefore, prior to January 1, 2018, we did not analyze third-party pass-through and out-of-pocket revenue and related costs from period to period.
Our Clinical Development Services segment represented 83.2%, 84.9% and 83.8% of total segment revenue for the years ended December 31, 2019, 2018 and 2017, respectively, with the remainder generated from Laboratory Services.
We have a diverse customer mix, with no one customer accounting for more than 10% of our revenue for the years ended December 31, 2019, 2018 and 2017. Our top 10 customers accounted for approximately 47.9%, 47.5% and 50.5% of our revenue for the years ended December 31, 2019, 2018 and 2017, respectively. Based on the diversity of our customer base, we do not believe we have significant customer concentration risk. We do not have any significant product revenues.
Operating Costs and Expenses
Our operating costs and expenses primarily consist of direct costs, reimbursed costs, selling, general and administrative (“SG&A”) expenses and depreciation and amortization.
Direct Costs
Direct costs represent costs for providing services to customers. Direct costs primarily include labor-related costs, such as compensation and benefits for employees providing services, an allocation of facility and information technology costs, supply costs, costs for certain media-related services for patient recruitment, other overhead costs and offsetting R&D incentive credits. Direct costs typically increase or decrease with changes in revenue and may fluctuate significantly from period to period as a percentage of revenue due to staff labor utilization, project labor mix, the type of services, changes to the timing of work performed and project inefficiencies, among other factors.
Reimbursed Costs
Reimbursed costs include third-party pass-through and out-of-pocket costs which are generally reimbursable by our customers at cost. Third-party pass-through and out-of-pocket costs include, but are not limited to, payments to investigators, payments for the use of third-party technology, shipping costs and travel costs related to the performance of services, among others. Third-party pass-through and out-of-pocket costs are incurred across both of our reportable segments.
Because services associated with reimbursed costs are generally provided by us without profit or mark-up and fluctuate from period to period without being important to our underlying performance over the full term of a contract, these costs do not have a significant impact on our income from operations. While fluctuations from period to period are not meaningful over the full term of a contract, actual and estimated reimbursed costs can impact revenue recognized and income from operations throughout the duration of a contract.




2



Selling, General and Administrative Expenses
SG&A expenses represent costs of business development, administrative and support functions. SG&A expenses primarily include compensation and benefits for employees, costs related to employees performing administrative tasks, stock-based compensation expense, sales, marketing and promotional expenses, employee recruiting and relocation expenses, employee training costs, travel costs, an allocation of facility and information technology costs and other overhead costs.
Depreciation and Amortization
Depreciation and amortization represents the costs charged for our property and equipment and intangible assets. We record depreciation and amortization using the straight-line method, based on the estimated useful lives of the respective assets. We depreciate leasehold improvements over the shorter of the lease term or the estimated useful lives of the improvements. We amortize software developed or obtained for internal use, including software licenses obtained through a cloud computing arrangement, over the estimated useful life of the software or term of the licensing or service agreement. Amortization expense primarily comes from acquired definite-lived intangible assets. We amortize definite-lived intangible assets using either the straight-line method or sum-of-the-years digits method over the estimated useful lives of the assets.
How We Assess the Performance of Our Business
We manage and assess our business based on segment performance and allocate resources utilizing segment revenues and segment operating income. We also assess the performance of our consolidated business using a number of metrics including backlog and net authorizations. Our financial information for all periods presented below for backlog and net authorizations exclude the impact of net authorizations from anticipated third-party pass-through and out-of-pocket revenue.
Our backlog represents anticipated direct revenue for work not yet completed or performed (i) under signed contracts, letters of intent and, in some cases, awards that are supported by other forms of written communication and (ii) where there is sufficient or reasonable certainty about the customer’s ability and intent to fund and commence the services within six months.
Backlog and backlog conversion to direct revenue (defined as the quarterly average of direct revenue, which excludes the impact of third-party pass-through and out-of-pocket revenue and, for 2019 and 2018, the impact of ASC 606 on direct revenue, for the period divided by opening backlog for that period) vary from period to period depending upon new authorizations, contract modifications, cancellations and the amount of direct revenue recognized under existing contracts. We adjust backlog for foreign currency fluctuations and exclude direct revenue that has been recognized as revenue in our consolidated statements of operations.
Although an increase in backlog will generally result in an increase in future direct revenue to be recognized over time (depending on future contract modifications, contract cancellations and other adjustments), an increase in backlog at a particular point in time does not necessarily correspond to an increase in direct revenue during a particular period. The timing and extent to which backlog will result in direct revenue depends on many factors, including the timing of commencement of work, the rate at which we perform services, scope changes, cancellations, delays, receipt of regulatory approvals and the nature, duration, size, complexity and phase of the studies. Our contracts generally have terms ranging from several months to several years. In addition, delayed projects remain in backlog until they are canceled. As a result of these factors, our backlog might not be a reliable indicator of future direct revenue and we might not realize all or any part of the direct revenue from the authorizations in backlog as of any point in time.
We add new authorizations to backlog based on the aforementioned criteria for backlog. Net authorizations represent new business awards, net of award or contract modifications, contract cancellations, foreign currency fluctuations and other adjustments. New authorizations vary from period to period depending on numerous factors, including customer authorization volume, sales performance and overall health of the biopharmaceutical industry, among others. New authorizations have varied and will continue to vary significantly from quarter to quarter and from year to year. In addition to net authorizations, we also assess net book-to-bill which represents the amount of net authorizations for the period divided by the direct revenue (calculated consistent with backlog conversion to direct revenue above) recognized in that period.



3



Backlog and Net Authorizations
 
 
 
 
 
 
 
 
Change
 
 
 
 
 
 
 
 
2019 vs. 2018
 
2018 vs. 2017
(dollars in millions)
 
2019
 
2018
 
2017
 
$
 
%
 
$
 
%
Net authorizations (for the years ended December 31)
 
$
3,827.3

 
$
3,421.0

 
$
2,485.4

 
$
406.3

 
11.9
%
 
$
935.6

 
37.6
%
Backlog (as of December 31)
 
7,066.3

 
6,313.7

 
5,730.6

 
752.6

 
11.9

 
583.1

 
10.2

Backlog conversion (quarterly average for the years ended December 31)
 
11.9
%
 
11.9
%
 
11.7
%
 
 
 

 
 
 
0.2

Net book-to-bill
 
1.2x

 
1.2x

 
0.9x

 
 
 
 
 
 
 
 
Our net authorizations for the years ended December 31, 2019, 2018 and 2017 were $3,827.3 million, $3,421.0 million and $2,485.4 million, respectively. Our backlog as of December 31, 2019, 2018 and 2017 was $7,066.3 million, $6,313.7 million and $5,730.6 million, respectively. The increase in net authorizations and backlog in 2019 as compared to the same period in the prior year was primarily due to a higher win rate on competitive decisions (which represents the total dollar amount of new business on which we bid) and favorable net foreign currency fluctuations, partially offset by cancellations. The increase in net authorizations and backlog in 2018 as compared to the same period in the prior year was primarily due to a higher number of competitive decisions and lower cancellations, partially offset by unfavorable foreign currency fluctuations.
Acquisitions
September 2019 Acquisition
On September 3, 2019, we acquired 100% of the issued and outstanding equity of Synarc, Inc. (“Synarc”), the global site network of Bioclinica, Inc., expanding its global footprint into China and Latin America and expanding its central nervous system offering in the United States. As of December 31, 2019, the preliminary purchase price was $45.2 million. The initial accounting for the acquisition is not yet complete. See Note 6, “Business Combinations,” of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.
July 2019 Acquisition
On July 1, 2019, we acquired 100% of the issued and outstanding equity of Medimix International (“Medimix”), a global technology company that provides real-world evidence insights and information to the pharmaceutical, diagnostic and medical device industries. As of December 31, 2019, the preliminary purchase price was $36.8 million, including $5.0 million of common stock of the Company. The initial accounting for the acquisition is not yet complete. See Note 6, “Business Combinations,” of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.
September 2017 Acquisition
On September 1, 2017, we acquired 100% of Optimal Research, LLC (“Optimal Research”), a dedicated clinical research site network with enhanced oncology enrollment capabilities. The purchase price was $24.0 million. See Note 6, “Business Combinations,” of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.
Incremental Public Company Expenses
As a new public company, we will incur additional expenses on an ongoing basis that we did not incur as a private company. Those costs include additional director and officer liability insurance expenses, as well as third-party and internal resources related to accounting, auditing, Sarbanes-Oxley Act compliance, legal, investor and public relations expenses and additional stock-based compensation expense as we align our long-term incentive plan with other public company plans. These costs will generally be SG&A expenses.


4



We also expect to replace our existing cash-based long-term incentive plan with annual equity awards in 2020. We recorded compensation expense of $14.1 million, $12.0 million and $11.1 million for each of the years ended December 31, 2019, 2018 and 2017, respectively, in connection with awards issued under our cash-based long-term incentive plan.
Results of Operations
We have included the results of operations of acquired companies in our consolidated results of operations from the date of their respective acquisitions, which impacts the comparability of our results of operations when comparing results for the year ended December 31, 2019 to the year ended December 31, 2018 and the year ended December 31, 2018 to the year ended December 31, 2017. We have noted in the discussion below, to the extent meaningful and quantifiable, the impact on the comparability of our consolidated results of operations to prior year results due to the inclusion of acquired companies as well as the impact of ASC 606 when comparing the year ended December 31, 2018 to the year ended December 31, 2017.
Year Ended December 31, 2019 versus Year Ended December 31, 2018 and Year Ended December 31, 2018 versus Year Ended December 31, 2017
Consolidated Results of Operations
Revenue
 
 
 
 
 
 
 
 
Change
 
 
Years Ended December 31,
 
2019 vs. 2018
 
2018 vs. 2017
(dollars in thousands)
 
2019
 
2018
 
2017
 
$
 
%
 
$
 
%
Revenue
 
$
4,031,017

 
$
3,748,971

 
$
2,767,476

 
$
282,046

 
7.5
%
 
$
981,495

 
35.5
%
Reimbursed revenue
 

 

 
233,574

 

 
n.m.

