Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from        to    
Commission file number: 001-39212
PPD, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
45-3806427
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
929 North Front Street, Wilmington, North Carolina 28401
(Address of Principal Executive Offices) (Zip Code)
910-251-0081
Registrant's telephone number, including area code
————————————————
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 (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x   No  o 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   x   No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer  
x
Smaller reporting company
o
 
 
Emerging growth company
o
                
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes  o   No  x 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Number of Shares Outstanding
Common Stock $0.01 par value
 
349,654,449 shares outstanding as of October 26, 2020




When we use the terms “PPD,” the “Company,” “we,” “us” or “our” in this Quarterly Report on Form 10-Q, we mean PPD, Inc. and its subsidiaries on a consolidated basis, unless the context indicates otherwise.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements reflect, among other things, our current expectations and anticipated results of operations, all of which are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, market trends, or industry results to differ materially from those expressed or implied by such forward-looking statements. Therefore, any statements contained herein that are not statements of historical fact may be forward-looking statements and should be evaluated as such.
These statements often include words such as “anticipate,” “expect,” “suggest,” “plan,” “believe,” “intend,” “project,” “forecast,” “estimates,” “targets,” “projections,” “should,” “could,” “would,” “may,” “might,” “will,” and other similar expressions including forward-looking statements about the impact from the novel coronavirus disease (the “COVID-19 pandemic”). We base these forward-looking statements on our current expectations, plans and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances at this time, including the impact from the COVID-19 pandemic. As you read this Quarterly Report on Form 10-Q, you should understand that these statements are not guarantees of performance or results. The forward-looking statements contained herein are subject to and involve risks, uncertainties and assumptions and you should not place undue reliance on these forward-looking statements. Although we believe that these forward-looking statements are based on reasonable assumptions at the time they are made, actual results might differ materially from those expressed in the forward-looking statements. Factors that might materially affect such forward-looking statements include:
the magnitude, continued duration, geographic reach and ongoing impact on the global economy and capital and credit markets of the COVID-19 pandemic;
the current and uncertain future impact from the COVID-19 pandemic on our business, growth, reputation, prospects, financial condition, results of operations (including components of our financial results), cash flows and liquidity;
the fragmented and highly competitive nature of the drug development services industry;
changes in trends in the biopharmaceutical industry, including decreases in research and development spending and outsourcing;
our ability to keep pace with rapid technological changes that could make our services less competitive or obsolete;
the United States and international healthcare industry is subject to political, economic and/or regulatory influences and changes, such as healthcare reform, all of which could adversely affect both our customers’ and our businesses;
any failure of our backlog to accurately predict or convert into future revenue;
the fact that our customers can terminate, delay or reduce the scope of our contracts with them upon short notice or with no notice;
the impact of industry, customer and therapeutic area concentration;
our ability to accurately price our contracts and manage our costs associated with performance of such contracts;
any failures in our information and communication systems, including cybersecurity breaches, impacting us or our customers, clinical trial participants or employees;
any failure to perform services in accordance with contractual requirements, regulatory standards and ethical standards;
our ability to recruit, retain and motivate key personnel, including the loss of any key executive who becomes seriously ill with COVID-19;
our ability to access clinical research sites, attract suitable investigators or enroll a sufficient number of patients (including as a result of the COVID-19 pandemic) for our customers’ clinical trials;
any failure by us to comply with numerous privacy laws;
our dependence on third parties for critical goods and support services, including a significant impact from the COVID-19 pandemic on our suppliers;
our dependence on our technology network, and the impact from upgrades to the network;
any violation of laws, including laws governing the conduct of clinical trials or other biopharmaceutical research, and anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act and the United Kingdom Bribery Act of 2010;
competition between our existing and potential customers and the potential negative impact on our business;
our management of business restructuring transactions and the integration of acquisitions;

2


risks related to the drug development services industry that could result in potential liability that could affect our business, reputation and financial condition;
any failure of our insurance to cover the potential liabilities, including indemnification obligations, associated with the operation of our business and provision of services;
our use of biological and hazardous materials, which could violate law or cause injury or death, resulting in liability;
disruptions to our operations by the occurrence of a natural disaster, pandemic (such as the COVID-19 pandemic), or other catastrophic events;
international or U.S. economic, currency, political and other risks, such as those from the COVID-19 pandemic;
economic conditions and regulatory changes relating to the United Kingdom’s exit from the European Union;
any inability to adequately protect our intellectual property or the security of our systems and the data stored therein;
consolidation amongst our customers, and the potential for rationalization of the combined drug development pipeline, resulting in fewer products in clinical development;
any patent or other intellectual property litigation we might be involved in;
changes in tax laws, such as U.S. tax reform, or interpretations of existing tax laws;
our investments in third parties, which are illiquid and subject to loss;
the substantial value of our goodwill and intangible assets, which we might not fully realize, resulting in impairment losses;
difficult and volatile conditions in the capital and credit markets and in the overall economy, including those caused by the COVID-19 pandemic;
risks related to our indebtedness;
risks related to ownership of our common stock;
the significant influence certain stockholders have over us; and
other factors beyond our control.
These cautionary statements should not be construed by you to be exhaustive and are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For further discussion of the risks relating to our business, see Part II, Item 1A, “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q, as well as Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.

3


PPD, INC.
FORM 10-Q
TABLE OF CONTENTS

Item
 
Page
 
 
 
 
PART I - FINANCIAL INFORMATION
 
1.
 
 
 
 
 
 
 
 
 
 
 
 
2.
3.
4.
 
 
 
 
PART II - OTHER INFORMATION
 
1.
1A.
2.
3.
4.
5.
6.




4


PART I - FINANCIAL INFORMATION
Item 1.     Financial Statements (unaudited)
PPD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
 
Three Months Ended September 30,
 
Nine Months Ended 
 September 30,
 
2020
 
2019
 
2020
 
2019
Revenue
$
1,233,802

 
$
1,023,864

 
$
3,317,182

 
$
2,984,133

 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 
 
 
 
 
 
Direct costs, exclusive of depreciation and amortization
433,422

 
369,476

 
1,222,700

 
1,112,181

Reimbursed costs
335,866

 
241,804

 
810,523

 
688,696

Selling, general and administrative expenses
249,320

 
226,996

 
734,712

 
681,431

Depreciation and amortization
71,317

 
66,889

 
206,395

 
197,896

Long-lived asset impairment
1,414

 

 
1,414

 

Total operating costs and expenses
1,091,339

 
905,165

 
2,975,744

 
2,680,204

Income from operations
142,463

 
118,699

 
341,438

 
303,929

Interest expense, net of interest income of $433 and $1,089 for the three
 
 
 
 
 
 
 
months ended September 30, 2020 and 2019, respectively, and $1,996 and
 
 
 
 
 
 
 
$4,383 for the nine months ended September 30, 2020 and 2019, respectively
(49,882)
 
(85,754
)
 
(165,995
)
 
(229,147
)
Loss on extinguishment of debt

 

 
(93,534
)
 

(Loss) gain on investments
(53,100
)
 
(15,106
)
 
16,649

 
(22,716
)
Other (expense) income, net
(17,153
)
 
9,157

 
(14,097
)
 
(3,158
)
Income before provision for income taxes
22,328

 
26,996

 
84,461

 
48,908

Provision for income taxes
11,169

 
9,044

 
20,682

 
12,387

Income before equity in losses of unconsolidated affiliates
11,159

 
17,952

 
63,779

 
36,521

Equity in losses of unconsolidated affiliates, net of income taxes
(2,057
)
 
