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and related notes thereto included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , as superseded by, and solely to the extent set forth in, our first Current Report on Form 8-K filed onMay 21, 2020 (the "May 2020 Form 8-K").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, including the impact from the COVID-19 pandemic and other factors set forth in other sections of this Quarterly Report on Form 10-Q, as well as the risk factors set forth in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . For important information regarding these forward-looking statements, please see "Special Note Regarding Forward-Looking Statements." Company Overview We are a leading provider of drug development services to the biopharmaceutical industry, focused on helping our customers bring their new medicines to patients around the world. We have been in the drug development 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. We have deep experience across a broad range of rapidly growing areas of drug development and engage 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 our customers. Our company is currently organized and managed around two reportable segments,Clinical Development Services and Laboratory Services. See Part I, Item 1, "Business," in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , as superseded by, and only to the extent set forth in ourMay 2020 Form 8-K, for additional information on our Clinical Development Services and Laboratory Services segments. Our purpose and mission are to improve health by helping our customers deliver life-changing therapies. We pursue our purpose and mission through our clinical development and laboratory services and our strategy to bend the cost and time curve of drug development and optimize value for our customers. Our customers benefit from accelerated time to market because it results in lengthened periods of market exclusivity, and our real-world evidence solutions support the superior efficacy and value of their novel therapies. We believe our medical, scientific and drug development expertise, along with our innovative technologies and knowledge of global regulatory requirements, help our customers accelerate the development of safe and effective therapeutics and maximize returns on their research and development ("R&D") investments. Initial Public Offering OnFebruary 6, 2020 , our common stock began trading on The Nasdaq Global Select Market under the symbol "PPD". OnFebruary 10, 2020 , we completed our initial public offering ("IPO") of our common stock at a price to the public of$27.00 per share. We 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. We raised net proceeds of$1,773.0 million through the IPO, after deducting underwriting discounts and other offering expenses totaling$90.0 million . We 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 (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 (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 total loss on extinguishment of debt of$50.1 million . Issuance of New Notes and Redemption of OpCo Notes OnJune 5, 2020 , we issued$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"). We used the proceeds from the issuance of the New Notes to redeem$1,125.0 million in aggregate principal amount of unsecured 6.375% senior notes (the "OpCo Notes"), plus accrued and unpaid interest thereon and a$35.9 million redemption premium. The redemption of the OpCo Notes resulted in a total loss on extinguishment of debt of$43.5 million . 31 -------------------------------------------------------------------------------- Secondary Public Offering InSeptember 2020 , we completed an underwritten secondary public offering of 43.7 million shares of common stock, including 5.7 million shares of common stock pursuant to the full exercise of the underwriters' option to purchase additional shares, sold primarily by our private equity sponsors (the "Selling Stockholders"). We 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. We incurred costs of$1.9 million in relation to the secondary public offering for the three and nine months endedSeptember 30, 2020 . COVID-19 Pandemic InMarch 2020 , theWorld Health Organization declared COVID-19 a global pandemic that has resulted in travel and business disruption and volatile conditions in the capital and credit markets and overall economy. Globally, governments have implemented travel bans, stay at home or total lock-down mandates and other social distancing measures to combat the spread of COVID-19. In response to the global pandemic, we have created a pandemic response committee of company leaders, including our chief medical officer, to help manage our response to the pandemic focused on (i) the health and safety of our employees and patients and (ii) business continuity, preserving the integrity of the work we do for our customers, including support for vaccines and anti-viral therapies for COVID-19. To implement social distancing measures and maximize work productivity, we have enacted several measures, including limiting personnel in our facilities, with remote-capable employees throughout our company working remotely, and introduced COVID-19 testing for employees in critical patient facing roles. We have also significantly limited domestic and international travel of our employees. To date, the COVID-19 pandemic has impacted our business across both our Clinical Development Services and Laboratory Services segments. The impacts include the ability of our employees to visit hospitals and other clinical