 
(233,574
)
 
n.m.

Total revenue
 
$
4,031,017

 
$
3,748,971

 
$
3,001,050

 
$
282,046

 
7.5

 
$
747,921

 
24.9

Revenue increased $282.0 million, or 7.5%, to $4,031.0 million for the year ended December 31, 2019 as compared to the same period in 2018. Revenue increased 7.6% from organic volume growth due to increased net authorizations and backlog growth in 2019 and 2018 and 0.7% from inorganic growth primarily due to our current year acquisitions of Synarc and Medimix (the “2019 Acquisitions”). The increase in revenue was partially offset by a 0.8% decrease from the unfavorable impact from foreign currency exchange rates.
Total revenue increased $747.9 million, or 24.9%, to $3,749.0 million for the year ended December 31, 2018 as compared to the same period in 2017. Total revenue increased primarily due to the adoption of ASC 606, which requires third-party pass-through revenue and out-of-pocket reimbursed revenue to be reported on a gross presentation basis as part of revenue. Previously, under ASC 605, third-party pass-through revenue was presented net of third-party pass-through costs in our consolidated statements of operations. Excluding the impact of the adoption of ASC 606, revenue increased $70.3 million, or 2.5%. Total revenue increased 1.5% primarily due to organic volume growth and higher backlog conversion, 0.7% due to the effect of favorable foreign currency exchange rates, and 0.3% due to inorganic growth from the 2017 acquisition of Optimal Research (the “2017 Acquisition”).
Direct Costs
 
 
 
 
 
 
 
 
Change
 
 
Years Ended December 31,
 
2019 vs. 2018
 
2018 vs. 2017
(dollars in thousands)
 
2019
 
2018
 
2017
 
$
 
%
 
$
 
%
Direct costs
 
$
1,484,258

 
$
1,333,812

 
$
1,302,983

 
$
150,446

 
11.3
%
 
$
30,829

 
2.4
%
% of total revenue
 
36.8
%
 
35.6
%
 
43.4
%
 
 
 
 
 
 
 
 
    




5



Direct costs increased $150.4 million to $1,484.3 million for the year ended December 31, 2019 as compared to the same period in 2018. The increase in direct costs was due to (i) a $97.9 million increase from growth in employee headcount and contract labor to support current and anticipated growth in future revenue as well as compensation increases, (ii) a $16.5 million increase from the impact of the 2019 Acquisitions and (iii) an increase in project delivery costs, including media-related costs for patient recruitment services and laboratory supply costs. The increase in direct costs was partially offset by a 1.6% decrease from the favorable impact from foreign currency exchange rates. As a percentage of revenue, direct costs increased to 36.8% for the year ended December 31, 2019 as compared to 35.6% in the same period in 2018 primarily due to the factors identified above.
Direct costs increased $30.8 million to $1,333.8 million for the year ended December 31, 2018 as compared to the same period in 2017. The increase in direct costs was primarily due to (i) a $30.9 million increase from growth in employee headcount to support current and anticipated growth in future revenue as well as compensation increases, (ii) an increase in project delivery costs, including media-related costs for patient recruitment services and (iii) an inorganic increase of $5.2 million for the 2017 Acquisition, partially offset by increased R&D incentive credits. The increase in direct costs included a 0.8% increase from the unfavorable impact from foreign currency exchange rates. As a percentage of revenue, direct costs decreased to 35.6% for the year ended December 31, 2018 as compared to 43.4% in the same period in 2017. Excluding the impact from the adoption of ASC 606, direct costs were 43.4%, as a percentage of revenue, for the year ended December 31, 2018.
Reimbursed Costs
 
 
 
 
 
 
 
 
Change
 
 
Years Ended December 31,
 
2019 vs. 2018
 
2018 vs. 2017
(dollars in thousands)
 
2019
 
2018
 
2017
 
$
 
%
 
$
 
%
Reimbursed costs
 
$
924,634

 
$
940,913

 
$
233,574

 
$
(16,279
)
 
(1.7
)%
 
$
707,339

 
302.8
%
% of total revenue
 
22.9
%
 
25.1
%
 
7.8
%
 
 
 
 
 
 
 
 
Reimbursed costs decreased $16.3 million to $924.6 million for the year ended December 31, 2019 as compared to the same period in 2018. Reimbursed costs decreased due to lower pass-through costs for certain larger clinical trials within our Clinical Development Services segment as a result of fluctuations in enrollment and patient activity, as well as the general timing of costs incurred across the remainder of the portfolio, which will vary over the course of clinical trials due to the timing of the work performed, scope changes and the complexity and phase of the study, among other factors.
Reimbursed costs increased $707.3 million to $940.9 million for the year ended December 31, 2018 as compared to the same period in 2017. Reimbursed costs increased primarily due to the adoption of ASC 606, which requires third-party pass-through costs to be recorded on a gross presentation basis instead of being presented net of pass-through revenue. Previously, under ASC 605, third-party pass-through costs were presented net of third-party pass-through revenue in our consolidated statements of operations for periods that commenced prior to January 1, 2018. Excluding the impact from the adoption of ASC 606, reimbursed costs would have been $222.2 million for the year ended December 31, 2018. See discussion above on the impact from the adoption of ASC 606 on our revenues.
Selling, General and Administrative Expenses
 
 
 
 
 
 
 
 
Change
 
 
Years Ended December 31,
 
2019 vs. 2018
 
2018 vs. 2017
(dollars in thousands)
 
2019
 
2018
 
2017
 
$
 
%
 
$
 
%
Selling, general and administrative expenses
 
$
938,806

 
$
813,035

 
$
809,333

 
$
125,771

 
15.5
%
 
$
3,702

 
0.5
%
% of total revenue
 
23.3
%
 
21.7
%
 
27.0
%
 
 
 
 
 
 
 
 
    






6



SG&A expenses increased $125.8 million to $938.8 million for the year ended December 31, 2019 as compared to the same period in 2018. The increase in SG&A expenses was primarily due to (i) a $43.7 million increase from growth in employee headcount to support current and anticipated growth in future revenue as well as compensation increases, (ii) $18.4 million in compensation costs related to a stock option modification and special cash bonus to option holders, (iii) an increase in professional fees, including acquisition and IPO transaction costs of $15.3 million and (iv) a $12.2 million increase in technology costs related to both licensing and cloud services and the implementation of a new enterprise resource planning system. The increase in SG&A expenses was partially offset by a 1.4% decrease from the favorable impact from foreign currency exchange rates. As a percentage of revenue, SG&A expenses increased to 23.3% for the year ended December 31, 2019 as compared to 21.7% in the same period in 2018 primarily due to the factors identified above.
SG&A expenses increased $3.7 million to $813.0 million for the year ended December 31, 2018 as compared to the same period in 2017. The increase in SG&A expenses was primarily due to (i) a $9.5 million increase from growth in employee headcount to support current and anticipated growth in future revenue as well as compensation increases and (ii) an inorganic increase of $3.3 million from the 2017 Acquisition, partially offset by $10.4 million of lower stock-based compensation, severance and other related costs. The increase in SG&A expenses included a 0.4% increase from the unfavorable impact from foreign currency exchange rates. As a percentage of revenue, SG&A expenses decreased to 21.7% for the year ended December 31, 2018 as compared to 27.0% in the same period in 2017. Excluding the impact from the adoption of ASC 606, as a percentage of revenue, SG&A expenses decreased to 26.7% for the year ended December 31, 2018.
Recapitalization Costs
 
 
Years Ended December 31,
(in thousands)
 
2019
 
2018
 
2017
Recapitalization costs
 
$

 
$

 
$
114,766

Recapitalization costs associated with the recapitalization of the Company were $114.8 million for the year ended December 31, 2017 and consisted of (i) $51.2 million of transaction costs, (ii) $52.2 million of stock-based compensation expense for the vesting and cash settlement of stock options, (iii) $4.3 million of accelerated other compensation expense for special cash bonuses to option holders and (iv) $7.1 million of other compensation expense for payroll taxes related to the cash and share settlement of stock options and special cash bonuses to option holders. There were no recapitalization costs for the years ended December 31, 2019 or 2018.
Depreciation and Amortization
 
 
Years Ended December 31,
(in thousands)
 
2019
 
2018
 
2017
Depreciation and amortization
 
$
264,830

 
$
258,974

 
$
279,066

Depreciation and amortization was $264.8 million for the year ended December 31, 2019 as compared to $259.0 million in the same period in 2018. The increase in depreciation and amortization expense primarily relates to the impact from (i) our laboratory facilities expansion, (ii) new purchased and internally developed software and (iii) the definite-lived intangibles amortization impact from the 2019 Acquisitions, partially offset by a decrease due to the timing of amortization of certain definite-lived intangible assets and a favorable impact from foreign currency exchange rates.
Depreciation and amortization was $259.0 million for the year ended December 31, 2018 as compared to $279.1 million in the same period in 2017. Depreciation and amortization expense decreased primarily due to certain definite-lived intangible assets and internally developed software becoming fully amortized in 2017, partially offset by an unfavorable impact from foreign currency exchange rates.
Goodwill and Long-Lived Asset Impairments
 