(1,370
)
 
(5,686
)
 
(2,060
)
Net income
9,102

 
16,582

 
58,093

 
34,461

Net income attributable to noncontrolling interest
(1,587
)
 
(1,161
)
 
(4,499
)
 
(3,390
)
Net income attributable to PPD, Inc.
7,515

 
15,421

 
53,594

 
31,071

Recapitalization investment portfolio consideration
44,468

 
11,231

 
(6,529
)
 
16,830

Net income attributable to common stockholders of PPD, Inc.
$
51,983

 
$
26,652

 
$
47,065

 
$
47,901

 
 
 
 
 
 
 
 
Earnings per share attributable to common stockholders of PPD, Inc.:
 
 
 
 
 
 
 
Basic
$
0.15

 
$
0.10

 
$
0.14

 
$
0.17

Diluted
$
0.15

 
$
0.09

 
$
0.14

 
$
0.17

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
348,672

 
279,425

 
338,277

 
279,235

Diluted
354,830

 
281,193

 
343,159

 
280,055






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

5

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


 
Three Months Ended September 30,
 
Nine Months Ended 
 September 30,
 
2020
 
2019
 
2020
 
2019
Net income
$
9,102

 
$
16,582

 
$
58,093

 
$
34,461

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax expense (benefit):
 
 
 
 
 
 
 
Foreign currency translation
45,602

 
(49,415
)
 
(7,192
)
 
(39,686
)
Defined benefit plan, net of income taxes of $28 and $26 for the
 
 
 
 
 
 
 
three months ended September 30, 2020 and 2019, respectively, and $85 and
 
 
 
 
 
 
 
$88 for the nine months ended September 30, 2020 and 2019, respectively
138

 
120

 
380

 
390

Derivative instruments, net of income taxes of $297 and $(756) for the
 
 
 
 
 
 
 
three months ended September 30, 2020 and 2019, respectively, and
 
 
 
 
 
 
 
$(31,300) and $(2,063) for the nine months ended September 30, 2020
 
 
 
 
 
 
 
and 2019, respectively
503

 
(2,419
)
 
(96,992
)
 
(7,157
)
Other comprehensive income (loss)
46,243

 
(51,714
)
 
(103,804
)
 
(46,453
)
Comprehensive income (loss)
55,345

 
(35,132
)
 
(45,711
)
 
(11,992
)
Comprehensive income attributable to noncontrolling interest
(2,078
)
 
(999
)
 
(5,651
)
 
(4,080
)
Comprehensive income (loss) attributable to PPD, Inc.
53,267

 
(36,131
)
 
(51,362
)
 
(16,072
)
Recapitalization investment portfolio consideration
44,468

 
11,231

 
(6,529
)
 
16,830

Comprehensive income (loss) attributable to common stockholders of PPD, Inc.
$
97,735

 
$
(24,900
)
 
$
(57,891
)
 
$
758






























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

6

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

Assets
 
September 30, 2020
 
December 31, 2019
Current assets:
 
 
 
Cash and cash equivalents
$
803,090

 
$
345,187

Accounts receivable and unbilled services, net
1,460,374

 
1,326,614

Income taxes receivable
29,016

 
27,437

Prepaid expenses and other current assets
122,040

 
119,776

Total current assets
2,414,520

 
1,819,014

 
 
 
 
Property and equipment, net
474,006

 
458,845

Investments in unconsolidated affiliates
36,501

 
34,028

Investments
252,606

 
250,348

Goodwill, net
1,771,106

 
1,764,104

Intangible assets, net
770,161

 
892,091

Other assets
157,126

 
156,220

Operating lease right-of-use assets
165,508

 
181,596

Total assets
$
6,041,534

 
$
5,556,246

Liabilities, Redeemable Noncontrolling Interest and Stockholders Deficit
Current liabilities:
 
 
 
Accounts payable
$
120,022

 
$
130,060

Accrued expenses:
 
 
 
Payables to investigators
384,004

 
322,231

Accrued employee compensation
328,469

 
263,834

Accrued interest
18,972

 
44,527

Other accrued expenses
216,130

 
138,632

Income taxes payable
11,040

 
15,161

Unearned revenue
1,048,392

 
1,110,872

Current portion of operating lease liabilities
48,339

 
45,962

Current portion of long-term debt and finance lease obligations
36,120

 
35,794

Total current liabilities
2,211,488

 
2,107,073

 
 
 
 
Accrued income taxes
20,609

 
38,465

Deferred tax liabilities
68,029

 
92,225

Recapitalization investment portfolio liability
183,288

 
191,678

Long-term operating lease liabilities, less current portion
134,994

 
153,766

Long-term debt and finance lease obligations, less current portion
4,233,178

 
5,608,134

Other liabilities
105,189

 
33,017

Total liabilities
6,956,775

 
8,224,358

Commitments and contingencies (Note 9)

 

Redeemable noncontrolling interest
35,687

 
30,036

Stockholders’ deficit:
 
 
 
Common stock - $0.01 par value; 2,000,000 and 2,080,000 shares authorized as of
 
 

September 30, 2020 and December 31, 2019, respectively;
 
 
 
350,291 shares issued and 349,565 shares outstanding as of September 30, 2020, and
 
 
 
280,127 shares issued and 279,426 shares outstanding as of December 31, 2019
3,503

 
2,801

Treasury stock, at cost, 726 shares and 701 shares as of September 30, 2020 and
 
 
 
December 31, 2019, respectively
(13,268
)
 
(12,707
)
Additional paid-in-capital
1,806,607

 
1,983

Accumulated deficit
(2,345,062
)
 
(2,391,321
)
Accumulated other comprehensive loss
(402,708
)
 
(298,904
)
Total stockholders’ deficit
(950,928
)
 
(2,698,148
)
Total liabilities, redeemable noncontrolling interest and stockholders’ deficit
$
6,041,534

 
$
5,556,246


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

7

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


 
Nine Months Ended 
 September 30,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income
$
58,093

 
$
34,461

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
206,395

 
197,896

Long-lived asset impairment
1,414

 

Stock-based compensation expense
16,099

 
11,701

Non-cash operating lease expense
34,625

 
33,465

Amortization of debt issuance costs, modification costs and debt discounts
8,263

 
12,162

Non-cash losses (gains) on interest rate swaps
942

 
(7,157
)
(Gain) loss on investments
(16,649
)
 
22,716

Deferred income tax expense (benefit)
5,770

 
(11,915
)
Loss on extinguishment of debt
93,534

 

Amortization of costs to obtain a contract
7,973

 
8,533

Other
5,427

 
1,698

Change in operating assets and liabilities, net of effect of businesses acquired:
 
 
 
Accounts receivable and unbilled services, net
(148,501
)
 
(46,932
)
Prepaid expenses and other current assets
26,908

 
(10,059
)
Other assets
(39,813
)
 
(15,328
)
Income taxes, net
(23,286
)
 
(7,606
)
Accounts payable, accrued expenses and other liabilities
116,503

 
12,546

Operating lease liabilities
(33,165
)
 
(31,639
)
Unearned revenue
(52,065
)
 
109,180

Net cash provided by operating activities
268,467

 
313,722

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(116,418
)
 
(89,398
)
Acquisition of businesses, net of cash and cash equivalents acquired
321

 
(74,242
)
Capital contributions paid for investments
(5,382
)
 
(2,792
)
Distributions received from investments
19,704

 
190

Investments in unconsolidated affiliates
(10,000
)
 
