PPD, INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 (our "2020 Form 10-K"). This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors set forth in other sections of this Quarterly Report on Form 10-Q, as well as the risk factors set forth in our 2020 Form 10-K. For important information regarding these forward-looking statements, please see "Special Note Regarding Forward-Looking Statements," located elsewhere in this Quarterly Report on Form 10-Q. When we use the terms "PPD," the "company," "we," "us" or "our" in this Quarterly Report on Form 10-Q, we meanPPD, Inc. and its subsidiaries on a consolidated basis, unless the context indicates otherwise. Company Overview We are a leading provider of drug development services to the biopharmaceutical industry, focused on helping our customers bring their medicines and other treatments to patients around the world. We have been in the drug development services business for 35 years, providing a comprehensive suite of clinical development and laboratory services to pharmaceutical, biotechnology, medical device and government organizations, as well as other industry participants. We have deep experience across a broad range of rapidly growing areas of the drug development industry and engage with our 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 our customers. 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," in our 2020 Form 10-K. Merger Agreement OnApril 15, 2021 , we entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among us, Thermo Fisher Scientific Inc., a company organized under the laws ofDelaware ("Thermo Fisher") andPowder Acquisition Corp. , aDelaware corporation and a wholly owned subsidiary of Thermo Fisher ("Merger Sub") pursuant to which we will be, subject to the terms and conditions of the Merger Agreement, merged with and into Merger Sub, with PPD continuing as the surviving corporation and a wholly owned subsidiary of Thermo Fisher. Under, and subject to, the terms of the Merger Agreement, our stockholders will have the right to receive$47.50 per share in cash, without interest and less any applicable withholding tax, for each share of our common stock upon the closing of the proposed merger. Our board of directors have unanimously approved the Merger Agreement and the transactions contemplated thereby and stockholders holding in aggregate approximately 60% of the issued and outstanding shares of our common stock duly executed and delivered to Thermo Fisher a written consent, adopting and approving the Merger Agreement and the transactions contemplated thereby. OnJuly 16, 2021 , we and Thermo Fisher each received a request for additional information and documentary materials (collectively, the "Second Request") from theU.S. Federal Trade Commission ("FTC"), in connection with theFTC's review of the proposed merger. The effect of the Second Request is to extend the waiting period imposed under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), until the 30th day after substantial compliance by us and Thermo Fisher with the Second Request, unless the waiting period is terminated earlier by theFTC . As ofOctober 22, 2021 , both we and Thermo Fisher had certified substantial compliance with the Second Request. The consummation of the proposed merger remains subject to the satisfaction or, to the extent permitted by law, waiver of customary closing conditions, including approvals under the HSR Act and certain other competition and foreign direct investment laws. Subject to such closing conditions, we continue to expect the proposed merger to close by the end of 2021. Third-party costs incurred related to the proposed merger during the three and nine months endedSeptember 30, 2021 were$1.9 million and$13.4 million , respectively, and are recorded as a component of selling, general and administrative ("SG&A") expenses on the condensed consolidated statements of operations. 25 -------------------------------------------------------------------------------- New Credit Agreement OnJanuary 13, 2021 , together with our indirect wholly-owned subsidiary,PPD Development, L.P. (the "Co-Borrower"), we entered into and closed a new (i)$3,050.0 million aggregate principal amount senior secured first-lien term loan facility issued at 99.5% of face value, or a discount of 0.5%, maturing inJanuary 2028 (the "New Term Loan") and (ii)$600.0 million committed principal amount senior secured first-lien revolving credit facility maturing inJanuary 2026 (the "New Revolving Credit Facility"), under our new credit agreement dated as ofJanuary 13, 2021 (the "New Credit Agreement"). The proceeds from the New Term Loan were used to extinguish our previously outstanding$3,064.0 million senior secured term loan entered into onAugust 18, 2015 (the "2015 Term Loan") under the credit agreement dated as of the same date, as amended (the "2015 Credit Agreement"). At the same time, we also extinguished our previously outstanding$300.0 million senior secured revolving credit facility (the "2015 Revolving Credit Facility"). The total loss on extinguishment of debt associated with the extinguishments of the 2015 Term Loan and 2015 Revolving Credit Facility was$10.7 million . COVID-19 Pandemic InMarch 2020 , theWorld Health Organization declared COVID-19 a global pandemic which resulted in travel and business disruption and volatile conditions in the capital and credit markets and overall economy. Globally, governments implemented travel bans, stay at home or total lock-down mandates and other social distancing measures to combat the spread of COVID-19, which have begun, in certain areas, to be partially or fully lifted during 2021. Additionally, in 2021, the global economy has, with certain setbacks, begun reopening and there has been wider distribution of vaccines to treat COVID-19. In response to the global pandemic, we created and continue to maintain a pandemic response committee of company leaders, including our chief medical officer, to help manage our response. Our company has been and continues to be focused on (i) the health and safety of our employees and the patients we recruit/enroll and (ii) business continuity, preserving the integrity of the work we do for our customers, such as providing support for vaccines and anti-viral therapies for COVID-19. In addition, to maximize employee safety and work productivity, we have (i) continued to maintain certain health and safety