 
Years Ended December 31,
(in thousands)
 
2019
 
2018
 
2017
Goodwill and long-lived asset impairments
 
$
1,284

 
$
29,626

 
$
43,459



7



Goodwill impairment was $29.6 million for the year ended December 31, 2018 as compared to $38.4 million in the same period in 2017. Our 2018 and 2017 annual goodwill impairment tests each indicated that one reporting unit in our Clinical Development Services segment had an estimated fair value below carrying value as a result of decreases in future cash flows. The goodwill impairments in 2018 and 2017 were recorded on different reporting units. There was no goodwill impairment in 2019.
In 2018, the expected future cash flows of the reporting unit decreased due to lower forecasted long-term revenue growth and higher forecasted operating expenses, resulting in reduced margins. In 2017, the expected future cash flows of the reporting unit decreased due to lower forecasted long-term revenue growth and reduced margins, primarily as a result of the loss of certain key customers.
Interest Expense, Net
 
 
Years Ended December 31,
(in thousands)
 
2019
 
2018
 
2017
Interest expense, net
 
$
311,744

 
$
263,618

 
$
253,891

Interest expense, net, was $311.7 million for the year ended December 31, 2019 as compared to $263.6 million in the same period in 2018. The increase in interest expense is due to $49.1 million of interest expense related to the issuance of the Additional HoldCo Notes and an increase in the interest rate on our term loan under our senior secured credit facilities for a portion of the year, partially offset by favorable amortization from our terminated interest rate swaps.
Interest expense, net, was $263.6 million for the year ended December 31, 2018 as compared to $253.9 million in the same period in 2017. The overall increase in interest expense is due to $16.0 million of interest expense from the issuance of the Initial HoldCo Notes in connection with the May 2017 recapitalization of the Company and an increase in the interest rate on our term loan under our senior secured credit facilities from 4.38% to 5.02%. These increases were partially offset by favorable interest rate swaps and the impact of a repricing of our term loan in March 2018 resulting in a lower margin on our term loan.
(Loss) Gain on Investments
 
 
Years Ended December 31,
(in thousands)
 
2019
 
2018
 
2017
(Loss) gain on investments
 
$
(19,043
)
 
$
15,936

 
$
92,750

Loss on investments was $19.0 million for the year ended December 31, 2019 as compared to a gain of $15.9 million in the same period in 2018. The loss for 2019 and gain for 2018, respectively, was primarily a result of changes in the fair values of the net asset values of our investments, partially offset by changes to the discounts on certain investments.
Gain on investments was $15.9 million for the year ended December 31, 2018 as compared to a gain of $92.8 million in the same period in 2017. The gain in 2018 and 2017 was primarily a result of increases in the fair value of the net asset values of our investments, partially offset by changes to the discount on certain investments.
The gains or losses from our investments will likely continue to fluctuate from period to period primarily based on the changes in fair value of the underlying holdings of the limited partnerships and changes in the discounts applied to such investments for our lack of control and lack of marketability, where applicable.
Other (Expense) Income, Net
 
 
Years Ended December 31,
(in thousands)
 
2019
 
2018
 
2017
Other (expense) income, net
 
$
(27,143
)
 
$
21,701

 
$
(40,259
)
Other expense, net, was $27.1 million for the year ended December 31, 2019 as compared to other income, net of $21.7 million in the same period in 2018. Foreign exchange rate movement resulted in transaction and re-measurement losses of $24.7 million for the year ended December 31, 2019 and transaction and re-measurement gains of $16.7 million in the same period in 2018.


8



Other income, net, was $21.7 million for the year ended December 31, 2018 as compared to other expense, net, of $40.3 million in the same period in 2017. The change in other income (expense), net, was primarily due to foreign exchange rate movement that resulted in transaction and re-measurement gains of $16.7 million for the year ended December 31, 2018 as compared to transaction and re-measurement losses of $40.1 million in the same period in 2017.
Provision for (Benefit from) Income Taxes
 
 
Years Ended December 31,
(dollars in thousands)
 
2019
 
2018
 
2017
Provision for (benefit from) income taxes
 
$
2,957

 
$
39,579

 
$
(284,360
)
Effective income tax rate
 
5.0
%
 
27.0
%
 
(1,726.6
)%
Our provision for income taxes was $3.0 million, resulting in an effective income tax rate of 5.0%, for the year ended December 31, 2019 as compared to $39.6 million, or an effective income tax rate of 27.0%, in the same period in 2018. Our provision for income taxes for the year ended December 31, 2019 was primarily due to the estimated tax effect on our income before provision for income taxes offset by the impact from the benefit related to state taxes, net of federal benefit, related to the Tax Act, as well as the realization of carryforward foreign tax attributes and an increase in foreign R&D credits. Our provision for income taxes for the year ended December 31, 2018 was primarily due to the estimated tax effect on our income before provision for income taxes, which included a decrease in the corporate statutory tax rate and other tax impacts as a result of the Tax Act.
Our provision for income taxes was $39.6 million, resulting in an effective income tax rate of 27.0%, for the year ended December 31, 2018, as compared to a benefit from income taxes of $284.4 million, or an effective income tax rate of (1,726.6)%, in the same period in 2017. Our provision for income taxes for the year ended December 31, 2018 was primarily due to the estimated tax effect on our income before provision for income taxes, which included a decrease in the corporate statutory tax rate and other tax impacts as a result of the Tax Act. Our benefit from income taxes for the year ended December 31, 2017 was primarily due to (i) the net impacts of the Tax Act, including the benefit on our deferred tax liabilities from the decrease in the corporate statutory tax rate, the generation of foreign tax credits and the release of a deferred tax liability for accumulated unremitted foreign earnings, offset by the inclusion of the one-time mandatory transition tax and (ii) the estimated tax effect of certain stock-based and other compensation costs, offset by certain non-deductible transaction costs, all related to the recapitalization of the Company in May 2017.
Segment Results of Operations
During the first quarter of 2020, our Chief Operating Decision Maker began assessing performance and making resource allocation decisions based on total segment revenue, including direct and third-party pass-through and out-of-pocket revenue, and segment operating income, including reimbursed costs. Previously, certain revenue amounts and reimbursed costs were not allocated to segments, whereas following the change, all revenue and reimbursed costs are allocated to the respective segment. As a result, we have updated our segment presentation for the years ended December 31, 2019 and 2018 which has been recast to reflect the change in the measurement of segment performance measures. No changes have been made to the segment presentation for the year ended December 31, 2017, as prior to the adoption of ASC 606 on January 1, 2018, third-party pass-through and out-of-pocket revenue, as well as reimbursed costs, were not allocated to our segments. Clinical Development Services and Laboratory Services segment results for the years ended December 31, 2019, 2018 and 2017 are detailed below.
Clinical Development Services
 
 
 
 
 
 
 
 
Change
 
 
Years Ended December 31,
 
2019 vs. 2018
 
2018 vs. 2017
(dollars in thousands)
 
2019
 
2018
 
2017
 
$
 
%
 
$
 
%
Segment revenue
 
$
3,354,163

 
$
3,182,870

 
$
2,319,103

 
$
171,293

 
5.4
 %
 
$
863,767

 
37.2
 %
Segment direct costs
 
1,162,678

 
1,064,557

 
1,053,557

 
98,121

 
9.2

 
11,000

 
1.0

Segment reimbursed costs
 
845,580

 
876,617

 

 
(31,037
)
 
(3.5
)
 
876,617

 

Segment SG&A expenses
 
529,425

 
475,242

 
464,794

 
54,183

 
11.4

 
10,448

 
2.2

Segment operating income
 
816,480

 
766,454

 
800,752

 
50,026

 
6.5

 
(34,298
)
 
(4.3
)
    