(30,000
)
Other

 
694

Net cash used in investing activities
(111,775
)
 
(195,548
)
Cash flows from financing activities:
 
 
 
Purchase of treasury stock
(626
)
 
(2,738
)
Proceeds from exercise of stock options
14,272

 
3,625

Borrowing on Revolving Credit Facility
150,000

 

Repayment of Revolving Credit Facility
(150,000
)
 

Proceeds from issuance of senior notes
1,200,000

 
891,000

Redemption of HoldCo Notes
(1,464,500
)
 

Redemption of OpCo Notes
(1,160,865
)
 

Payments on long-term debt and finance leases
(32,080
)
 
(28,974
)
Payment of debt issuance and debt modification costs
(18,525
)
 
(30,142
)
Payment of contingent consideration for acquisition of business
(4,338
)
 

Net proceeds from initial public offering
1,772,960

 

Return of capital and special dividend to stockholders

 
(1,086,000
)
Net cash provided by (used in) financing activities
306,298

 
(253,229
)
Effect of exchange rate changes on cash and cash equivalents
(5,087
)
 
(14,613
)
Net increase (decrease) in cash and cash equivalents
457,903

 
(149,668
)
Cash and cash equivalents, beginning of the period
345,187

 
553,066

Cash and cash equivalents, end of the period
$
803,090

 
$
403,398

 

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

8

PPD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT AND REDEEMABLE NONCONTROLLING INTEREST
(unaudited)
(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, June 30, 2020
 
$
33,609

 
 
349,312

 
$
3,493

 
$
1,787,645

 
726

 
$
(13,268
)
 
$
(448,951
)
 
$
(2,397,045
)
 
$
(1,068,126
)
Net income
 
1,587

 
 

 

 

 

 

 

 
7,515

 
7,515

Other comprehensive income
 
491

 
 

 

 

 

 

 
46,243

 

 
46,243

Vesting of restricted stock
 

 
 
2

 

 

 

 

 

 

 

Issuance of common stock for stock option exercises
 

 
 
977

 
10

 
13,553

 

 

 

 

 
13,563

Stock-based compensation expense
 

 
 

 

 
5,409

 

 

 

 

 
5,409

Recapitalization investment portfolio consideration
 

 
 

 

 

 

 

 

 
44,468

 
44,468

Balance, September 30, 2020
 
$
35,687

 
 
350,291

 
$
3,503

 
$
1,806,607

 
726

 
$
(13,268
)
 
$
(402,708
)
 
$
(2,345,062
)
 
$
(950,928
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2019
 
$
30,036

 
 
280,127

 
$
2,801

 
$
1,983

 
701

 
$
(12,707
)
 
$
(298,904
)
 
$
(2,391,321
)
 
$
(2,698,148
)
Net income
 
4,499

 
 

 

 

 

 

 

 
53,594

 
53,594

Other comprehensive income (loss)
 
1,152

 
 

 

 

 

 

 
(103,804
)
 

 
(103,804
)
Vesting of restricted stock
 

 
 
7

 

 

 

 

 

 

 

Issuance of common stock for stock option exercises
 

 
 
1,157

 
12

 
16,255

 

 

 

 

 
16,267

Repurchases of common stock
 

 
 

 

 

 
25

 
(561
)
 

 

 
(561
)
Stock-based compensation expense
 

 
 

 

 
16,099

 

 

 

 

 
16,099

Recapitalization investment portfolio consideration
 

 
 

 

 

 

 

 

 
(6,529
)
 
(6,529
)
Issuance of common stock for initial public offering
 

 
 
69,000

 
690

 
1,772,270

 

 

 

 

 
1,772,960

Other
 

 
 

 

 

 

 

 

 
(806
)
 
(806
)
Balance, September 30, 2020
 
$
35,687

 
 
350,291

 
$
3,503

 
$
1,806,607

 
726

 
$
(13,268
)
 
$
(402,708
)
 
$
(2,345,062
)
 
$
(950,928
)














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

9

PPD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT AND REDEEMABLE NONCONTROLLING INTEREST
(unaudited)
(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, June 30, 2019
 
$
27,973

 
 
279,781

 
$
2,797

 
$
964

 
628

 
$
(11,162
)
 
$
(307,630
)
 
$
(2,271,841
)
 
$
(2,586,872
)
Net income
 
1,161

 
 

 

 

 

 

 

 
15,421

 
15,421

Other comprehensive loss
 
(162
)
 
 

 

 

 

 

 
(51,714
)
 

 
(51,714
)
Vesting of restricted stock
 

 
 
5

 

 

 

 

 

 

 

Issuance of common stock for stock option exercises
 

 
 
10

 

 
177

 

 

 

 

 
177

Repurchases of common stock
 

 
 

 

 

 
11

 
(206
)
 

 

 
(206
)
Stock-based compensation expense
 

 
 

 

 
3,178

 

 

 

 

 
3,178

Recapitalization investment portfolio consideration
 

 
 

 

 

 

 

 

 
11,231

 
11,231

Issuance of common stock for acquisition
 

 
 
268

 
4

 
4,997

 

 

 

 

 
5,001

Other
 

 
 

 

 

 

 

 

 
(95
)
 
(95
)
Balance, September 30, 2019
 
$
28,972

 
 
280,064

 
$
2,801

 
$
9,316

 
639

 
$
(11,368
)
 
$
(359,344
)
 
$
(2,245,284
)
 
$
(2,603,879
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
3,390

 
 

 

 

 

 

 

 
31,071

 
31,071

Other comprehensive income (loss)
 
690

 
 

 

 

 

 

 
(46,453
)
 

 
(46,453
)
Vesting of restricted stock
 

 
 
11

 

 

 

 

 

 

 

Issuance of common stock for stock option exercises
 

 
 
240

 
2

 
3,623

 

 

 

 

 
3,625

Repurchases of common stock
 

 
 

 

 

 
124

 
(2,435
)
 

 

 
(2,435
)
Stock-based compensation expense
 

 
 

 

 
11,701

 

 

 

 

 
11,701

Recapitalization investment portfolio consideration
 

 
 

 

 

 

 

 

 
16,830

 
16,830

Issuance of common stock for acquisition
 

 
 
268

 
4

 
4,997

 

 

 

 

 
5,001

Modification of stock option awards
 

 
 

 

 
(14,703
)
 

 

 

 

 
(14,703
)
Return of capital and special dividend
 

 
 

 

 
(37,987
)
 

 

 

 
(1,048,013
)
 
(1,086,000
)
Other
 

 
 

 

 

 

 

 

 
(95
)
 
(95
)
Balance, September 30, 2019
 
$
28,972

 
 
280,064

 
$
2,801

 
$
9,316

 
639

 
$
(11,368
)
 
$
(359,344
)
 
$
(2,245,284
)
 
$
(2,603,879
)







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

10

PPD, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


1. Basis of Presentation
Description of Business
PPD, Inc. (together with its subsidiaries “PPD” or the “Company”) is a holding company incorporated in Delaware. References to the “Company” throughout these condensed consolidated financial statements refer to PPD, Inc. and its consolidated subsidiaries, unless the context indicates otherwise. The Company is a leading provider of drug development services to the biopharmaceutical industry, focused on helping the Company’s customers bring their 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”).
Unaudited Interim Financial Information and the Use of Estimates
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial reporting. The significant accounting policies followed by the Company for interim financial reporting are consistent with the accounting policies it follows for annual financial reporting and are disclosed in Note 1 of the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2019, as superseded by, and solely to the extent set forth in, the Company’s first Current Report on Form 8-K filed on May 21, 2020 (the “May 2020 Form 8-K”). There have been no significant changes to the Company’s significant accounting policies during the first nine months of 2020, except for a change in how the Company’s Chief Operating Decision Maker (“CODM”) assesses segment performance. See Note 14, “Segments,” for additional information.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company monitors estimates and assumptions on a continuous basis and updates these estimates and assumptions as facts and circumstances change and new information is obtained, including facts and circumstances related to the novel coronavirus disease (the “COVID-19 pandemic”). Actual results could differ from those estimates and assumptions due to, among other things, the impacts caused by the COVID-19 pandemic.
In the opinion of the Company’s management, these condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the full twelve-month period ending December 31, 2020 or any other future period. Therefore, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in its May 2020 Form 8-K. The information as of December 31, 2019 in the Company’s condensed consolidated balance sheet included herein is derived from the Company’s audited consolidated financial statements included in the May 2020 Form 8-K.
Principles of Consolidation
The condensed 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.
    