measures for all employees, (ii) provided COVID-19 testing for employees in critical patient-facing and laboratory roles and (iii) supported employees in obtaining COVID-19 vaccinations. During the first nine months of 2021, we began to lift certain travel restrictions for our employees and reopened offices in certain jurisdictions including theU.S. and theU.K. , providing the option for our remote enabled employees to return to the office. Certain of our offices outside of theU.S. remained closed for remote enabled employees but are being evaluated for reopening using country-specific health and safety criteria. During the first nine months of 2021, the pandemic primarily impacted our Clinical Development Services segment. While we continued to experience improvements in operating metrics during the first nine months of 2021, the impact of the pandemic continued to limit the ability of our employees to visit certain hospitals and other clinical research sites to conduct monitoring and other activities and patient recruitment and enrollment activities. Our Laboratory Services segment continued to operate at full capacity during the first nine months of 2021. Where necessary, we continue to take measures to mitigate the impact of the pandemic across our business. We are closely monitoring the changing landscape with respect to the pandemic, including with respect to potential infection surges and the emergence of new variants of the virus, and taking actions to manage our business and support our employees, customers and the patients we recruit/enroll. Depending on the future duration, severity and impacts of the pandemic, we may have to shut down one or all of our Phase I clinics or shut down one or more of our laboratories, other clinics or offices due to patient safety, government restrictions, illness or other impacts in connection with the COVID-19 pandemic. We will continue to evaluate the nature and extent of the impact of the pandemic to our business, results of operations, financial condition and liquidity. For further discussion of the risks related to our business and the COVID-19 pandemic, see Part II, Item 1A, "Risk Factors," included elsewhere in this Quarterly Report on Form 10-Q and Part I, Item 1A, "Risk Factors," included in our 2020 Form 10-K. Sources of Revenue 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 (collectively, "indirect revenue") represents the reimbursement by customers of third-party pass-through and out-of-pocket costs incurred by us under our contracts. We record the reimbursement of indirect revenue and the related costs incurred as revenue and reimbursed costs, respectively, on the condensed consolidated statements of operations. These reimbursed costs are included as revenue as we (i) are the principal in the relationship, (ii) are primarily responsible for the services provided by third parties and (iii) significantly integrate the services of the third parties with our own services in delivering a combined output to the customer. We assess our revenue based on our primary business segments, Clinical Development Services and Laboratory Services. Our Clinical Development Services segment represented 81.4% and 81.8% of revenue for the three months endedSeptember 30, 2021 and 2020, respectively, and 81.7% and 81.2% of revenue for the nine months endedSeptember 30, 2021 and 2020, respectively, with the remainder generated from Laboratory Services. 26 -------------------------------------------------------------------------------- We have a diverse customer mix, with no one customer accounting for more than 10% of our revenue for the three and nine months endedSeptember 30, 2021 or 2020. Our top 10 customers accounted for approximately 51.8% and 55.6% of our revenue for the three months endedSeptember 30, 2021 and 2020, respectively, and 51.1% and 52.3% for the nine months endedSeptember 30, 2021 and 2020, 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, 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, stock-based compensation expense, other overhead costs and offsetting research and development ("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. 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, consolidated income from operations and segment operating income throughout the duration of a contract. 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 on property and equipment 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 over the estimated useful life of the software or term of the licensing 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 reported consolidated business using a number of metrics including backlog and net authorizations. We primarily assess backlog and net authorizations on (i) a basis which excludes indirect revenues and the impact of Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC 606") on direct revenue ("Historical Basis") and (ii) an ASC 606 total direct and indirect revenue basis ("ASC 606 Basis"). Our discussion of backlog and net authorizations below is applicable to both of the aforementioned backlog and net authorization metrics. Our backlog represents anticipated 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 (defined as quarterly 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 revenue recognized under 27 -------------------------------------------------------------------------------- existing contracts. We adjust backlog for foreign currency fluctuations and exclude from backlog revenue that has been recognized as revenue in our statements of operations. Although an increase in backlog will generally result in an increase in future 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 revenue during a particular period. The timing and extent to which backlog will result in 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 unless they are canceled. As a result of these and other factors, including those from the impact of the COVID-19 pandemic, our backlog might not be a reliable indicator of future revenue and we might not realize all or any part of the revenue from the authorizations in backlog as of any point in time. Once work begins, we recognize revenue over the life of the contract as we perform services under such contract. 