9



Segment Revenue
Clinical Development Services’ segment revenue was $3,354.2 million for the year ended December 31, 2019, an increase of $171.3 million as compared to the same period in 2018. Segment revenue increased (i) 5.5% from organic volume growth in our Phase II-IV clinical trial management services, site and patient access services and medical communications services, as well as higher opening backlog at the beginning of the year and (ii) 0.8% from inorganic growth due to the 2019 Acquisitions. The increase in segment revenue was partially offset by a 0.9% decrease from the unfavorable impact from foreign currency exchange rates. The higher opening backlog was primarily due to increased net authorizations for our Phase II-IV clinical trial management services in 2018.
Clinical Development Services’ segment revenue was $3,182.9 million in 2018, an increase of $863.8 million as compared to the same period in 2017. Segment revenue increased due to the change in segment revenue presentation discussed above which resulted in a change in presentation for the year ended December 31, 2018, but not did impact segment presentation for the year ended December 31, 2017. Excluding the impact of the change in segment presentation, Clinical Development Services’ segment revenue increased $16.9 million, or 0.7%. This increase was due to a 0.4% increase in inorganic growth from the 2017 Acquisition and 0.7% due to favorable foreign currency exchange rates, partially offset by a 0.4% decrease in organic volume. The decrease in organic growth was primarily the result of a lower opening backlog and a decrease in net authorizations in 2017 in our Phase II-IV clinical trial management services.
Segment Direct Costs
Clinical Development Services’ segment direct costs were $1,162.7 million for the year ended December 31, 2019, an increase of $98.1 million as compared to the same period in 2018. The increase in segment direct costs was primarily due to (i) a $66.9 million increase from growth in employee headcount and contract labor to support current and anticipated growth in future revenue as well as compensation increases, (ii) a $16.5 million increase from the impact of the 2019 Acquisitions and (iii) an increase in project delivery costs including media-related costs for patient recruitment services. The increase in segment direct costs was partially offset by a 1.8% decrease from the favorable impact from foreign currency exchange rates.
Clinical Development Services’ segment direct costs were $1,064.6 million in 2018, an increase of $11.0 million as compared to the same period in 2017. The increase in segment direct costs was primarily due to (i) a $20.2 million increase from growth in employee headcount to support current and anticipated growth in future revenue as well as compensation increases, (ii) an increase in media-related costs for patient recruitment services and (iii) an inorganic increase of $5.2 million for the 2017 Acquisition, partially offset by increased R&D incentive credits and a $23.1 million decrease in temporary labor and certain other project delivery costs. The increase in segment direct costs included a 0.9% increase from the unfavorable impact from foreign currency exchange rates.
Segment Reimbursed Costs
Clinical Development Services’ segment reimbursed costs were $845.6 million for the year ended December 31, 2019, a decrease of $31.0 million as compared to the same period in 2018. The decrease in segment reimbursed costs was primarily due to lower pass-through costs for certain larger clinical trials as a result of fluctuations in enrollment and patient activity, as well as the general timing of costs incurred across the remainder of the portfolio, which will vary over the course of clinical trials due to the timing of the work performed, scope changes and the complexity and phase of the study, among other factors.
Clinical Development Services’ segment reimbursed costs were $876.6 million for the year ended December 31, 2018. The increase in segment reimbursed costs was due to the change in segment reimbursed cost presentation discussed above which resulted in a change in presentation for the year ended December 31, 2018, but not did impact segment presentation for the year ended December 31, 2017.
Segment SG&A Expenses
Clinical Development Services’ segment SG&A expenses were $529.4 million for the year ended December 31, 2019, an increase of $54.2 million as compared to the same period in 2018. The increase in segment SG&A expenses was primarily due to (i) a $32.2 million increase from growth in employee headcount to support current and anticipated growth in future revenue as well as compensation increases and (ii) a $7.1 million increase from the impact of the 2019 Acquisitions. The increase in segment SG&A expenses was partially offset by a 1.7% decrease from the favorable impact from foreign currency exchange rates.


10



Clinical Development Services’ segment SG&A expenses were $475.2 million in 2018, an increase of $10.4 million as compared to the same period in 2017. The increase in segment SG&A expenses was primarily due to (i) a $13.4 million increase from growth in employee headcount to support current and anticipated growth in future revenue as well as compensation increases and (ii) an increase of $3.3 million from the impact of the 2017 Acquisition, partially offset by a decrease in bad debt expense. The increase in segment SG&A expenses included a 0.7% increase from the unfavorable impact from foreign currency exchange rates.
Laboratory Services
 
 
 
 
 
 
 
 
Change
 
 
Years Ended December 31,
 
2019 vs. 2018
 
2018 vs. 2017
(dollars in thousands)
 
2019
 
2018
 
2017
 
$      
 
%     
 
$      
 
%     
Segment revenue
 
$
676,854

 
$
566,101

 
$
448,373

 
$
110,753

 
19.6
%
 
$
117,728

 
26.3
%
Segment direct costs
 
307,346

 
258,472

 
235,137

 
48,874

 
18.9

 
23,335

 
9.9

Segment reimbursed costs
 
79,054

 
64,296

 

 
14,758

 
23.0

 
64,296

 

Segment SG&A expenses
 
81,373

 
68,305

 
60,097

 
13,068

 
19.1

 
8,208

 
13.7

Segment operating income
 
209,081

 
175,028

 
153,139

 
34,053

 
19.5

 
21,889

 
14.3

Segment Revenue
Laboratory Services’ segment revenue was $676.9 million for the year ended December 31, 2019, an increase of $110.8 million as compared to the same period in 2018. Segment revenue increased from organic volume growth across all our laboratory services, including increased net authorizations in 2019, as well as higher opening backlog at the beginning of the year. The higher opening backlog was primarily due to increased net authorizations in 2018.
Laboratory Services’ segment revenue was $566.1 million in 2018, an increase of $117.7 million as compared to the same period in 2017. Segment revenue increased primarily due to the change in segment revenue presentation discussed above which resulted in a change in presentation for the year ended December 31, 2018, but not did impact segment presentation for the year ended December 31, 2017. Excluding the impact of the change in segment presentation, Laboratory Services’ segment revenue increased $53.4 million, or 11.9%. This increase was primarily as result of organic volume growth from our bioanalytical and GMP laboratory services as well as higher opening backlog at the beginning of the year. The higher opening backlog was primarily due to increased net authorizations in 2017.
Segment Direct Costs
Laboratory Services’ segment direct costs were $307.3 million for the year ended December 31, 2019, an increase of $48.9 million as compared to the same period in 2018. The increase in segment direct costs was primarily due to (i) a $27.9 million increase from growth in employee headcount to support current and anticipated growth in future revenue as well as compensation increases and (ii) an increase in laboratory supply costs associated with the growth in revenue.
Laboratory Services’ segment direct costs were $258.5 million in 2018, an increase of $23.3 million as compared to the same period in 2017. The increase in segment direct costs was primarily due to (i) a $19.1 million increase from growth in employee headcount to support current and anticipated growth in future revenue as well as compensation increases and (ii) an increase in laboratory supplies costs associated with the growth in revenue.
Segment Reimbursed Costs
Laboratory Services’ segment reimbursed costs were $79.1 million for the year ended December 31, 2019, an increase of $14.8 million as compared to the same period in 2018. The increase in segment reimbursed costs was primarily due to an increase in segment revenue and overall growth, as well as the general timing of costs incurred across our portfolio of work.
Laboratory Services’ segment reimbursed costs were $64.3 million for the year ended December 31, 2018. The increase in segment reimbursed costs was due to the change in segment reimbursed cost presentation discussed above which resulted in a change in presentation for the year ended December 31, 2018, but not did impact segment presentation for the year ended December 31, 2017.


11



    Segment SG&A Expenses
Laboratory Services’ segment SG&A expenses were $81.4 million for the year ended December 31, 2019, an increase of $13.1 million as compared to the same period in 2018. The increase in segment SG&A expenses was primarily due to a $9.1 million increase from growth in employee headcount to support current and anticipated growth in future revenue as well as compensation increases.
Laboratory Services’ segment SG&A expenses were $68.3 million in 2018, an increase of $8.2 million as compared to the same period in 2017. The increase in segment SG&A expenses was primarily due to an $8.3 million increase from growth in employee headcount to support current and anticipated growth in future revenue as well as compensation increases.


12
Exhibit
Exhibit 99.3

Part II

Item 8.    Financial Statements and Supplementary Data
Note: The information contained in this Item includes changes related to our segment performance measures based on changes made during the first quarter of 2020 in how the Chief Operating Decision Maker began assessing performance and making resource allocation decisions. These changes are discussed further in Note 19, “Segments.” This Item has not been updated for any other changes since the filing of the 2019 Annual Report on Form 10-K (the “2019 Form 10-K”). For developments subsequent to the filing of the 2019 Form 10-K, refer to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020.

1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of PPD, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of PPD, Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, stockholders’ deficit and redeemable noncontrolling interest, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and Schedule I (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases, and changed its method of accounting for revenue in 2018 due to the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP

Raleigh, North Carolina
March 5, 2020 (May 21, 2020, as to Note 19)

We have served as the Company’s auditor since 2002.



2

PPD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)





 
Years Ended December 31,
 
2019
 
2018
 
2017
Revenue:
 
 
 
 
 
Revenue
$
4,031,017

 
$
3,748,971

 
$
2,767,476

Reimbursed revenue

 

 
233,574

Total revenue
4,031,017

 
3,748,971

 
3,001,050

 
 
 
 
 
 
Operating costs and expenses:
 
 
 
 
 
Direct costs, exclusive of depreciation and amortization
1,484,258

 
1,333,812

 
1,302,983

Reimbursed costs
924,634


940,913


233,574

Selling, general and administrative expenses
938,806


813,035


809,333

Recapitalization costs




114,766

Depreciation and amortization
264,830


258,974


279,066

Goodwill and long-lived asset impairments
1,284


29,626


43,459

Total operating costs and expenses
3,613,812

 
3,376,360

 
2,783,181

Income from operations
417,205

 
372,611

 
217,869

Interest expense, net of interest income of $5,233, $5,454 and $3,553 in
 
 
 
 
 
 2019, 2018 and 2017, respectively
(311,744
)
 
(263,618
)
 
(253,891
)
(Loss) gain on investments
(19,043
)
 
15,936

 
92,750

Other (expense) income, net
(27,143
)
 
21,701

 
(40,259
)
Income before provision for (benefit from) income taxes
59,275

 
146,630

 
16,469

Provision for (benefit from) income taxes
2,957

 
39,579

 
(284,360
)
Income before equity in losses of unconsolidated affiliates
56,318

 
107,051

 
300,829

Equity in losses of unconsolidated affiliates, net of income taxes
(3,563
)
 
(186
)
 

Net income
52,755

 
106,865

 
300,829

Net income attributable to noncontrolling interest
(4,934
)
 
(2,679
)
 
(4,802
)
Net income attributable to PPD, Inc.
47,821

 
104,186

 
296,027

Recapitalization investment portfolio consideration
6,846

 
(7,849
)
 
(97,136
)
Net income attributable to common stockholders of PPD, Inc.
$
54,667

 
$
96,337

 
$
198,891

 
 
 
 
 
 
Earnings per share attributable to common stockholders of PPD, Inc.:
 
 
 
 
 
Basic
$
0.20

 
$
0.34

 
$
0.68

Diluted
$
0.19

 
$
0.34

 
$
0.68

Weighted-average common shares outstanding:
 
 
 
 
 
Basic
279,285

 
279,238

 
291,027

Diluted
280,693

 
279,317

 
293,826









The accompanying notes are an integral part of these consolidated financial statements.