11


Initial Public Offering
On February 6, 2020, the Company’s common stock began trading on The Nasdaq Global Select Market 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 shares of common stock issued pursuant to the full exercise of the underwriters’ option to purchase additional shares. The Company raised net proceeds of $1,773.0 million through the IPO, after deducting underwriting discounts and other offering expenses totaling $90.0 million. During the nine months ended September 30, 2020, the Company expensed $4.0 million of costs related to the IPO.
The Company used a portion of the net proceeds from the IPO to (i) redeem $550.0 million in aggregate principal amount of unsecured 7.625%/8.375% Senior PIK Toggle Notes due 2022 (the “Initial HoldCo Notes”), plus accrued and unpaid interest thereon and $5.5 million of redemption premium and (ii) redeem $900.0 million in aggregate principal amount of unsecured 7.75%/8.50% Senior PIK Toggle Notes due 2022 (the “Additional HoldCo Notes” and, together with the Initial HoldCo Notes, the “HoldCo Notes”), plus accrued and unpaid interest thereon and $9.0 million of redemption premium. The redemption of the HoldCo Notes resulted in a loss on extinguishment of debt of $50.1 million. See Note 6, “Long-term Debt and Finance Lease Obligations,” for additional information regarding the redemption.
In connection with the IPO, the Company’s board of directors adopted and stockholders approved the PPD, Inc. 2020 Omnibus Incentive Plan (“2020 Incentive Plan”) to implement a new market-based long-term incentive program to align the Company’s executive and management compensation packages with similarly situated public companies. Any awards previously granted under the Eagle Holding Company I 2017 Incentive Plan (the “Eagle I Plan”) remain subject to the terms of the Eagle I Plan and the applicable award agreements. During the nine months ended September 30, 2020, 1,211,869 awards, including time-based stock options, restricted stock units and performance stock units, with an aggregate fair value of $27.6 million, were granted under the 2020 Incentive Plan. The fair value of the awards issued under the 2020 Incentive Plan is determined in the same manner as described in the May 2020 Form 8-K, with the exception of the Company’s publicly traded stock value being used as the fair value of the Company’s common stock. As of September 30, 2020, there were 37,859,068 shares of common stock available for issuance under the 2020 Incentive Plan. No awards were issued under the Eagle I Plan during 2020 and no additional awards will be granted under the Eagle I Plan in the future. See Note 4, “Stock-based Compensation,” of the Company’s audited consolidated financial statements included in the May 2020 Form 8-K for additional information. Additionally, in connection with the IPO, the Company’s Amended and Restated Certificate of Incorporation, among other things, provides that the Company’s authorized capital consists of 2.0 billion shares of common stock, par value $0.01 per share and 100.0 million shares of preferred stock, par value $0.01 per share.
During the first quarter of 2020, the Company terminated its cash-based long-term incentive plan (the “LTIP”) and accelerated the remaining expense for future service under the plan. The LTIP was terminated to align the long-term compensation package of a certain set of employees to the interests of the Company’s stockholders and that offered by similarly situated public companies. These employees started receiving stock-based awards under the 2020 Incentive Plan beginning in May 2020. During the nine months ended September 30, 2020, the Company recorded compensation expense of $22.2 million for the acceleration of expense under the LTIP. The compensation expense was recorded as a component of direct costs and selling, general and administrative (“SG&A”) expenses on the condensed consolidated statement of operations.
Secondary Public Offering
In September 2020, the Company completed an underwritten secondary public offering of 43.7 million shares of common stock sold primarily by the Company’s private equity sponsors (the “Selling Stockholders”), including 5.7 million shares of common stock pursuant to the full exercise of the underwriters’ option to purchase additional shares. The Company did not offer any common stock in this transaction and did not receive any proceeds from the sale of the shares of common stock by the Selling Stockholders. The Company incurred costs of $1.9 million in relation to the secondary public offering for the three and nine months ended September 30, 2020 and such costs are recorded as a component of SG&A expenses on the condensed consolidated statement of operations.
Investment Activity
During the third quarter of 2020, the Company made an additional investment of $10.0 million in Science 37, Inc. (“Science 37”), a clinical trial company whose virtual model focuses on improving patient access and enrollment and accelerating clinical development. The Company’s total investment in Science 37 as of September 30, 2020 was $25.3 million. The investment in Science 37 is accounted for under the equity method of accounting and is classified as investments in unconsolidated affiliates on the condensed consolidated balance sheets. See Note 7, “Investments,” of the Company’s audited consolidated financial statements included in the May 2020 Form 8-K for additional information on the Company’s investments.

12


Recently Adopted Accounting Standard
In August 2018, the Financial Accounting Standards Board issued an accounting standards update to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. This new guidance was issued to align the accounting for costs incurred to implement a cloud computing arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. With the adoption of this standard, implementation costs incurred in a cloud computing arrangement that is a service contract are capitalized and presented in the financial statements similar to prepaid expenses related to service contracts. Additionally, expenses associated with capitalized implementation costs are recorded in the same financial statement line item as the fees associated with the hosting element of a cloud computing arrangement. The Company adopted this accounting standards update on January 1, 2020 using the prospective method. The adoption of this accounting standards update did not have a material impact to the Company’s condensed consolidated financial statements.
2.    Revenue
Performance Obligations
Revenue recognized from performance obligations partially satisfied in prior periods was $28.4 million and $82.9 million for the three and nine months ended September 30, 2020, respectively, and $35.1 million and $80.4 million for the three and nine months ended September 30, 2019, respectively. These cumulative catch-up adjustments primarily related to (i) contract modifications executed in the current period, which resulted in changes to the transaction price, (ii) changes in transaction price related to variable consideration and (iii) changes in estimates such as estimated total costs.
As of September 30, 2020, the aggregate amounts of transaction price allocated to unsatisfied performance obligations with an original contract term of greater than one year was $7.0 billion. The Company expects to recognize 36% to 42% of the transaction price allocated to unsatisfied performance obligations over the next 12 months as services are rendered, with the remainder recognized thereafter during the remaining contract term. The Company does not include the value of the transaction price allocated to unsatisfied performance obligations for contracts that have an original contract term of less than one year or for contracts which are determined to be short-term based on certain termination for convenience provisions.
Accounts Receivable and Unbilled Services, net and Unearned Revenue
The Company’s accounts receivable and unbilled services, net, consisted of the following amounts on the dates set forth below:
(in thousands)
 