research sites to conduct monitoring and other critical site visits and patient recruitment and enrollment activities as part of services offered within our Clinical Development Services segment, as well as a temporary shutdown of our Phase I clinics beginning inMarch 2020 . Furthermore, we have had customers delay new studies and/or pause ongoing studies or certain activities thereof, such as patient recruitment, patient enrollment, site visits and site monitoring, impacting our Clinical Development Services segment. Additionally, at the onset of the pandemic, our Laboratory Services segment experienced limited reductions in central lab services due to delays in clinical trial activity that impacted sample volumes. Beginning in the second quarter of 2020, as travel restrictions were lifted and phased reopenings began in jurisdictions in which we operate, we reopened a limited number of our offices and also allowed business-critical travel to occur, including employee visits to hospitals and other clinical research sites, as well as the activation of new sites. We also began a phased reopening of all of our Phase I clinics, with such phased reopenings resulting in reduced domiciling of patients for clinical trials as compared to pre-pandemic levels. Due to safety measures we implemented shortly following the onset of the COVID-19 pandemic, our laboratory facilities have continued to operate at near full capacity during the pandemic. While we saw improvements over the course of the second and third quarters of 2020 in relation to fewer customers delaying new or ongoing studies, steady improvements in site-based activities and the return of pre-pandemic testing volumes at our central labs, these delays have impacted and will continue to impact the timing and extent to which backlog has and will convert to revenue. In response to the COVID-19 pandemic, we have taken measures to mitigate the impact of the aforementioned factors across both of our segments. Such mitigation activities include, but are not limited to, (i) winning new awards for services to help our customers treat or combat the spread of COVID-19 with anti-viral therapies and vaccines, which includes more than 125 COVID-19 related awards as ofSeptember 30, 2020 across both of our segments, (ii) the continued adoption of digital and virtual strategies and (iii) cost reduction strategies, including reducing travel and related expenses, limiting increases in employee headcount in certain non-billable areas, voluntary and limited temporary involuntary employee furloughs and reduced working hours. We may also implement other cost mitigation or reduction measures in the future depending on the progression of the COVID-19 pandemic and the resulting impacts to our business. We do not yet know nor can we predict the full extent of the impact the COVID-19 pandemic will have on our business, financial condition, results of operations or the global economy as a whole, as the ultimate impact of the pandemic is highly uncertain and subject to change. While the COVID-19 pandemic has impacted our business and results of operations, we have been able to partially offset the financial impact due to the mitigation activities discussed above. However, the operational and financial impacts from COVID-19 could significantly increase in the future due to the magnitude, continued duration, geographic reach, ongoing impact on the global economy and capital and credit markets, and current travel and other restrictions relating to the pandemic. In addition, we might not be able to mitigate future impacts as we have done to date. 32 -------------------------------------------------------------------------------- Furthermore, federal, state and local governments have implemented, and may implement in the future, economic and other stimulus measures to support individuals and businesses impacted by the COVID-19 pandemic, and while we have utilized such measures where applicable, there can be no assurance that such measures will benefit us or otherwise offset any or all of the financial impacts from the COVID-19 pandemic. To date, such measures have not been material to our results of operations. If the pandemic continues for an extended period or worsens, such as a second global wave, governments' actions to contain the spread of COVID-19 are ineffective and/or there is a significant delay in the development or distribution of an effective vaccine, these factors could result in a material negative impact on our business, growth, reputation, prospects, financial condition, results of operations (including components of our financial results), cash flows and liquidity. Such impacts could include, but are not limited to, additional customer delays or cancellations of awarded services, reductions in R&D drug development pipelines which could result in lower growth to our industry, additional costs related to restructuring activities, non-cash impairments of goodwill and other long-lived assets, decreases in the value of our investments, loss of hedge accounting and restrictions on our ability to obtain additional financing, if needed, or refinancing of our senior secured credit facilities. We are closely monitoring the changing landscape with respect to the COVID-19 pandemic and taking actions to manage our business and support our employees, patients and customers. We will continue to evaluate the nature and extent of the impact 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. 