3

PPD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)


 
Years Ended December 31,
 
2019
 
2018
 
2017
Net income
$
52,755

 
$
106,865

 
$
300,829

 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
Foreign currency translation adjustments, net of income taxes of
 
 
 
 
 
$0, $0 and $16,825 in 2019, 2018 and 2017, respectively
24,824

 
(91,177
)
 
143,158

Defined benefit pension plan adjustments, net of income taxes of
 
 
 
 
 
($259), $339 and $1,382 in 2019, 2018 and 2017, respectively
(1,314
)
 
1,504

 
10,923

Derivative instruments adjustments, net of income taxes of
 
 
 
 
 
($2,804), $2,183 and $4,785 in 2019, 2018 and 2017, respectively
(9,523
)
 
11,159

 
9,219

Other comprehensive income (loss)
13,987

 
(78,514
)
 
163,300

Comprehensive income
66,742

 
28,351

 
464,129

Comprehensive income attributable to noncontrolling interest
(5,144
)
 
(3,159
)
 
(5,315
)
Comprehensive income attributable to PPD, Inc.
61,598

 
25,192

 
458,814

Recapitalization investment portfolio consideration
6,846

 
(7,849
)
 
(97,136
)
Comprehensive income attributable to common stockholders of PPD, Inc.
$
68,444

 
$
17,343

 
$
361,678

































The accompanying notes are an integral part of these consolidated financial statements.

4

PPD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)

Assets
 
December 31,
 
2019
 
2018
Current assets:
 
 
 
Cash and cash equivalents
$
345,187

 
553,066

Accounts receivable and unbilled services, net
1,326,614

 
1,260,724

Income taxes receivable
27,437

 
16,065

Prepaid expenses and other current assets
119,776

 
102,274

Total current assets
1,819,014

 
1,932,129

 
 
 
 
Property and equipment, net
458,845

 
399,103

Investments in unconsolidated affiliates
34,028

 
8,756

Investments
250,348

 
265,715

Goodwill
1,764,104

 
1,723,378

Intangible assets, net
892,091

 
1,028,973

Other assets
156,220

 
131,307

Operating lease right-of-use assets
181,596

 

Total assets
$
5,556,246

 
$
5,489,361

Liabilities, Redeemable Noncontrolling Interest and Stockholders Deficit
Current liabilities:
 
 
 
Accounts payable
$
130,060

 
$
89,010

Accrued expenses:
 
 
 
Payables to investigators
322,231

 
355,144

Accrued employee compensation
263,834

 
240,679

Accrued interest
44,527

 
35,681

Other accrued expenses
138,632

 
108,335

Income taxes payable
15,161

 
8,953

Unearned revenue
1,110,872

 
921,964

Current portion of operating lease liabilities
45,962

 

Current portion of long-term debt and finance lease obligations
35,794

 
34,907

Total current liabilities
2,107,073

 
1,794,673

 
 
 
 
Accrued income taxes
38,465

 
26,597

Deferred tax liabilities
92,225

 
165,114

Recapitalization investment portfolio liability
191,678

 
198,524

Long-term operating lease liabilities, less current portion
153,766

 

Long-term debt and finance lease obligations, less current portion
5,608,134

 
4,760,777

Other liabilities
33,017

 
41,205

Total liabilities
8,224,358

 
6,986,890

Commitments and contingencies (Note 1)

 

Redeemable noncontrolling interest
30,036

 
24,892

Stockholders’ deficit:
 
 
 
Common stock $0.01 par value, 2,080,000 shares authorized;
 
 
 
280,127 shares issued and 279,426 shares outstanding as of
 
 
 
December 31, 2019 and 2,080,000 shares authorized;
 
 
 
279,545 shares issued and 279,030 shares outstanding as of
2,801

 
2,795

December 31, 2018
 
 
 
Treasury stock, at cost, 701 and 515 shares, respectively, at
(12,707
)
 
(8,933
)
December 31, 2019 and December 31, 2018
 
 
 
Additional paid-in-capital
1,983

 
41,685

Accumulated deficit
(2,391,321
)
 
(1,245,077
)
Accumulated other comprehensive loss
(298,904
)
 
(312,891
)
Total stockholders’ deficit
(2,698,148
)
 
(1,522,421
)
Total liabilities, redeemable noncontrolling interest and stockholders’ deficit
$
5,556,246

 
$
5,489,361


The accompanying notes are an integral part of these consolidated financial statements.

5

PPD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT AND REDEEMABLE NONCONTROLLING INTEREST
(in thousands)

 
 
 
 
 
PPD, Inc. Stockholders’ Deficit
 
 
 
 
 
Common Stock
 
Treasury Stock
 
 
 
 
 
 
 
 
Redeemable Noncontrolling Interest
 
 
Shares
 
Amount
 
Paid-in-Capital
 
Shares
 
Amount
 
Accumulated Other Comprehensive Loss
 
Accumulated Deficit
 
Total Stockholders’ Deficit
Balance, December 31, 2016
 
$
19,330

 
 
313,411

 
$
3,134

 
$
4,209

 
1,068

 
$
(9,790
)
 
$
(397,677
)
 
$
(564,117
)
 
$
(964,241
)
Net income
 
4,802

 
 

 

 

 

 

 

 
296,027

 
296,027

Other comprehensive income
 
513

 
 

 

 

 

 

 
163,300

 

 
163,300

Vesting of restricted stock
 

 
 
19

 

 

 

 

 

 

 

Issuance of common stock for stock option exercises
 

 
 
272

 
3

 
1,122

 

 

 

 

 
1,125

Repurchases of common stock
 

 
 

 

 

 
201

 
(1,808
)
 

 

 
(1,808
)
Stock-based compensation expense
 

 
 

 

 
74,299

 

 

 

 

 
74,299

Recapitalization cancellation of treasury stock
 

 
 
(1,268
)
 
(12
)
 
5

 
(1,269
)
 
11,598

 

 
(11,591
)
 

Recapitalization share issuances
 

 
 
184,080

 
1,841

 
769,098

 

 

 

 
1,999,062

 
2,770,001

Recapitalization share redemptions
 

 
 
(219,958
)
 
(2,200
)
 
(778,100
)
 

 

 

 
(2,529,576
)
 
(3,309,876
)
Recapitalization cash option settlement
 

 
 

 

 
(52,207
)
 

 

 

 
(142,299
)
 
(194,506
)
Recapitalization share option settlement
 

 
 
2,391

 
23

 
(10
)
 

 

 

 
(13
)
 

Recapitalization investment portfolio consideration
 

 
 

 

 

 

 

 

 
(217,170
)
 
(217,170
)
Recapitalization tax benefit consideration
 

 
 

 

 

 

 

 

 
(105,159
)
 
(105,159
)
Recapitalization transaction costs
 

 
 

 

 

 

 

 

 
(7,279
)
 
(7,279
)
Employee stock purchases
 

 
 
496

 
5

 
7,462

 

 

 

 

 
7,467

Purchase of noncontrolling interest
 
(2,912
)
 
 

 

 
(3,888
)
 

 

 

 

 
(3,888
)
Other
 

 
 

 

 
28

 

 

 

 

 
28

Balance, December 31, 2017
 
21,733

 
 
279,443

 
2,794

 
22,018

 

 

 
(234,377
)
 
(1,282,115
)
 
(1,491,680
)
Impact from adoption of ASC 606, net of tax
 

 
 

 

 

 

 

 

 
(55,467
)
 
(55,467
)
Balance, January 1, 2018
 
21,733

 
 
279,443

 
2,794

 
22,018

 

 

 
(234,377
)
 
(1,337,582
)
 
(1,547,147
)
Net income
 
2,679

 
 

 

 

 

 

 

 
104,186

 
104,186

Other comprehensive income (loss)
 
480

 
 

 

 

 

 

 
(78,514
)
 

 
(78,514
)
Vesting of restricted stock
 

 
 
9

 

 

 

 

 

 

 

Issuance of common stock for stock option exercises
 

 
 
61

 
1

 
922

 

 

 

 

 
923

Repurchases of common stock
 

 
 

 

 

 
515

 
(8,933
)
 

 

 
(8,933
)
Stock-based compensation expense
 

 
 

 

 
18,265

 

 

 

 

 
18,265

Recapitalization investment portfolio consideration
 

 
 

 

 

 

 

 

 
(7,849
)
 
(7,849
)
Recapitalization tax benefit consideration
 

 
 

 

 

 

 

 

 
(3,161
)
 
(3,161
)
Employee stock purchases
 

 
 
32

 

 
480

 

 

 

 

 
480

Other
 

 
 

 

 

 

 

 

 
(671
)
 
(671
)
Balance, December 31, 2018
 
24,892

 
 