September 30, 2020
 
December 31, 2019
Accounts receivable
 
$
792,784

 
$
726,111

Unbilled services
 
675,525

 
609,674

Total accounts receivable and unbilled services
 
1,468,309

 
1,335,785

Allowance for doubtful accounts
 
(7,935
)
 
(9,171
)
Total accounts receivable and unbilled services, net
 
$
1,460,374

 
$
1,326,614

The Company’s unearned revenue consisted of the following amounts on the dates set forth below:
(in thousands)
 
September 30, 2020
 
December 31, 2019
Unearned revenue
 
$
1,048,392

 
$
1,110,872

As of September 30, 2020 and December 31, 2019, contract assets of $160.6 million and $178.8 million, respectively, were included in unbilled services. The changes in the Company’s contract assets and unearned revenue resulted from the timing difference between the Company’s satisfaction of performance obligations under its contracts, achievement of billing milestones and customer payments. Additionally, during the nine months ended September 30, 2020 and 2019, the Company recognized revenue of $815.4 million and $653.8 million, respectively, from the balance of unearned revenue outstanding as of January 1, 2020 and January 1, 2019, respectively. Impairments of accounts receivable, unbilled services and contract assets were insignificant during the three and nine months ended September 30, 2020 and 2019.



13


Customer Concentration    
Concentrations of credit risk with respect to accounts receivable and unbilled services, net, are limited due to the Company’s large number of customers. As of September 30, 2020, one customer accounted for approximately 11% of accounts receivable and unbilled services, net. As of December 31, 2019, two customers each individually accounted for approximately 11% of accounts receivable and unbilled services, net. No one customer accounted for greater than 10% of revenues for the three and nine months ended September 30, 2020 and 2019.
3.    Stockholders’ Deficit and Redeemable Noncontrolling Interest
Shares
Common Stock
The following is a summary of the Company’s authorized, issued and outstanding shares of common stock as of the periods set forth below:
(in thousands)
 
September 30, 2020
 
December 31, 2019
Shares authorized
 
2,000,000

 
2,080,000

Shares issued
 
350,291

 
280,127

 
 
 
 
 
Shares outstanding:
 
 
 
 
Voting
 
349,565

 
276,052

Non-voting
 

 
3,374

Total shares outstanding
 
349,565

 
279,426

Voting, Dividend, and Liquidation Rights of Common Stock
Each share of common stock is entitled to one vote on all matters to be voted on by the stockholders of the Company holding common stock, including the election of directors. Additionally, the holders of common stock are entitled to dividends on a pro rata basis at such time and in such amounts, if and when declared by the Company’s board of directors and are entitled to participate on a pro rata basis in all distributions that may be legally made to the Company’s stockholders in connection with a voluntary or involuntary liquidation, dissolution or winding up of the Company. With the completion of the IPO in the first quarter of 2020, all non-voting shares of common stock were converted to voting shares of common stock.
Stock Split
In January 2020, the Company filed its Amended and Restated Certificate of Incorporation prior to the IPO 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, which was subsequently reduced to 2.0 billion in connection with the Company’s Amended and Restated Certificate of Incorporation filed in February 2020 as part of the IPO. All references to share and per share amounts in the Company’s condensed consolidated financial statements for periods prior to the stock split were retrospectively revised to reflect the stock split and increase in authorized shares for all periods presented.
Preferred Stock
In connection with the Company’s Amended and Restated Certificate of Incorporation filed in February 2020, the Company authorized 100.0 million shares of preferred stock. No shares of preferred stock were issued or outstanding as of September 30, 2020.
Redeemable Noncontrolling Interest
The Company owns 60% of its consolidated subsidiary PPD-SNBL K.K. (“PPD-SNBL”). The 40% ownership interest in PPD-SNBL held by Shin Nippon Biomedical Laboratories Ltd. (“SNBL”) is classified as a redeemable noncontrolling interest on the condensed consolidated balance sheets due to certain put options under which SNBL may require the Company to purchase SNBL’s remaining ownership interest at fair value upon the occurrence of certain events described in the PPD-SNBL shareholders agreement. As of September 30, 2020 and December 31, 2019, no such events had occurred. See Note 12, “Related Party Transactions,” for additional information.


14


4.    Business Combinations
The Company accounted for its business combinations below under the acquisition method of accounting and measured at fair value, the identifiable assets acquired and liabilities assumed at the date of acquisition. For each business combination, the Company recorded assets and liabilities representing working capital at their historical costs, which approximate fair value given the short-term nature of the assets and liabilities. The methods used to estimate the fair value of definite-lived intangible assets are consistent with those described in Note 1, “Basis of Presentation and Summary of Significant Accounting Policies,” of the Company’s audited consolidated financial statements included in the May 2020 Form 8-K.
Acquisition of Synarc
On September 3, 2019, the Company acquired 100% of the issued and outstanding equity of Synarc, Inc. (“Synarc”), the global site network business of Bioclinica, Inc., expanding its global footprint into China and Latin America and expanding its central nervous system offering in the United States. The purchase price was $48.6 million and was paid with cash on hand.
The accounting for the acquisition is complete. The Company recorded measurement period adjustments including (i) an increase in the purchase price of $3.4 million, (ii) a net decrease in assets of $11.1 million and (iii) a net decrease in liabilities of $2.2 million, resulting in an increase of goodwill of $12.3 million. The goodwill recognized of $13.4 million was primarily the result of anticipated growth through the development of new customers, additional services to existing customers and the assembled workforce. The goodwill was assigned to a reporting unit within the Company’s Clinical Development Services segment. The Company is not able to deduct goodwill for U.S. income tax purposes.
The Company acquired the following definite-lived intangible assets with the acquisition of Synarc:
 
 
Acquired Intangible Assets
(in thousands)
 
Weighted-Average Amortization Period
(in years)
Customer relationships
 
$
2,000

 
15
Know-how/processes
 
1,800

 
8
Investigator network
 
1,900

 
8
Trade names
 
1,400

 
10
Total
 
$
7,100

 
10

















15


The following table summarizes the consideration and the fair values of identifiable assets acquired and liabilities assumed at the acquisition date (in thousands):
Purchase price
 
$
48,635

 
 
 
Identifiable assets acquired:
 
 
Cash and cash equivalents
 
$
6,003

Accounts receivable and unbilled services
 
18,819

Prepaid expenses and other current assets
 
1,590

Property and equipment
 
19,273

Intangible assets
 
7,100

Other assets
 
928

Operating lease right-of-use assets
 
1,609

Total identifiable assets acquired
 
55,322

Liabilities assumed:
 
 
Accounts payable
 
(2,117
)
Other accrued expenses
 
(4,026
)
Unearned revenue
 
(7,210
)
Long-term debt and finance lease obligations
 
(38
)
Deferred tax liabilities
 
(4,736
)
Other liabilities
 
(330
)
Operating lease liabilities
 
(1,609
)
Total liabilities assumed
 
(20,066
)
Separately identifiable net assets acquired
 
35,256

Goodwill
 
13,379

Total net assets
 
$
48,635

Acquisition of Medimix
On July 1, 2019, the Company acquired 100% of the issued and outstanding equity of Medimix International (“Medimix”), a global technology company providing real-world evidence insights and information to the pharmaceutical, diagnostic and medical device industries. The acquisition enhanced the Company’s ability to leverage data to provide real-world evidence and insights for customers. The purchase price was $36.8 million, which consisted of $27.5 million of cash, $5.0 million of common stock of the Company and $4.3 million of estimated contingent consideration.
Based on the fair values of identifiable assets acquired and liabilities assumed at the acquisition date, the consideration paid was allocated as follows: (i) $13.5 million to definite-lived intangible assets, (ii) $20.5 million to goodwill and (iii) $2.8 million to other net assets primarily related to net working capital.
As of December 31, 2019, the Company recorded a contingent consideration liability of $9.5 million to be paid based on Medimix meeting certain performance targets through December 31, 2019. The contingent consideration was paid to the seller in July 2020.
The accounting for the acquisition is complete and measurement period adjustments recorded were not material. The goodwill recognized was primarily the result of anticipated growth through the development of new customers, additional services to existing customers and the assembled workforce. The goodwill was assigned to a reporting unit within the Company’s Clinical Development Services segment. The majority of goodwill is tax deductible for U.S. income tax purposes.
The Company acquired the following definite-lived intangible assets with the acquisition of Medimix:
 