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 revenue recognized in that period. We have included new business awards associated with COVID-19 in our net authorizations and backlog. The dynamics of such awards differ from those of more traditional studies and therefore we have adjusted the amount of such new business awards in net authorizations and backlog. Net Authorizations and Backlog The following table provides selected information related to our net authorizations and backlog as of and for the three months endedSeptember 30 : Historical Basis ASC 606 Basis (dollars in millions) 2021 2020 2021 2020 Net authorizations $ 1,352.7$ 1,200.3 $ 2,253.3 $ 1,764.5 Backlog 9,492.5 7,890.4 14,592.0 11,720.1 Backlog conversion 12.2 % 11.8 % 11.2 % 11.0 % Net book-to-bill 1.19x 1.35x 1.44x 1.43x The increase in net authorizations and backlog in 2021 for the metrics above as compared to the same period in the prior year was primarily due to continued growth in new business awards, including awards related to the COVID-19 pandemic, and fewer award cancellations, partially offset by unfavorable net foreign currency fluctuations. Foreign Currency A large portion of our revenues and expenses are denominated in foreign currencies and our condensed consolidated financial statements are reported inUnited States dollars. As such, changes in foreign currency exchange rates can significantly affect our results of operations. The revenue and expenses of our foreign operations are generally denominated in local currencies and translated intoUnited States dollars for financial reporting purposes. Therefore, exchange rate fluctuations will affect the translation of foreign results intoUnited States dollars for purposes of reporting consolidated results of operations. We believe that reporting results of operations that disclose the effects of foreign currency rate fluctuations on certain financial results, where meaningful, can facilitate analysis of period to period comparisons. Consolidated Results of Operations Three Months EndedSeptember 30, 2021 versus Three Months EndedSeptember 30, 2020 Consolidated Results of Operations Revenue Three Months Ended September 30, (dollars in thousands) 2021 2020 Change Revenue$ 1,560,796 $ 1,233,802 $ 326,994 26.5 % 28
-------------------------------------------------------------------------------- Revenue increased$327.0 million , or 26.5%, to$1,560.8 million for the three months endedSeptember 30, 2021 as compared to the same period in 2020. Revenue increased (i) 25.9% from organic volume growth across our business due to higher opening backlog at the beginning of the period as compared to the prior year and overall growth in new business awards during 2021, (ii) from awards and associated revenue for certain COVID-19 work which has a higher mix of indirect revenue and (iii) 0.6% from the favorable impact from foreign currency exchange rates. Direct Costs Three Months Ended September 30, (dollars in thousands) 2021 2020 Change Direct costs, exclusive of depreciation and amortization$ 529,690 $ 433,422 $ 96,268 22.2 % % of revenue 33.9 % 35.1 % Direct costs increased$96.3 million to$529.7 million for the three months endedSeptember 30, 2021 as compared to the same period in 2020. The increase in direct costs was primarily due to (i) a$49.4 million increase from growth in employee headcount to support current and anticipated growth in revenue, as well as compensation increases including stock-based compensation expense, (ii) a$32.6 million increase in contract labor and certain project delivery costs, (iii) an$11.1 million increase in laboratory supply costs in connection with the growth in revenue and (iv) a 0.8% increase from the unfavorable impact from foreign currency exchange rates. As a percentage of revenue, direct costs decreased to 33.9% for the three months endedSeptember 30, 2021 as compared to 35.1% in the same period in 2020 primarily due to the factors identified above. Reimbursed Costs Three Months Ended September 30, (dollars in thousands) 2021 2020 Change Reimbursed costs$ 433,358 $ 335,866 $ 97,492 29.0 % % of revenue 27.8 % 27.2 % Reimbursed costs increased$97.5 million to$433.4 million for the three months endedSeptember 30, 2021 as compared to the same period in 2020. Reimbursed costs increased primarily due to the increase in revenue, including growth related to certain awards of work for COVID-19 which have significant reimbursed costs. The increase in reimbursed costs was also impacted by the general timing of costs incurred across our portfolio of work, which vary over the course of clinical trials due to (i) the timing of the work performed, (ii) scope changes and (iii) the complexity and phase of the study, among other factors. As a percentage of revenue, reimbursed costs increased to 27.8% for the three months endedSeptember 30, 2021 as compared to 27.2% in the same period in 2020 primarily due to the factors identified above. The impact from foreign currency exchange rates was insignificant. Selling, General and Administrative Expenses Three Months Ended September 30, (dollars in thousands) 2021 2020 Change Selling, general and administrative expenses$ 335,624 $ 249,320 $ 86,304 34.6 % % of revenue 21.5 % 20.2 % SG&A expenses increased$86.3 million to$335.6 million for the three months endedSeptember 30, 2021 as compared to the same period in 2020. The increase in SG&A expenses was primarily due to (i) a$74.0 million increase from growth in employee headcount to support current and anticipated growth in revenue, as well as compensation increases including stock-based compensation expense, (ii) a$6.4 million increase in technology costs primarily related to software licensing, (iii) a$1.9 million increase in third-party costs incurred related to the proposed merger with Thermo Fisher and (iv) a 0.8% increase from the unfavorable impact from foreign currency exchange rates. As a percentage of revenue, SG&A expenses increased to 21.5% for the three months endedSeptember 30, 2021 as compared to 20.2% in the same period in 2020 primarily due to the factors identified above. Depreciation and Amortization Three Months Ended
(in thousands) 2021 2020
Depreciation and amortization $ 74,028 $ 71,317
Depreciation and amortization was $74.0 million for the three months ended
September 30, 2021 as compared to $71.3 million in the same period in 2020. The
increase in depreciation and amortization expense primarily relates to the
impact from our laboratory facility expansions partially offset by a decrease
due to the timing of amortization of certain definite-lived intangible assets.