279,545

 
2,795

 
41,685

 
515

 
(8,933
)
 
(312,891
)
 
(1,245,077
)
 
(1,522,421
)
Net income
 
4,934

 
 

 

 

 

 

 

 
47,821

 
47,821

Other comprehensive income
 
210

 
 

 

 

 

 

 
13,987

 

 
13,987

Vesting of restricted stock
 

 
 
13

 

 

 

 

 

 

 

Issuance of common stock for stock option exercises
 

 
 
301

 
3

 
4,521

 

 

 

 

 
4,524

Issuance of common stock for acquisition
 

 
 
268

 
3

 
4,998

 

 

 

 

 
5,001

Repurchases of common stock
 

 
 

 

 

 
186

 
(3,774
)
 

 

 
(3,774
)
Stock-based compensation expense
 

 
 

 

 
15,632

 

 

 

 

 
15,632

Modification of stock option awards to cash and liability awards
 

 
 

 

 
(19,669
)
 

 

 

 

 
(19,669
)
Return of capital and special dividend to stockholders
 

 
 

 

 
(45,184
)
 

 

 

 
(1,200,816
)
 
(1,246,000
)
Recapitalization investment portfolio consideration
 

 
 

 

 

 

 

 

 
6,846

 
6,846

Other
 

 
 

 

 

 

 

 

 
(95
)
 
(95
)
Balance, December 31, 2019
 
$
30,036

 
 
280,127

 
$
2,801

 
$
1,983

 
701

 
$
(12,707
)
 
$
(298,904
)
 
$
(2,391,321
)
 
$
(2,698,148
)
The accompanying notes are an integral part of these consolidated financial statements.

6

PPD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)


 
Years Ended December 31,
 
2019
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
 
Net income
$
52,755

 
$
106,865

 
$
300,829

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

Depreciation and amortization
264,830

 
258,974

 
279,066

Goodwill and long-lived asset impairments
1,284

 
29,626

 
43,459

Stock-based compensation expense
15,632

 
18,265

 
74,299

Non-cash operating lease expense
40,633

 

 

Amortization of debt issuance and modification costs and debt discount
17,768

 
10,082

 
9,001

Amortization of accumulated other comprehensive income on terminated interest rate swaps
(9,523
)
 
(5,269
)
 

Loss (gain) on investments
19,043

 
(15,936
)
 
(92,750
)
Benefit from deferred income taxes
(84,795
)
 
(26,062
)
 
(317,385
)
Amortization of costs to obtain a contract
11,432

 
8,693

 

Other
12,929

 
(11,691
)
 
2,834

Change in operating assets and liabilities, net of effect of businesses acquired or sold:
 
 

 

Accounts receivable and unbilled services, net
(28,075
)
 
(144,822
)
 
(12,300
)
Prepaid expenses and other current assets
(11,465
)
 
18,510

 
36,787

Other assets
(31,288
)
 
(26,819
)
 
(37,118
)
Income taxes, net
7,712

 
606

 
(10,278
)
Accounts payable, accrued expenses and other liabilities
26,283

 
(4,443
)
 
102,974

Operating lease liabilities
(39,065
)
 

 

Unearned revenue
166,856

 
206,827

 
(20,339
)
Net cash provided by operating activities
432,946

 
423,406

 
359,079

Cash flows from investing activities:
 
 
 
 
 
Purchases of property and equipment
(125,928
)
 
(116,145
)
 
(105,135
)
Acquisitions of businesses, net of cash and cash equivalents acquired
(74,187
)
 
224

 
(24,219
)
Capital contributions paid for investments
(4,069
)
 
(1,546
)
 
(1,844
)
Distributions received from investments
452

 
27,778

 
36,397

Investments in unconsolidated affiliates
(30,000
)
 
(9,000
)
 

Proceeds from sale of business

 
8,000

 

Other
504

 
164

 
2,058

Net cash used in investing activities
(233,228
)
 
(90,525
)
 
(92,743
)
Cash flows from financing activities:
 
 
 
 
 
Purchase of treasury stock
(4,012
)
 
(8,630
)
 
(1,808
)
Proceeds from exercise of stock options
4,524

 
923

 
1,125

Proceeds from issuance of HoldCo notes
891,000

 

 
550,000

Payments on long-term debt and finance leases
(37,409
)
 
(35,387
)
 
(35,012
)
Purchase of noncontrolling interest

 

 
(7,080
)
Payment of debt issuance and debt modification costs
(30,142
)
 

 
(11,939
)
Proceeds from recapitalization share issuance

 

 
2,770,001

Payout for recapitalization share redemptions

 

 
(3,309,876
)
Recapitalization cash option settlement

 

 
(194,506
)
Recapitalization transaction costs

 

 
(7,279
)
Recapitalization tax benefit distribution

 
(108,320
)
 

Recapitalization investment portfolio distribution

 
(16,008
)
 
(10,486
)
Proceeds from employee stock purchases

 
480

 
7,467

Return of capital and special dividend to stockholders
(1,246,000
)
 

 

Net cash used in financing activities
(422,039
)
 
(166,942
)
 
(249,393
)
Effect of exchange rate changes on cash and cash equivalents
14,442

 
(31,833
)
 
40,276

Net (decrease) increase in cash and cash equivalents
(207,879
)
 
134,106

 
57,219

Cash and cash equivalents, beginning of the period
553,066

 
418,960

 
361,741

Cash and cash equivalents, end of the period
$
345,187

 
$
553,066

 
$
418,960




The accompanying notes are an integral part of these consolidated financial statements.

7

PPD, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in tables in thousands, except per share data)

 
1.    Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation    
Description of Business
PPD, Inc. (together with its subsidiaries “PPD” or the “Company”) is a holding company incorporated in Delaware. References to the “Company” throughout these consolidated financial statements refer to PPD, Inc. and its consolidated subsidiaries. The Company is a leading provider of drug development services to the biopharmaceutical industry, focused on helping the Company’s customers bring their new medicines to patients around the world. The Company has been in the drug development services business for more than 30 years, providing a comprehensive suite of clinical development and laboratory services to pharmaceutical, biotechnology, medical device, government organizations and other industry participants. The Company has deep experience across a broad range of rapidly growing areas of drug development and engages with customers through a variety of commercial models, including both full-service and functional service partnerships and other offerings tailored to address the specific needs of the Company’s customers. The Company has two reportable segments, Clinical Development Services (“Clinical Development Services”) and Laboratory Services (“Laboratory Services”).
Basis of Presentation
On May 11, 2017, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) dated as of April 26, 2017, by and among PPD, Eagle Holding Company II, LLC (“Eagle II”), Eagle Reorganization Merger Sub, Inc. (“Merger Sub”), Eagle Buyer, Inc. (“Buyer”) and Jaguar Holding Company I (“Jaguar I”), Merger Sub merged with and into Jaguar I with Jaguar I as the surviving corporation (the “Reorganization Merger”). As a result of the Reorganization Merger, Jaguar I became a direct, wholly-owned subsidiary of Eagle II, itself a direct wholly-owned subsidiary of PPD, and Jaguar I and Jaguar Holding Company II (“Jaguar II”) both became indirect, wholly-owned subsidiaries of PPD. Subsequent to the Reorganization Merger, Jaguar I was converted from a Delaware corporation into a Delaware limited liability company (the “Conversion”) and Buyer merged with and into PPD, with PPD as the surviving corporation (the “Recapitalization Merger”). A series of transactions associated with the Reorganization Merger and Recapitalization Merger took place to effect a recapitalization of Jaguar I (the Reorganization Merger and the Recapitalization Merger, collectively, the “Recapitalization”). PPD, Eagle II, Merger Sub and Buyer were incorporated or formed by affiliates of The Carlyle Group, Inc. (“Carlyle”) and affiliates of Hellman & Friedman LLC (“H&F”) (Carlyle and H&F, collectively, the “Majority Sponsors”) to effect the Recapitalization. Jaguar I and Jaguar II were incorporated or formed by affiliates of the Majority Sponsors to effect the acquisition of Pharmaceutical Product Development, Inc. on December 5, 2011. Subsequent to the acquisition on December 5, 2011, Pharmaceutical Product Development, Inc. was reorganized into a Delaware limited liability company and changed its name to Pharmaceutical Product Development, LLC (“PPD LLC”).
Prior to the Recapitalization, Jaguar I was majority owned and jointly controlled by affiliates of the Majority Sponsors. Subsequent to the Recapitalization, PPD, and indirectly, Jaguar I, continue to be majority owned and jointly controlled by affiliates of the Majority Sponsors, both having invested from new investment funds into PPD. Additionally, two investors, an affiliate of the Abu Dhabi Investment Authority (“ADIA”) and an affiliate of GIC Private Limited (“GIC”), one of Singapore’s sovereign wealth funds, both obtained direct minority ownership interests in PPD (H&F, Carlyle, ADIA and GIC, collectively, the “Sponsors”). See Note 2, “Recapitalization Transaction,” for additional information on the Recapitalization.
The Recapitalization was treated as a recapitalization for accounting purposes with the basis of the assets and liabilities of Jaguar I remaining unchanged. Prior to the Recapitalization, PPD had no assets, liabilities or operating results and it was incorporated on April 13, 2017, for the sole purpose of effectuating the Recapitalization. The Recapitalization resulted in PPD being the continuing reporting entity for Jaguar I with no changes in the underlying business or operations of the Company. Therefore, the historical information and financial results reported in the consolidated financial statements represent the historical information and financial results for Jaguar I and its subsidiaries prior to the Recapitalization. No changes have been made to the Jaguar I historical information and financial results. When references are made in the consolidated financial statements to prior financial statements of the Company for periods prior to the Recapitalization, such financial statements referenced represent the historical consolidated financial statements of Jaguar I.
    