 
Acquired Intangible Assets
(in thousands)
 
Weighted-Average Amortization Period
(in years)
Customer relationships
 
$
7,500

 
13
Trade names
 
900

 
10
Technology/intellectual property
 
5,100

 
8
Total
 
$
13,500

 
11

16


Acquisition Costs
Acquisition costs for the three and nine months ended September 30, 2019 were $1.5 million and $7.1 million, respectively. There were no acquisition costs for the three and nine months ended September 30, 2020. These costs are expensed as incurred and are included on the condensed consolidated statements of operations as a component of SG&A expenses.
5.    Goodwill and Intangible Assets, Net
Goodwill, Net
The changes in the carrying amount of goodwill by segment consisted of the following on the dates set forth below:
(in thousands)
 
Total
 
Clinical Development Services
 
Laboratory Services
Balance at December 31, 2019:
 
 
 
 
 

Goodwill
 
$
1,890,815

 
$
1,664,201

 
$
226,614

Accumulated impairment losses
 
(126,711
)
 
(99,432
)
 
(27,279
)
Goodwill, net
 
1,764,104

 
1,564,769

 
199,335

Activity:
 
 
 
 
 

Translation adjustments
 
(5,312
)
 
(5,312
)
 

Measurement period adjustments for prior acquisition
 
12,314

 
12,314

 

Balance at September 30, 2020:
 
 
 
 
 
 
Goodwill
 
1,897,817

 
1,671,203

 
226,614

Accumulated impairment losses
 
(126,711
)
 
(99,432
)
 
(27,279
)
Goodwill, net
 
$
1,771,106

 
$
1,571,771

 
$
199,335

Intangible Assets, Net
The Company’s definite-lived intangible assets were composed of the following on the dates set forth below:
 
 
September 30, 2020
 
December 31, 2019
(in thousands)
 
Carrying Amount
 
Accumulated Amortization
 
Net
 
Carrying Amount
 
Accumulated Amortization
 
Net
Customer relationships
 
$
883,459

 
$
(455,943
)
 
$
427,516

 
$
884,788

 
$
(415,427
)
 
$
469,361

Trade names
 
370,716

 
(151,655
)
 
219,061

 
372,210

 
(139,141
)
 
233,069

Backlog
 
177,294

 
(176,464
)
 
830

 
177,599

 
(175,571
)
 
2,028

Investigator/payer network
 
236,617

 
(203,866
)
 
32,751

 
236,082

 
(185,478
)
 
50,604

Technology/intellectual property
 
8,600

 
(4,022
)
 
4,578

 
8,600

 
(3,319
)
 
5,281

Know-how/processes
 
585,633

 
(500,208
)
 
85,425

 
586,971

 
(455,223
)
 
131,748

Total
 
$
2,262,319

 
$
(1,492,158
)
 
$
770,161

 
$
2,266,250

 
$
(1,374,159
)
 
$
892,091

Amortization expense was $39.5 million and $118.6 million for the three and nine months ended September 30, 2020, respectively, and $40.1 million and $121.1 million for the three and nine months ended September 30, 2019, respectively. Translation adjustments of approximately $2.6 million were recorded during the nine months ended September 30, 2020, resulting in a decrease to the carrying amount of the Company’s definite-lived intangible assets, net. The Company does not have any indefinite-lived intangible assets other than goodwill.

17


6.    Long-term Debt and Finance Lease Obligations
Long-term debt and finance lease obligations consisted of the following as set forth on the dates below:
(dollars in thousands)
 
Maturity Date
 
Effective Rate
 
Stated Rate
 
September 30, 2020
 
December 31, 2019
Term Loan
 
August 2022
 
3.71%
 
3.50%
 
$
3,072,112

 
$
3,096,429

2025 Notes
 
June 2025
 
4.97%
 
4.63%
 
500,000

 

2028 Notes
 
June 2028
 
5.24%
 
5.00%
 
700,000

 

OpCo Notes(1)
 
 
6.61%
 
6.38%
 

 
1,125,000

Initial HoldCo Notes(1)
 
 
8.92%
 
7.63%
 

 
550,000

Additional HoldCo Notes(1)
 
 
8.90%
 
7.75%
 

 
900,000

Other debt(1)
 
 
1.13%
 
1.13%
 

 
5,707

Finance lease obligations
 
Various
 
Various
 
Various
 
26,635

 
28,726

 
 
 
 
 
 
 
 
4,298,747

 
5,705,862

Unamortized debt discount
 
(4,822
)
 
(13,956
)
Unamortized debt issuance costs
 
(24,627
)
 
(47,978
)
Current portion of long-term debt and finance lease obligations
 
(36,120
)
 
(35,794
)
Long-term debt and finance lease obligations, less current portion
 
$
4,233,178

 
$
5,608,134

(1) Effective rate and stated rate are as of December 31, 2019 for the extinguished OpCo Notes, Initial HoldCo Notes, Additional HoldCo Notes and Other debt.
Revolving Credit Facility    
The Company has a revolving credit facility (the “Revolving Credit Facility”) available for use under the credit agreement dated as of August 18, 2015, as amended (the “Credit Agreement”), with a total committed credit of $300.0 million. In March 2020, the Company borrowed $150.0 million from the Revolving Credit Facility as a precautionary measure in order to further strengthen the Company’s cash position and to preserve financial flexibility due to the uncertainty in the global markets as a result of the COVID-19 pandemic. In June 2020, the Company repaid the outstanding balance of the Revolving Credit Facility using cash on hand. From time to time, the Company is required to have letters of credit issued on its behalf to provide credit support for guarantees, contractual commitments and insurance policies. As of September 30, 2020 and December 31, 2019, the Company had letters of credit outstanding with an aggregate value of $1.6 million, which reduced available borrowings under the Revolving Credit Facility by such amount. As of September 30, 2020, the Company had available credit under the Revolving Credit Facility of $298.4 million. The Company did not have any borrowings outstanding under the Revolving Credit Facility as of September 30, 2020 and December 31, 2019.
Issuance of the 2025 Notes and the 2028 Notes
On June 5, 2020, the Company’s indirect wholly-owned subsidiaries, Jaguar Holding Company II and PPD Development, L.P., issued and sold in a private placement $1,200.0 million of unsecured senior notes consisting of (i) $500.0 million aggregate principal amount of 4.625% senior notes due 2025 (the “2025 Notes”) and (ii) $700.0 million aggregate principal amount of 5.0% senior notes due 2028 (the “2028 Notes” and, together with the 2025 Notes, the “New Notes”), in each case, under an indenture dated as of June 5, 2020 (the “Indenture”). The 2025 Notes mature on June 15, 2025 and the 2028 Notes mature on June 15, 2028. Interest on the New Notes is payable semi-annually on June 15 and December 15 of each year. The New Notes do not have registration rights. Debt issuance costs of $18.6 million, consisting primarily of underwriters fees and professional fees, were capitalized in connection with the issuance of the New Notes. The net proceeds from the New Notes were used to redeem all outstanding $1,125.0 million aggregate principal amount of unsecured 6.375% senior notes (the “OpCo Notes”), as well as to pay for the redemption premium and accrued interest on the OpCo Notes and debt issuance costs associated with the New Notes.
The Company may redeem, at its option, some or all of the 2025 Notes prior to June 15, 2022, or the 2028 Notes prior to June 15, 2023, at a price equal to 100% of the principal amount of the 2025 Notes and 2028 Notes, plus accrued and unpaid interest, if any, to the redemption date plus a “make-whole” premium. Alternatively, within the same time frames, the Company may redeem up to 40% of the original principal amount of the 2025 Notes or the 2028 Notes, as applicable, with the proceeds of certain equity offerings at a redemption price of 104.625%, in the case of the 2025 Notes, and 105.000%, in the case of the 2028 Notes, of the principal amount of the 2025 Notes or the 2028 Notes, plus accrued and unpaid interest, if any, to the redemption date.