29
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Interest Expense, Net Three Months Ended September 30,
(in thousands) 2021 2020
Interest expense, net $ (46,231) $(49,882)
Interest expense, net, was$46.2 million for the three months endedSeptember 30, 2021 as compared to$49.9 million in the same period in 2020. The decrease in interest expense was primarily due to a$7.6 million reduction related to a decrease in the variable interest rate on our New Term Loan as compared to our extinguished 2015 Term Loan, partially offset by an increase of$3.5 million from the unfavorable net impact of our interest rate swaps. Gain (Loss) on Investments Three Months Ended September
30,
(in thousands) 2021 2020
Gain (loss) on investments $ 18,971 Gain on investments was$19.0 million for the three months endedSeptember 30, 2021 as compared to a loss of$53.1 million in the same period in 2020. The gains and losses for both periods were primarily a result of changes in the fair values of the net asset values of our investments, which included changes in the publicly traded stock prices of certain underlying holdings within our investments in limited partnerships. 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, including the volatility of stock prices underlying publicly traded investments within the partnerships, and changes in the discounts applied to such investments for our lack of control and lack of marketability, where applicable. Other Income (Expense), Net Three Months Ended September
30,
(in thousands) 2021 2020
Other income (expense), net $ 21,022 Other income, net, was$21.0 million for the three months endedSeptember 30, 2021 as compared to other expense, net, of$17.2 million in the same period in 2020. Foreign exchange rate movement resulted in transaction and re-measurement gains of$20.8 million for the three months endedSeptember 30, 2021 and losses of$17.5 million in the same period in 2020. Provision for Income Taxes Three Months Ended September
30,
(dollars in thousands) 2021 2020
Provision for income taxes $ 39,993
Effective income tax rate 22.0 % 50.0 %
Our provision for income taxes was$40.0 million , resulting in an effective income tax rate of 22.0%, for the three months endedSeptember 30, 2021 as compared to a provision of$11.2 million , or an effective income tax rate of 50.0%, in the same period in 2020. Our provision for income taxes for the three months endedSeptember 30, 2021 was primarily due to the estimated tax effect on our pre-tax income. Our provision for income taxes for the three months endedSeptember 30, 2020 was primarily due to the estimated tax on our distribution of pre-tax income among domestic and foreign jurisdictions and the impact of statutory rate changes in theUnited Kingdom . Equity in Earnings (Losses) of Unconsolidated Affiliates, Net of Income Taxes Three Months Ended September 30, (in thousands) 2021 2020
Equity in earnings (losses) of unconsolidated affiliates, net of income taxes
$ 27,250 (2,057) Equity in earnings (losses) of unconsolidated affiliates, net of income taxes, was income of$27.3 million for the three months endedSeptember 30, 2021 as compared to a loss of$2.1 million in the same period in 2020. The income for the current period was due to the gain recorded for the dilution of our ownership in one of our unconsolidated affiliates, partially offset by the operating losses of our unconsolidated affiliates. The loss in the prior period was due to the operating losses of our unconsolidated affiliates. 30 -------------------------------------------------------------------------------- Segment Results of Operations Clinical Development Services and Laboratory Services segment results for the three months endedSeptember 30, 2021 and 2020 are detailed below. Clinical Development Services Three Months Ended September 30, (dollars in thousands) 2021 2020 Change Segment revenue$ 1,270,613 $ 1,008,639 $ 261,974 26.0 % Segment direct costs 397,416 330,281 67,135 20.3 Segment reimbursed costs 399,687 309,117 90,570 29.3 Segment SG&A expenses 206,644 137,984 68,660 49.8 Segment operating income $ 266,866$ 231,257 $ 35,609 15.4 Segment Revenue Clinical Development Services' revenue was$1,270.6 million for the three months endedSeptember 30, 2021 , an increase of$262.0 million as compared to the same period in 2020. Revenue increased (i) 25.2% from organic volume growth primarily from our Phase II-IV clinical trial management services as a result of higher opening backlog at the beginning of the period as compared to the prior year and overall growth in new business awards during 2021, (ii) from awards and associated revenue for certain COVID-19 work which has a higher mix of indirect revenue and (iii) 0.8% from the favorable impact from foreign currency exchange rates. Segment Direct Costs Clinical Development Services' direct costs were$397.4 million for the three months endedSeptember 30, 2021 , an increase of$67.1 million as compared to the same period in 2020. The increase in direct costs was primarily due to (i) a$34.4 million increase from growth in employee headcount to support current and anticipated growth in revenue, as well as compensation increases, (ii) a$30.4 million increase in contract labor and certain project delivery costs and (iii) a 0.9% increase from the unfavorable impact from foreign currency exchange rates. Segment Reimbursed Costs Clinical Development Services' reimbursed costs were$399.7 million for the three months endedSeptember 30, 2021 , an increase of$90.6 million as compared to the same period in 2020. Reimbursed costs increased primarily due to the increase in revenue, including growth related to certain awards of work for COVID-19 which have significant reimbursed costs. The increase in reimbursed costs was also impacted by the general timing of costs incurred across our portfolio of work, which vary over the course of clinical trials due to (i) the timing of the work performed, (ii) scope