8

PPD, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in tables in thousands, except per share data)

On January 15, 2020, the Company filed its amended and restated certificate of incorporation, which, among other things, effected a 1.8-for-1 stock split of its common stock and increased the authorized number of shares of its common stock to 2.08 billion. All references to share and per share amounts in the Company’s consolidated financial statements have been retrospectively revised to reflect the stock split and increase in authorized shares. See Note 22, “Subsequent Events,” for additional information.
Initial Public Offering
On February 6, 2020, the Company’s common stock began trading on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “PPD.” On February 10, 2020, the Company completed its initial public offering (“IPO”) of its common stock at a price to the public of $27.00 per share. The Company issued and sold 69.0 million shares of common stock in the IPO including 9.0 million common shares issued pursuant to the full exercise of the underwriters option to purchase additional shares. The IPO raised proceeds to the Company of approximately $1,765.7 million, after deducting underwriting discounts and other offering expenses. See Note 22, “Subsequent Events,” for additional information.
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts and operations of the Company. All intercompany balances and transactions have been eliminated in consolidation. Amounts pertaining to the redeemable noncontrolling ownership interest held by a third party in the operating results and financial position of the Company’s indirect majority-owned subsidiary are included as a noncontrolling interest.
Use of Estimates
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company monitors estimates and assumptions on a continuous basis and updates these estimates and assumptions as facts and circumstances change and new information is obtained. Actual results could differ from those estimates and assumptions.
Revenue Recognition    
Revenue recognition under ASC 606
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued, as amended, Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). The new guidance outlined a single comprehensive model for entities to use in accounting for revenue from contracts with customers. The Company adopted ASC 606 on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The consolidated financial statements as of and for the years ended December 31, 2019 and 2018 reflect the application of ASC 606, while the consolidated financial statements for the year ended December 31, 2017 reflect accounting guidance from the application of ASC Topic 605, Revenue Recognition (“ASC 605”).
The Company enters into contracts with customers to provide services in which contract consideration is generally
based on fixed-fee or variable pricing arrangements. The Company recognizes revenue arising from contracts with customers in an amount that reflects the consideration that the Company expects to receive in exchange for the services it provides. The Company determines its revenue recognition through the following five steps: (i) identification of the contract with a customer, (ii) identification of the performance obligations in the contract, (iii) determination of the transaction price, (iv) allocation of the transaction price to the performance obligations in the contract and (v) recognition of revenue when, or as, the Company satisfies its performance obligations in the contract. The Company’s contracts are service contracts that generally have a duration of a few months to several years with revenue being recognized primarily over time as services are provided to the customer in satisfaction of its performance obligations.
    




9

PPD, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in tables in thousands, except per share data)

The majority of the Company’s contracts can be terminated by the customer either immediately or after a specified notice period. Upon early termination, the contracts generally require the customer to pay the Company for: (i) consideration earned through the termination date, which is consistent with the level of cost and effort expended through the termination date, (ii) consideration for services to complete the work still required to be performed and reimbursement for other related expenses, as applicable, (iii) reimbursement for certain non-cancelable expenditures and (iv) in certain cases, payment to cover a portion of the total consideration under the contract or a termination penalty.
Changes to the scope of the Company’s services are common, especially under long-term contracts, and a change in the scope of services generally results in a change in the transaction price. Changes in scope are reflected through contract modifications which are assessed on a contract-by-contract basis to determine if they should be accounted for as a new contract or part of the original contract. Generally, contract modifications are accounted for as part of the existing contract as the services to be provided for the modification are not distinct from the existing services provided under the contract. When contract modifications are accounted for as part of the existing contract, the effect of the contract modification on the transaction price and measure of progress under the contract is recognized as a cumulative adjustment to revenue as of the date of the modification.
In many cases, the Company’s contracts include variable consideration that is contingent upon the occurrence of future events, such as volume rebates, performance incentives and performance penalties or other variable consideration such as third-party pass-through and out-of-pocket costs incurred, which may impact the transaction price. Variable consideration is estimated using the expected value or the most likely amount of consideration and is included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The estimation of variable consideration is based on the Company’s expected performance under the contract and where applicable, available historical, current and forecasted information to support such estimate. Actual results could differ significantly from estimates.
The Company incurs third-party pass-through and out-of-pocket costs in the performance of services under its contracts which are reimbursed by the customer. Third-party pass-through and out-of-pocket costs include, but are not limited to, payments to investigators, payments for the use of third-party technology, shipping costs and travel costs related to the performance of services, among others. The Company records third-party pass-through and out-of-pocket costs as revenue and the related costs incurred as reimbursed costs on the consolidated statements of operations. These reimbursed costs are included as revenue as the Company is the principal in the relationship, is primarily responsible for the services provided by third parties and significantly integrates the services of third parties with its own services in delivering a combined output to the customer. The Company excludes from revenue amounts collected and paid to governmental authorities, such as value-added taxes, that are associated with revenue transactions. All of the Company’s revenue is from contracts with customers. See Note 3, “Revenue,” for additional information.
Revenue recognition under ASC 605
Prior to the adoption of ASC 606 on January 1, 2018, the Company recognized revenue for services when all of the following criteria had been satisfied: (i) persuasive evidence of an arrangement existed, (ii) services had been rendered, (iii) the price to the customer was fixed or determinable and (iv) collectability was reasonably assured. The Company entered into contracts with customers to provide services in which contract consideration was generally based on fixed-fee or variable pricing arrangements and contracts generally had a duration of a few months to several years. The Company’s contracts generally included multiple service deliverables including trial feasibility, investigator recruitment, clinical trial monitoring, project management, database management and biostatistical services and laboratory testing, among others. If each service deliverable within the contract had standalone value to the customer, each was treated as a separate unit of accounting. If each service deliverable did not have standalone value to the customer, the service deliverables were combined into a single unit of accounting.
    






10

PPD, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in tables in thousands, except per share data)

For those contracts with multiple units of accounting, the Company allocated contract consideration based on the relative selling price of the separately identified units of accounting. The relative selling price method required a hierarchy of evidence to be followed when determining the best evidence of the selling price of a deliverable. The best evidence of selling price for a unit of accounting was vendor-specific objective evidence (“VSOE”), or the price charged when a deliverable was sold separately on a standalone basis. When VSOE was not available, relevant third-party evidence (“TPE”) of selling price was used, such as prices competitors charge for interchangeable services to similar customers. When neither VSOE nor TPE of selling price existed, the Company used its best estimate of selling price (“BESP”) considering all relevant information that was available without undue cost or effort. Generally, the Company was not able to establish VSOE or TPE of selling price for its service deliverables due to its service deliverables with multiple units of accounting being highly customized, the variability in prices charged to customers and the lack of available competitor information. Therefore, the Company generally allocated consideration at the inception of the contract using BESP. BESP was generally established based on market factors and conditions and Company specific factors such as profit objectives, internal cost structure, market share and position and geographic region, among other factors.
The majority of the Company’s clinical development services contracts are fixed-fee, fee-for-service or time and materials contracts for clinical trial related services that represent a single unit of accounting. The Company primarily used the proportional performance method to recognize revenue for delivery of services for such contracts. Because of the service nature of the Company’s contracts, the Company believed that direct costs incurred reflected the hours incurred with hours representing the output of contracts. Thus, to measure performance under the proportional performance method, the Company compared direct costs incurred through a specified date to estimated total direct costs to complete the contract. Direct costs consisted primarily of the amount of direct labor and certain overhead costs for the delivery of services. The Company reviewed and revised the estimated total direct costs throughout the life of the contract, and recorded adjustments to revenue resulting from such revisions in the period in which the change in estimate was determined. This methodology was consistent with the manner in which the customer received the benefit of the work performed and was consistent with the Company’s contract termination provisions.
The majority of the Company’s laboratory services contracts are fixed-fee, fee-for-service or time and materials contracts that generally include multiple units of accounting. For those contracts with multiple service deliverables, the Company followed the relative selling price method to allocate contract consideration and recognized revenue as services were delivered once all other revenue recognition criteria were met.
The Company also incurred third-party pass-through and out-of-pocket costs which were generally reimbursable by its customers at cost. Prior to the adoption of ASC 606, third-party pass-through revenue and costs were presented on a net basis and out-of-pocket revenues and cost were presented on a gross basis as reimbursed revenue and reimbursed cost on the consolidated statements of operations. Additionally, third-party pass-through and out-of-pocket costs were excluded from the costs used in the measure of progress for contracts utilizing the proportional performance method to recognize revenue and revenue related to these reimbursed costs was recognized when the cost was incurred. The Company excluded from revenue amounts collected and paid to governmental authorities, such as value-added taxes, that were associated with revenue transactions.
Operating Costs and Expenses
Direct costs represent costs for providing services to customers. Direct costs primarily include labor-related costs, such as compensation and benefits for employees providing services, an allocation of facility and information technology costs, supply costs, cost for certain media-related services, other related overhead costs and offsetting research and development incentive credits.
Reimbursed costs include third-party pass-through and out-of-pocket costs which are generally reimbursable by the Company’s customers at cost. Third-party pass-through and out-of-pocket costs include, but are not limited to, payments to investigators, payments for the use of third-party technology, shipping costs and travel costs related to the performance of services, among others. Third-party pass-through and out-of-pocket costs are incurred across both reportable segments.
Selling, general and administrative (“SG&A”) expenses represent costs of business development, administrative and support functions. SG&A expenses primarily include compensation and benefits for employees, costs related to employees performing administrative tasks, stock-based compensation expense, sales, marketing and promotional expenses, recruiting and relocation expenses, training costs, travel costs, an allocation of facility and information technology costs and other related overhead costs.
    