18


On or after June 15, 2022, in the case of the 2025 Notes, and June 15, 2023, in the case of the 2028 Notes, the Company may redeem some or all of such notes at the redemption prices listed below (expressed as a percentage of the principal amount), plus accrued and unpaid interest, if any, to the redemption date, if redeemed during the 12-month period commencing on June 15 of the years set forth below.
2025 Notes
Period
 
Redemption Price
2022
 
102.313
%
2023
 
101.156
%
2024 and thereafter
 
100.000
%
2028 Notes
Period
 
Redemption Price
2023
 
102.500
%
2024
 
101.250
%
2025 and thereafter
 
100.000
%
Upon the occurrence of specific kinds of changes of control events, the holders of the New Notes will have the right to cause the Company to repurchase some or all of the New Notes at 101% of face amount, plus accrued and unpaid interest, if any, to the repurchase date. Additionally, if the Company or its restricted subsidiaries sells assets, under certain circumstances, the Company will be required to make an offer to purchase a specified amount of New Notes equal to the net proceeds of such sale at an offer price in cash at the amount equal to 100% of the principal amount of the New Notes to be redeemed, plus accrued and unpaid interest, if any, to the repurchase date.
The New Notes are unsecured obligations and (i) rank senior in right of payment to all of the Company’s existing and future subordinated indebtedness, (ii) rank equally in right of payment with all of the Company’s existing and future senior indebtedness, (iii) are effectively subordinated to any of the Company’s existing and future secured debt, to the extent of the value of the assets securing such debt and (iv) are structurally subordinated to all of the existing and future liabilities of each of the Company’s subsidiaries that do not guarantee the New Notes. The New Notes contain customary covenants including, but not limited to, restrictions on the Company and its restricted subsidiaries’ ability to incur additional indebtedness and guarantee indebtedness; pay dividends or make other distributions in respect of, or repurchase or redeem, capital stock; make loans and investments; sell or otherwise dispose of assets; incur liens; enter into transactions with affiliates; enter into agreements restricting the Company’s subsidiaries’ ability to pay dividends; and consolidate, merge or sell all or substantially all of their assets. Additionally, the Indenture for the New Notes includes certain customary events of default which may require acceleration of payment. Such events of default include nonpayment of principal or interest, failure to pay final judgments in excess of a specified threshold, failure of a guarantee to remain in effect, bankruptcy and insolvency events and cross acceleration, the occurrence of which could result in the principal of and accrued interest on the New Notes to become or be declared due and payable immediately.
Redemption of OpCo Notes
On June 5, 2020, the Company redeemed all its outstanding OpCo Notes in accordance with the provisions governing the OpCo Notes indenture for $1,160.9 million, including a redemption premium of $35.9 million. As such, the obligations of the Company under the OpCo Notes indenture were discharged on that date. Also as part of the redemption, the Company wrote off unamortized debt issuance costs related to the OpCo Notes of $7.6 million, and combined with the applicable redemption premium, resulted in a total loss on extinguishment of debt of $43.5 million. The Company redeemed the OpCo Notes with the proceeds received from the Company’s New Notes. See Note 10, “Long-term Debt and Finance Lease Obligations,” of the Company’s audited consolidated financial statements included in the May 2020 Form 8-K for additional information on the OpCo Notes.





19


Redemption of HoldCo Notes
On February 18, 2020, the Company redeemed all of its outstanding HoldCo Notes in accordance with the provisions governing the HoldCo Notes indentures for $1,464.5 million, including a redemption premium of $14.5 million. As such, the obligations of the Company under the HoldCo Notes and such indentures were discharged on that date. Also as part of the redemption, the Company wrote off the unamortized debt discount and deferred debt issuance costs related to the HoldCo Notes of $35.6 million. The Company redeemed the HoldCo Notes with a portion of the net proceeds received from the Company’s IPO. See Note 10, “Long-term Debt and Finance Lease Obligations,” of the Company’s audited consolidated financial statements included in the May 2020 Form 8-K for additional information on the HoldCo Notes.
Other Debt
During the first nine months of 2020, the Company repaid its working capital loan with SNBL which was classified as “other debt.” See Note 12, “Related Party Transactions,” for additional details on the Company’s transactions with SNBL.
Debt Covenants and Default Provisions
Other than the customary covenants and default provisions related to the New Notes, there were no changes to the debt covenants or default provisions related to the Company’s outstanding debt under its Credit Agreement or other obligations during the first nine months of 2020. In June 2020, the Company repaid the outstanding balance of the Revolving Credit Facility and therefore ceased to be subject to the net secured leverage ratio test, as defined in the Credit Agreement. The Company was in compliance with all covenants for all long-term debt arrangements as of September 30, 2020 and December 31, 2019. For additional information on the Company’s debt arrangements, debt covenants and default provisions, see Note 10, “Long-term Debt and Finance Lease Obligations,” of the Company’s audited consolidated financial statements included in the May 2020 Form 8-K.
Scheduled Maturities of Long-term Debt and Finance Lease Obligations
As of September 30, 2020, the scheduled maturities of long-term debt and settlement of finance lease obligations for the remainder of 2020, each of the next five years and thereafter were as follows (in thousands):
Year
 
Amount
2020 (remaining three months)
 
$
8,969

2021
 
36,156

2022
 
3,035,578

2023
 
3,690

2024
 
3,530

2025
 
503,530

Thereafter
 
707,294

Total
 
$
4,298,747

7.    Income Taxes
On March 27, 2020, the U.S. government passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) in response to the COVID-19 pandemic. The CARES Act provides wide-ranging economic relief, including significant changes to U.S. business tax provisions. These changes include, in summary, (i) modifications to limitations on the deductibility of net operating losses, (ii) modifications to limitations on the deductibility of business interest, (iii) alternative minimum tax credit acceleration and (iv) the expensing of qualified improvement property. The most significant impact to the Company from the CARES Act relates to the modification to limitations on the deductibility of business interest and the expensing of qualified improvement property. The Company has accounted for the impact of the CARES Act on tax years prior to 2020 within the period ended March 31, 2020 and accounted for the impact on the current tax year in its annual effective tax rate and provision for income taxes for the three and nine months ended September 30, 2020. The Company is continuing to assess the income tax impact of the CARES Act and other legislative changes enacted and being considered by governments around the world in response to the COVID-19 pandemic.     