changes and (iii) the complexity and phase of the study, among other factors. The impact from foreign currency exchange rates was insignificant. Segment SG&A Expenses Clinical Development Services' SG&A expenses were$206.6 million for the three months endedSeptember 30, 2021 , an increase of$68.7 million as compared to the same period in 2020. The increase in SG&A expenses was primarily due to (i) a$58.4 million increase from growth in employee headcount to support current and anticipated growth in revenue, as well as compensation increases and (ii) a 1.0% increase from the unfavorable impact from foreign currency exchange rates. Laboratory Services Three Months Ended September 30, (dollars in thousands) 2021 2020 Change Segment revenue $ 290,183$ 225,163 $ 65,020 28.9 % Segment direct costs 129,785 102,355 27,430 26.8 Segment reimbursed costs 33,671 26,749 6,922 25.9 Segment SG&A expenses 31,217 23,283 7,934 34.1 Segment operating income $ 95,510$ 72,776 $ 22,734 31.2 Segment Revenue Laboratory Services' revenue was$290.2 million for the three months endedSeptember 30, 2021 , an increase of$65.0 million as compared to the same period in 2020. Revenue increased from organic volume growth across all our laboratory services in part due to higher opening backlog at the beginning of the period as compared to the prior year and overall growth in new business awards during 2021, including awards and associated revenue for COVID-19 work. The higher opening backlog was primarily due to increased net authorizations across all of our lab businesses in 2020 as compared to 2019. The impact from foreign currency exchange rates was insignificant. 31 -------------------------------------------------------------------------------- Segment Direct Costs Laboratory Services' direct costs were$129.8 million for the three months endedSeptember 30, 2021 , an increase of$27.4 million as compared to the same period in 2020. The increase in direct costs was primarily due to a$13.2 million increase from growth in employee headcount to support current and anticipated growth in revenue, as well as compensation increases, and an$11.1 million increase in laboratory supply costs in connection with the growth in revenue. The impact from foreign currency exchange rates was insignificant. Segment Reimbursed Costs Laboratory Services' reimbursed costs were$33.7 million for the three months endedSeptember 30, 2021 , an increase of$6.9 million as compared to the same period in 2020. Reimbursed costs increased primarily due to (i) the increase in revenue, (ii) higher shipping costs and (iii) the general timing of costs incurred across our portfolio of work. The impact from foreign currency exchange rates was insignificant. Segment SG&A Expenses Laboratory Services' SG&A expenses were$31.2 million for the three months endedSeptember 30, 2021 , an increase of$7.9 million as compared to the same period in 2020. The increase in SG&A expenses was primarily due to an$8.0 million increase from growth in employee headcount to support current and anticipated growth in revenue, as well as compensation increases. The impact from foreign currency exchange rates was insignificant. Nine Months EndedSeptember 30, 2021 versus Nine Months EndedSeptember 30, 2020 Consolidated Results of Operations Revenue Nine Months Ended September 30, (dollars in thousands) 2021 2020 Change Revenue$ 4,514,648 $ 3,317,182 $ 1,197,466 36.1 % Revenue increased$1,197.5 million , or 36.1%, to$4,514.6 million for the nine months endedSeptember 30, 2021 as compared to the same period in 2020. Revenue increased (i) 34.7% from organic volume growth across our business due to higher opening backlog at the beginning of the period as compared to the prior year and overall growth in new business awards during 2021, (ii) from awards and associated revenue for certain COVID-19 work which has a higher mix of indirect revenue and (iii) 1.4% from the favorable impact from foreign currency exchange rates. The higher opening backlog was primarily due to increased net authorizations across our business in 2020 as compared to 2019. Direct Costs Nine Months Ended September 30, (dollars in thousands) 2021 2020 Change Direct costs, exclusive of depreciation and amortization$ 1,507,510 $ 1,222,700 $ 284,810 23.3 % % of revenue 33.4 % 36.9 % Direct costs increased$284.8 million to$1,507.5 million for the nine months endedSeptember 30, 2021 as compared to the same period in 2020. The increase in direct costs was primarily due to (i) a$161.4 million increase from growth in employee headcount to support current and anticipated growth in revenue, as well as compensation increases including stock-based compensation expense, (ii) an$89.4 million increase in contract labor and certain project delivery costs, (iii) a$35.5 million increase in laboratory supply costs in connection with the growth in revenue and (iv) a 2.0% increase from the unfavorable impact from foreign currency exchange rates. As a percentage of revenue, direct costs decreased to 33.4% for the nine months endedSeptember 30, 2021 as compared to 36.9% in the same period in 2020 primarily due to the increase in indirect revenue included as part of revenue which does not have a corresponding impact on direct costs. Reimbursed Costs Nine Months Ended September 30, (dollars in thousands) 2021 2020 Change Reimbursed costs$ 1,330,704 $ 810,523 $ 520,181 64.2 % % of revenue 29.5 % 24.4 % 32