11

PPD, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in tables in thousands, except per share data)

Leases
In February 2016, the FASB issued an accounting standards update, as amended, on leases, ASC Topic 842, Leases (“ASC 842”). The new guidance requires recognition of, at the lease commencement date, a liability for future lease payments and a corresponding right-of-use (“ROU”) asset on the balance sheet representing the lessee’s right to use the underlying asset for the lease term. The Company adopted ASC 842 on January 1, 2019 using the modified retrospective method for all operating leases and capital leases under ASC Topic 840, Leases (“ASC 840”). As a result of the adoption of ASC 842, all operating leases with an initial term of greater than one year are recorded on the consolidated balance sheets as a lease liability and a corresponding ROU asset. The Company elected certain practical expedients which allows the Company not to reassess: (i) whether any expired or existing contracts contain a lease, (ii) the lease classification for any expired or existing leases and (iii) whether any previously capitalized initial direct costs would qualify for capitalization. The Company also made an accounting policy election to not recognize lease liabilities and associated ROU assets for all existing short-term leases at the time of adoption.
The adoption of ASC 842 resulted in the initial recognition of lease liabilities of $196.3 million and ROU assets of $179.7 million related to operating leases. The operating lease liabilities included $39.7 million of current lease liabilities and $156.6 million in long-term lease liabilities. Previously, under ASC 840, the Company had deferred rent, prepaid rent and unearned lease incentives, net totaling $16.6 million, that were reclassified to ROU assets at the time of adoption. There were no changes to the assets and liabilities of finance leases as a result of the adoption of ASC 842, previously referred to as capital leases under ASC 840. See Note 11, “Leases” for the Company’s lease accounting policies under ASC 842. The consolidated financial statements as of, and for the year ended December 31, 2019, reflect the application of ASC 842, while the consolidated financial statements for the prior periods reflect previous accounting guidance from the application of ASC 840.
Stock-Based Compensation
The Company measures stock-based compensation cost at the grant date, based on the fair value of the award, and recognizes it as expense (net of actual forfeitures as they occur) over the recipient’s requisite service period considering performance features, if any, that may impact vesting of such award. The Company estimates the fair value of each stock option award on the grant date using the Black-Scholes option-pricing model. The model requires the use of subjective and objective assumptions, including the fair value of the Company’s common stock on the date of grant, expected term of the award, expected stock price volatility, expected dividends and risk-free interest rate. The Company recognizes all excess tax benefits or tax deficiencies associated with stock-based awards discretely in its provision for (benefit from) income taxes. See Note 4, “Stock-based Compensation,” for additional information.
Other (Expense) Income, Net
The components of other (expense) income, net, were as follows:
 
Years Ended December 31,
 
2019
 
2018
 
2017
Other (expense) income, net:
 
 
 
 
 
Foreign currency (losses) gains, net
$
(24,659
)
 
$
16,682

 
$
(40,132
)
Other income
3,778

 
8,728

 
706

Other expense
(6,262
)
 
(3,709
)
 
(833
)
Total other (expense) income, net
$
(27,143
)
 
$
21,701

 
$
(40,259
)
Cash and Cash Equivalents
Cash and cash equivalents consist of unrestricted cash accounts that are not subject to withdrawal restrictions or penalties and all highly liquid investments that have a maturity of three months or less at the date of purchase.







12

PPD, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in tables in thousands, except per share data)

Supplemental cash flow information consisted of the following:
 
2019
 
2018
 
2017
Cash paid for interest (for the years ended December 31)
$
300,528

 
$
262,921

 
$
238,826

Cash paid for income taxes, net (for the years ended December 31)
72,510

 
64,714

 
43,438

Purchases of property and equipment in current liabilities (as of December 31)
29,924

 
17,461

 
22,725

Accounts Receivable, Unbilled Services and Unearned Revenue
In the normal course of business, the Company generally establishes prerequisites for billings based on contractual
provisions, including payment schedules, the completion of milestones or the submission of appropriate billing detail based on the performance of services during a specified period. Payment for the Company’s services may or may not coincide with the recognition of revenue. The Company’s intent with its invoicing and payment terms is not to provide financing to the customer or receive financing from the customer. Payment terms with customers are short-term, as payment for services is typically due less than one year from the date of billing.
Accounts receivable represents amounts for which invoices have been provided to customers pursuant to contractual terms. Unbilled services represent revenue earned and recognized for services performed to date for which amounts have not yet been billed to the customer pursuant to contractual terms. Contract assets represent unbilled services where the Company's right to bill includes something other than the passage of time, such as the satisfaction of milestones related to a performance obligation for services. Contract assets are recorded as part of accounts receivable and unbilled services, net, on the consolidated balance sheets.
The Company records unearned revenue, also referred to as contract liabilities, for amounts collected from or billed to customers in excess of revenue recognized. The Company reduces unearned revenue and recognizes revenue as the related performance obligations for services are performed. Unearned revenue and contract assets are recorded net on a contract-by-contract basis at the end of each reporting period.
Allowance for Doubtful Accounts
The Company’s allowance for doubtful accounts is based on a variety of factors including an assessment of risk, historical experience, length of time the accounts receivable are past due and specific customer collection information. The Company performs periodic credit evaluations of customers’ financial condition and continually monitors collections and payments from its customers. The Company writes off uncollectible invoices when appropriate collection efforts have been exhausted. The allowance for doubtful accounts is included in accounts receivable and unbilled services, net on the consolidated balance sheets. 
Property and Equipment
The Company records property and equipment at cost less accumulated depreciation and amortization. The Company records depreciation and amortization using the straight-line method, based on the following estimated useful lives:
Buildings
20-40 years
Furniture and equipment
4-18 years
Computer equipment and software
1-5 years
The Company depreciates leasehold improvements over the shorter of the remaining lease term or the estimated useful lives of the improvements. The Company capitalizes internal use software development costs incurred during the application development stage, while it expenses all other preliminary stage and post implementation-operation stage costs, including planning, training and maintenance costs as incurred. The Company amortizes software developed or obtained for internal use, including software licenses obtained through a cloud computing arrangement, over the estimated useful life of the software or the term of the licensing or service agreement.

13

PPD, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in tables in thousands, except per share data)

The Company reviews property and equipment for impairment when events and circumstances indicate that the carrying amount of property and equipment might not be recoverable. This evaluation involves various analyses, including undiscounted cash flow projections. In the event undiscounted cash flow projections or other analysis indicate that the carrying amount of property and equipment is not recoverable, the Company records an impairment reducing the carrying value of the property or equipment to its estimated fair value. The Company estimates fair value based on generally accepted valuation techniques, including income and market approaches. These approaches may include a discounted cash flow income model, use of market information of fair value, such as recent sales or market comparables, and other generally accepted approaches. The Company depreciates or amortizes the revised fair value of the property and equipment over the remaining estimated useful life. The valuation of long-lived assets at estimated fair value, when required, is performed using Level 2 or Level 3 fair value inputs.
Goodwill
Goodwill is allocated to each identified reporting unit, which is defined as an operating segment or one level below the operating segment (referred to as a component of the entity). The Company assigns to goodwill the excess of the fair value of consideration conveyed for a business acquired over the fair value of identifiable net assets acquired. The Company reviews goodwill for impairment annually during the fourth quarter, and more frequently if impairment indicators arise. Impairment indicators include events or changes in circumstances that would more likely than not reduce the fair value of a reporting unit with assigned goodwill below its carrying amount. The Company monitors events and changes in circumstances on a continuous basis between annual impairment testing dates to determine if any events or changes in circumstances indicate potential impairment.
The Company performs a qualitative assessment to determine whether it is more likely than not that the estimated fair value of a reporting unit is greater than its carrying value. The qualitative analysis includes an assessment of macroeconomic conditions, industry and market specific considerations, internal cost factors, financial performance, fair value history and other Company specific events. If the qualitative analysis indicates that it is more likely than not that the estimated fair value is less than the carrying value for the reporting unit, the Company performs a quantitative analysis of the reporting unit. If based on the qualitative analysis it is more likely than not that the reporting unit’s estimated fair value exceeds its carrying value, no further analysis is required.
When the Company performs a quantitative analysis, the Company estimates the fair value of each reporting unit using generally accepted valuation techniques, which include a weighted combination of income and market approaches. The income approach incorporates a discounted cash flow model in which the estimated future cash flows of the reporting unit are discounted using an appropriately risk-adjusted weighted-average cost of capital. The forecasts used in the discounted cash flow model for each reporting unit are based in part on strategic plans and represent the Company’s estimates based on current and forecasted business and market conditions. The market approach considers the Company’s results of operations and information about the Company’s publicly traded competitors, such as earnings multiples, making adjustments to the selected competitors based on size, strengths and weaknesses, as well as publicly announced acquisition transactions. The determination of fair value for each reporting unit requires significant judgments and estimates and actual results could be materially different than those judgments and estimates resulting in goodwill impairment. If the reporting unit’s carrying value exceeds the estimated fair value, a goodwill impairment loss must be recognized in an amount equal to that