20


The Company’s effective income tax rate was 50.0% and 33.5% for the three months ended September 30, 2020 and 2019, respectively, and 24.5% and 25.3% for the nine months ended September 30, 2020 and 2019, respectively. The Company’s provision for income taxes for the three months ended September 30, 2020 was primarily due to the estimated tax on the Company’s distribution of pre-tax income among domestic and foreign jurisdictions and the impacts of a tax rate change in the United Kingdom. The Company’s provision for income taxes for the nine months ended September 30, 2020 was primarily due to the estimated tax effect on the Company’s pre-tax income. The Company’s provision for income taxes for the three and nine months ended September 30, 2019 was primarily due to the estimated tax effect on the Company’s pre-tax income.
As of September 30, 2020 and December 31, 2019, the Company’s total unrecognized tax benefits were $21.4 million and $39.7 million, respectively. The decrease to the Company’s unrecognized tax benefits during the nine months ended September 30, 2020, was primarily the result of a $13.0 million release as a result of the application of the provisions of the CARES Act. Included in the balance of unrecognized tax benefits as of September 30, 2020 and December 31, 2019, were $14.6 million and $28.8 million, respectively, net of the federal benefit for state taxes, that if recognized, would reduce the Company’s effective tax rate. In addition, the Company believes that it is reasonably possible that the total amount of unrecognized tax benefits could decrease by an amount up to $6.4 million within the next 12 months due to the settlement of audits and the expiration of the statutes of limitations.
The Company has analyzed its filing positions in all significant federal, state and foreign jurisdictions where it is required to file income tax returns, as well as open tax years in these jurisdictions. The significant jurisdictions with periods subject to examination are the 2017 through 2019 tax years for the United States and the 2017 through 2019 tax years for the United Kingdom. Various foreign and state income tax returns are under examination by taxing authorities. The Company does not believe that the outcome of any examination or inquiry will have a material impact on its results of operations, financial condition or cash flows.
8.    Derivative Instruments and Hedging Activities
The Company has variable rate borrowings under its senior secured term loan outstanding under the Credit Agreement (the “Term Loan”), and as a result, is exposed to interest rate fluctuations on these borrowings. From time to time, the Company enters into interest rate swaps to mitigate the risk in fluctuations in interest rates. For hedges that qualify, the Company accounts for these interest rate swaps as qualifying cash flow hedges because their purpose is to hedge the Company’s exposure to increases in interest rates on its variable rate borrowings and as the interest rate swaps effectively convert variable rate borrowings under the Term Loan to fixed rate borrowings based on the fixed interest rate for the interest rate swaps plus the applicable margin on the Term Loan. For those interest rate swaps accounted for as cash flow hedges, the Company recognizes in accumulated other comprehensive loss (“AOCL”) or accumulated other comprehensive income (“AOCI”), net of tax, any changes in the fair value, representing unrealized gains or losses, of its interest rate swaps. The Company assesses effectiveness at inception and on an ongoing quarterly basis. The Company may also enter into interest rate swap agreements that are not designated as cash flow hedges for accounting purposes. Changes in the fair value of interest rate swaps not designated as cash flow hedges are reported in the statements of operations as part of other (expense) income, net. The Company does not use derivative financial instruments for speculative or trading purposes and does not offset the fair value amounts of its derivatives.
In February 2020, the Company considered refinancing certain portions of its outstanding debt with new variable rate debt and, in anticipation thereof, the Company entered into three new variable to fixed interest rate swaps with multiple counterparties to hedge future interest rate exposure. At the inception date, the interest rate swaps were designated as cash flow hedges and accounted for in accordance with the aforementioned accounting policy. In February and March 2020, due to, among other factors, difficult and volatile conditions in the credit markets caused by the COVID-19 pandemic, the Company did not enter into the new variable rate debt structure. Therefore, in March 2020, the Company entered into a fixed to variable interest rate swap which reduced the amount of variable rate debt being hedged.
The following table summarizes the material terms of the interest rate swaps outstanding as of September 30, 2020 (dollars in thousands):
Swap #
 
Terms
 
Notional Amount
 
Fixed Interest Rate
 
Maturity Date
1
 
Variable to fixed
 
$
1,500,000

 
1.19%
 
March 31, 2025
2
 
Variable to fixed
 
1,500,000

 
1.22%
 
March 31, 2025
3
 
Variable to fixed
 
500,000

 
1.17%
 
March 31, 2025
4
 
Fixed to variable
 
500,000

 
0.52%
 
March 31, 2025

21


The Company did not designate the fixed to variable swap as a cash flow hedge for accounting purposes. Simultaneously upon entering into the fixed to variable swap, the Company discontinued cash flow hedge accounting on a variable to fixed swap with the same notional amount and began recording the change in fair value directly in earnings. The unrealized losses recorded in AOCL at the date of discontinuance will be reclassified into (i) interest expense, net, or (ii) other (expense) income, net, for any portion of the originally forecasted transactions deemed not probable to occur, through the original maturity date of the interest rate swap. Going forward, the Company expects the change in fair value of the two undesignated swaps to mostly offset in earnings as the swaps economically offset each other. During the three and nine months ended September 30, 2020, the Company recorded a gain of $0.4 million and a loss of $1.5 million, respectively, in other (expense) income, net, from the settlement and change in the fair value of the undesignated interest rate swaps. Current market conditions, including dislocation in the financial markets and volatility in interest rates due to the COVID-19 pandemic, may affect the performance of the Company’s hedging relationships for cash flow hedges, which could cause the hedges to no longer be effective.
The Company expects to reclassify current unrealized losses of $31.2 million within the next 12 months from AOCL to interest expense, net, on the condensed consolidated statements of operations as interest payments are made on the Term Loan.
The Company recognized the following amounts of pre-tax loss as a component of AOCL during the three and nine months ended September 30, 2020 and 2019:
(in thousands)
 
Pre-Tax Loss Recognized in AOCL
Derivatives in Cash Flow Hedging Relationships
 
Three Months Ended September 30,
 
Nine Months Ended 
 September 30,
 
 
2020
 
2019
 
2020
 
2019
Interest rate swaps
 
$
(4,364
)
 
$

 
$
(142,709
)
 
$

The following table provides the location of the pre-tax (loss) gain reclassified from AOCL into the condensed consolidated statements of operations during the three and nine months ended September 30, 2020 and 2019:
 
 
 
 
Pre-Tax (Loss) Gain Reclassified from AOCL into Statements of Operations
(in thousands)
 
Location of (Loss) Gain Reclassified from AOCL into Statements of Operations
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2020
 
2019
 
2020
 
2019
Interest rate swaps
 
Interest expense, net
 
$
(5,001
)
 
$
3,175

 
$
(4,513
)
 
$
9,220

Interest rate swaps
 
Other (expense) income, net
 
(163
)
 

 
(9,904
)
 

The fair value of derivative instruments consisted of the following balances as set forth on the dates below:
 
 
 
 
September 30, 2020
 
December 31, 2019
(in thousands)
 
Balance sheet location
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Other accrued expenses
 
$

 
$
31,591

 
$

 
$

Interest rate swaps
 
Other liabilities
 

 
83,523

 

 

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Prepaid expenses and other current assets
 
1,810

 

 

 

Interest rate swaps
 
Other assets
 
2,636

 

 

 

Interest rate swaps
 
Other accrued expenses
 

 
5,088

 

 

Interest rate swaps
 
Other liabilities
 

 
13,479

 

 

 
 
 
 
$
4,446

 
$