-------------------------------------------------------------------------------- Reimbursed costs increased$520.2 million to$1,330.7 million for the nine months endedSeptember 30, 2021 as compared to the same period in 2020. Reimbursed costs increased primarily due to the increase in revenue, including growth related to certain awards of work for COVID-19 which have significant reimbursed costs, and a 1.9% increase from the unfavorable impact from foreign currency exchange rates. The increase in reimbursed costs was also impacted by the general timing of costs incurred across our portfolio of work, which vary over the course of clinical trials due to (i) the timing of the work performed, (ii) scope changes and (iii) the complexity and phase of the study, among other factors. As a percentage of revenue, reimbursed costs increased to 29.5% for the nine months endedSeptember 30, 2021 as compared to 24.4% in the same period in 2020 primarily due to the factors identified above as well as the increase in indirect revenue included as part of revenue which has a corresponding impact on reimbursed costs. Selling, General and Administrative Expenses Nine Months Ended September 30, (dollars in thousands) 2021 2020 Change Selling, general and administrative expenses$ 959,587 $ 734,712 $ 224,875 30.6 % % of revenue 21.3 % 22.1 % SG&A expenses increased$224.9 million to$959.6 million for the nine months endedSeptember 30, 2021 as compared to the same period in 2020. The increase in SG&A expenses was primarily due to (i) a$179.5 million increase from growth in employee headcount to support current and anticipated growth in revenue, as well as compensation increases including stock-based compensation expense, (ii) a$15.9 million increase in technology costs primarily related to software licensing, (iii) a$13.4 million increase in third-party costs incurred related to the proposed merger with Thermo Fisher and (iv) a 1.8% increase from the unfavorable impact from foreign currency exchange rates. As a percentage of revenue, SG&A expenses decreased to 21.3% for the nine months endedSeptember 30, 2021 as compared to 22.1% in the same period in 2020 primarily due to (i) lower travel and associated expenses and (ii) the increase in indirect revenue included as part of revenue which does not have a corresponding impact on SG&A expenses. Depreciation and Amortization Nine Months Ended
(in thousands) 2021 2020
Depreciation and amortization $ 227,426 Depreciation and amortization was$227.4 million for the nine months endedSeptember 30, 2021 as compared to$206.4 million in the same period in 2020. The increase in depreciation and amortization expense primarily relates to (i) the impact from our laboratory facility expansions, (ii) new purchased and internally developed software and (iii) amortization expense for the acceleration of the useful life of certain intangible asset trade names, partially offset by a decrease due to the timing of amortization of certain definite-lived intangible assets. Interest Expense, Net Nine Months Ended September 30, (in thousands) 2021 2020 Interest expense, net$ (139,577) $ (165,995) Interest expense, net, was$139.6 million for the nine months endedSeptember 30, 2021 as compared to$166.0 million in the same period in 2020. The decrease in interest expense was primarily due to (i) a$25.0 million reduction related to a decrease in the variable interest rate on our New Term Loan as compared to our extinguished 2015 Term Loan, (ii) a$15.4 million reduction as a result of the redemption of our unsecured Senior PIK Toggle Notes (the "HoldCo Notes") as part of our initial public offering ("IPO") during the first quarter of 2020 and (iii) the impact from the lower interest rate on our unsecured senior notes that were refinanced during the second quarter of 2020, partially offset by an increase of$20.5 million from the unfavorable net impact of our interest rate swaps. Loss on Extinguishment of Debt Nine Months Ended
(in thousands) 2021 2020
Loss on extinguishment of debt $ (10,677) Loss on extinguishment of debt was$10.7 million for the nine months endedSeptember 30, 2021 as compared to$93.5 million in the same period in 2020. The loss in the current period resulted from the write off of our previously recorded unamortized debt discount and deferred debt issuance costs related to the extinguishments of our 2015 Term Loan and 2015 Revolving Credit Facility. The loss in the prior period resulted from the early extinguishment of our HoldCo Notes and the early extinguishment of our unsecured senior notes (the "OpCo Notes") and consisted of redemption premiums of$50.4 million and the write off of our unamortized debt discount and deferred debt issuance costs of$43.1 million . 33 -------------------------------------------------------------------------------- (Loss) Gain on Investments Nine Months Ended September
30,
(in thousands) 2021 2020
(Loss) gain on investments $ (28,127) Loss on investments was$28.1 million for the nine months endedSeptember 30, 2021 as compared to a gain of$16.6 million in the same period in 2020. The losses and gains for both periods were primarily a result of changes in the fair values of the net asset values of our investments, which included changes in the publicly traded stock prices of certain underlying holdings within our investments in limited partnerships, partially offset by changes to the discount rate on certain investments in the prior year. 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, including the volatility of stock prices underlying publicly traded investments within the partnerships, and changes in the discounts applied to such investments for our lack of control and lack of marketability, where applicable. Other Income (Expense), Net Nine Months Ended September
30,
(in thousands) 2021 2020
Other income (expense), net $ 17,392 Other income, net, was$17.4 million for the nine months endedSeptember 30, 2021 as compared to other expense, net, of$14.1 million in the same period in 2020. Foreign exchange rate movement resulted in transaction and re-measurement gains of$16.0 million for the nine months endedSeptember 30, 2021 and losses of$3.1 million in the same period in 2020. Interest rate swap hedging activity resulted in gains of$0.6 million for the nine months endedSeptember 30, 2021 and losses of$11.4 million in the same period in 2020. Provision for Income Taxes Nine Months Ended September
30,
(dollars in thousands) 2021 2020
Provision for income taxes $ 81,421
Effective income tax rate 24.9 % 24.5 %
Our provision for income taxes was$81.4 million , resulting in an effective income tax rate of 24.9% for the nine months endedSeptember 30, 2021 as compared to a provision of$20.7 million , or an effective income tax rate of 24.5%, in the same period in 2020. Our provision for income taxes for the nine months endedSeptember 30, 2021 and 2020 was primarily due to the estimated tax effect on our pre-tax income. Equity in Earnings (Losses) of Unconsolidated Affiliates, Net of Income Taxes Nine Months Ended September 30, (in thousands) 2021 2020
Equity in earnings (losses) of unconsolidated affiliates, net of income taxes
$
22,488
Equity in earnings (losses) of unconsolidated affiliates, net of income taxes, was income of$22.5 million for the nine months endedSeptember 30, 2021 as compared to a loss of$5.7 million in the same period in 2020. The income for the current period was due to the gain recorded for the dilution of our ownership in one of our unconsolidated affiliates, partially offset by the operating losses of our unconsolidated affiliates. The loss in the prior period was due to the operating losses of our unconsolidated affiliates. 34 -------------------------------------------------------------------------------- Segment Results of Operations Clinical Development Services and Laboratory Services segment results for the nine months endedSeptember 30, 2021 and 2020 are detailed below. Clinical Development Services Nine Months Ended September 30, (dollars in thousands) 2021 2020 Change Segment revenue$ 3,688,200 $ 2,694,775 $ 993,425 36.9 % Segment direct costs 1,130,521 922,737 207,784 22.5 Segment reimbursed costs 1,229,773 730,872 498,901 68.3 Segment SG&A expenses 574,069 415,334 158,735 38.2 Segment operating income $ 753,837$ 625,832 $ 128,005 20.5 Segment Revenue Clinical Development Services' revenue was$3,688.2 million for the nine months endedSeptember 30, 2021 , an increase of$993.4 million as compared to the same period in 2020. Revenue increased (i) 35.4% from organic volume growth primarily from our Phase II-IV clinical trial management services as a result of higher opening backlog at the beginning of the period as compared to the prior year and overall growth in new business awards during 2021, (ii) from awards and associated revenue for certain COVID-19 work which has a higher mix of indirect revenue and (iii) 1.5% from the favorable 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 2020 as compared to 2019. Segment Direct Costs Clinical Development Services' direct costs were$1,130.5 million for the nine months endedSeptember 30, 2021 , an increase of$207.8 million as compared to the same period in 2020. The increase in direct costs was primarily due to (i) a$126.4 million increase from growth in employee headcount to support current and anticipated growth in revenue, as well as compensation increases, (ii) an$82.4 million increase in contract labor and certain project delivery costs and (iii) a 2.3% increase from the unfavorable impact from foreign currency exchange rates. Segment Reimbursed Costs Clinical Development Services' reimbursed costs were$1,229.8 million for the nine months endedSeptember 30, 2021 , an increase of$498.9 million as compared to the same period in 2020. Reimbursed costs increased primarily due to the increase in revenue, including growth related to certain awards of work for COVID-19 which have significant reimbursed costs, and a 1.9% increase from the unfavorable impact from foreign currency exchange rates. The increase in reimbursed costs was also impacted by the general timing of costs incurred across our portfolio of work, which vary over the course of clinical trials due to (i) the timing of the work performed, (ii) scope changes and (iii) the complexity and phase of the study, among other factors. Segment SG&A Expenses Clinical Development Services' SG&A expenses were$574.1 million for the nine months endedSeptember 30, 2021 , an increase of$158.7 million as compared to the same period in 2020. The increase in SG&A expenses was primarily due to (i) a$144.0 million increase from growth in employee headcount to support current and anticipated growth in revenue, as well as compensation increases and (ii) a 2.3% increase from the unfavorable impact from foreign currency exchange rates. The increase in SG&A expenses was partially offset by lower travel and associated expenses. Laboratory Services Nine Months Ended September 30, (dollars in thousands) 2021 2020 Change Segment revenue$ 826,448 $ 622,407 $ 204,041 32.8 % Segment direct costs 368,741 279,154 89,587 32.1 Segment reimbursed costs 100,931 79,651 21,280 26.7 Segment SG&A expenses 88,651 66,929 21,722 32.5 Segment operating income$ 268,125 $ 196,673 $ 71,452 36.3 35
-------------------------------------------------------------------------------- Segment Revenue Laboratory Services' revenue was$826.4 million for the nine months endedSeptember 30, 2021 , an increase of$204.0 million as compared to the same period in 2020. Revenue increased (i) 31.9% from organic volume growth across all our laboratory services in part due to higher opening backlog at the beginning of the period as compared to the prior year and overall growth in new business awards during 2021, (ii) awards and associated revenue for COVID-19 work and (iii) 0.9% from the favorable impact from foreign currency exchange rates. The higher opening backlog was primarily due to increased net authorizations across all of our lab businesses in 2020 as compared to 2019. Segment Direct Costs Laboratory Services' direct costs were$368.7 million for the nine months endedSeptember 30, 2021 , an increase of$89.6 million as compared to the same period in 2020. The increase in direct costs was primarily due to (i) a$44.8 million increase from growth in employee headcount to support current and anticipated growth in revenue, as well as compensation increases and (ii) a$35.5 million increase in laboratory supply costs in connection with the growth in revenue and (iii) a 1.1% increase from the unfavorable impact from foreign currency exchange rates. Segment Reimbursed Costs Laboratory Services' reimbursed costs were$100.9 million for the nine months endedSeptember 30, 2021 , an increase of$21.3 million as compared to the same period in 2020. Reimbursed costs increased primarily due to (i) the increase in revenue, (ii) higher shipping costs, (iii) the general timing of costs incurred across our portfolio of work and (iv) a 2.3% increase from the unfavorable impact from foreign currency exchange rates. Segment SG&A Expenses Laboratory Services' SG&A expenses were$88.7 million for the nine months endedSeptember 30, 2021 , an increase of$21.7 million as compared to the same period in 2020. The increase in SG&A expenses was primarily due to a$20.4 million increase from growth in employee headcount to support current and anticipated growth in revenue, as well as compensation increases, and a 0.6% increase from the unfavorable impact from foreign currency exchange rates. Liquidity and Capital Resources Overview We assess our liquidity in terms of our ability to generate adequate amounts of cash to meet current and future needs. We have historically funded our operations with cash flows from operations. We have historically used long-term debt and cash on hand to fund acquisitions and make special cash dividends or distributions to our stockholders. Our expected primary cash uses on a short-term and long-term basis are for repayment of debt, interest payments, working capital, capital expenditures, geographic or service offering expansion, acquisitions, investments and other general corporate purposes. We do not expect to declare any dividends on our common stock in the foreseeable future. We hold our cash balances inthe United States and numerous locations throughout the rest of the world. As ofSeptember 30, 2021 , we had$1,172.7 million of cash and cash equivalents of which$509.8 million was held by our foreign subsidiaries. InJanuary 2021 , we successfully completed a refinancing of our variable rate long-term debt that was outstanding under our 2015 Credit Agreement, as well as increased the size of our revolving credit facility from$300.0 million to$600.0 million . Also inJanuary 2021 , we entered into a new finance lease agreement for our existing laboratory facilities inVirginia . The new lease agreement replaced the prior operating lease agreements for certain existing facilities, consolidated multiple operating leases into one new lease agreement and extended the term of the lease for the facilities. See Note 4, "Long-term Debt and Finance Lease Obligations," to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information. Contractual and Other Obligations We have incurred contractual and other obligations in the ordinary course of running our business and as a result of the recapitalization of our company in 2017. Excluding the obligations we have or will incur in the ordinary course of running our business, our primary short-term and long-term obligations include (i) payments on our long-term debt and related interest, (ii) payments on our operating and finance leases, (iii) future capital calls on our investments, (iv) purchase obligations and commitments related to planned capital expenditures and (v) obligations as a result of the recapitalization of our company in 2017. As required under the recapitalization transaction merger agreement, during the nine months endedSeptember 30, 2021 , we made cash distributions of approximately$12.8 million for the payment of a portion of the recapitalization investment portfolio liability from the cash proceeds received from the recapitalization investment portfolio. No distributions for the recapitalization investment portfolio liability were made during the nine months endedSeptember 30, 2020 . As ofSeptember 30, 2021 , the recapitalization investment portfolio liability was$169.7 million . 36
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Other than (i) the extinguishments of our 2015 Term Loan and 2015 Revolving Credit Facility, (ii) entering into our New Credit Agreement and (iii) our new finance lease agreement for one of our laboratory facilities as discussed elsewhere in this Quarterly Report on Form 10-Q, there have been no material changes, outside of the ordinary course of business, to our contractual and other obligations as previously disclosed in our 2020 Form 10-K. See our 2020 Form 10-K for additional discussion of our material cash requirements. We expect to continue funding our operations and contractual and other obligations from existing cash, cash flows from operations and, if necessary or appropriate, borrowings under our New Revolving Credit Facility, which remains undrawn. Based on current conditions, we believe that these sources of liquidity will be sufficient to fund our operations and meet our contractual obligations and other requirements in the short and long-term. From time to time, we evaluate potential acquisitions, investments and other growth and strategic opportunities that might require use of existing cash, borrowings under our New Revolving Credit Facility or additional long-term financing. While we believe we have sufficient liquidity to fund our operations for the foreseeable future, our sources of liquidity could be affected by factors described above and Part II, Item 1A, "Risk Factors," included elsewhere in this Quarterly Report on Form 10-Q as well as under "Indemnification and Insurance," within Part I, Item 1, "Business;" Part I, Item 1A, "Risk Factors;" "Critical Accounting Policies and Estimates," within Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations;" and Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," in our 2020 Form 10-K.
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