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 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 81.8% and 82.6% of revenue for the three months endedSeptember 30, 2020 and 2019, respectively, and 81.2% and 83.4% of revenue for the nine months endedSeptember 30, 2020 and 2019, respectively, with the remainder generated from our Laboratory Services segment. 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, 2020 and 2019. Our top 10 customers accounted for approximately 55.6% and 46.0% of our revenue for the three months endedSeptember 30, 2020 and 2019, respectively, and 52.3% and 45.2% for the nine months endedSeptember 30, 2020 and 2019, respectively. Based on the diversity of our customer base, we do not believe we have significant customer concentration risk. We do not have any significant product revenues. Operating Costs and Expenses Our operating costs and expenses primarily consist of direct costs, reimbursed costs, selling, general and administrative ("SG&A") expenses and depreciation and amortization. Direct Costs Direct costs represent costs for providing services to customers. Direct costs primarily include labor-related costs, such as compensation and benefits for employees providing services, an allocation of facility and information technology costs, supply costs, costs for certain media-related services for patient recruitment, stock-based compensation expense, other overhead costs and offsetting R&D incentive credits. Direct costs typically increase or decrease with changes in revenue and may fluctuate significantly from period to period as a percentage of revenue due to staff labor utilization, project labor mix, the type of services, changes to the timing of work performed and project inefficiencies, among other factors. 33 -------------------------------------------------------------------------------- Reimbursed Costs Reimbursed costs include third-party pass-through and out-of-pocket costs which are generally reimbursable by our customers at cost. Third-party pass-through and out-of-pocket costs include, but are not limited to, payments to investigators, payments for the use of third-party technology, shipping costs and travel costs related to the performance of services, among others. Third-party pass-through and out-of-pocket costs are incurred across both of our reportable segments. Because services associated with reimbursed costs are generally provided by us without profit or mark-up and fluctuate from period to period without being important to our underlying performance over the full term of a contract, these costs do not have a significant impact on our income from operations. While fluctuations from period to period are not meaningful over the full term of a contract, actual and estimated reimbursed costs can impact revenue recognized, 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. Historically, we have assessed backlog and net authorizations on a basis which excluded indirect revenues and the impact of Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC 606") on direct revenue ("Historical Basis"). Starting in the first quarter of 2020, we also began to assess backlog and net authorizations on 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 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. 34
-------------------------------------------------------------------------------- As noted elsewhere in this Quarterly Report on Form 10-Q, due to the COVID-19 pandemic, we have had customers delay new studies and/or pause ongoing studies or certain activities thereof, such as patient recruitment, patient enrollment, site visits and site monitoring. These delays have impacted and will continue to impact the timing and extent to which backlog has and will convert to revenue. We have not adjusted backlog to remove the backlog associated with these studies as our customers for these studies have not canceled or notified us of their intent to cancel these studies and because we cannot estimate the length of delay. As a result of these and other factors, 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 have included new business awards associated with COVID-19 in our net authorizations and backlog. 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. Net Authorizations and Backlog The following table provides selected information related to our backlog and net authorizations as of and for the three months endedSeptember 30 : Historical Basis ASC 606 Basis (dollars in millions) 2020 2019 2020 2019 Net authorizations$ 1,200.3 $ 900.2 $ 1,764.5 $ 1,158.7 Backlog 7,890.4 6,805.7 11,720.1 9,896.6 Backlog conversion 11.8 % 11.8 % 11.0 % 10.5 % Net book-to-bill 1.35x 1.14x 1.43x 1.13x The increase in net authorizations and backlog in 2020 for the metrics above as compared to the same period in the prior year was primarily due to a higher number of, and win rate on, competitive decisions (which represents the total dollar amount of new business on which we bid), new business awards related to the COVID-19 pandemic and favorable net foreign currency fluctuations, partially offset by higher cancellations. Acquisitions OnSeptember 3, 2019 , we acquired 100% of the issued and outstanding equity ofSynarc, Inc. ("Synarc"), the global site network ofBioclinica, Inc. , expanding our global footprint intoChina andLatin America and expanding our central nervous system offering inthe United States . Additionally, onJuly 1, 2019 , we acquired 100% of the issued and outstanding equity ofMedimix International ("Medimix"), a global technology company that provides real-world evidence insights and information to the pharmaceutical, diagnostic and medical device industries. See Note 4, "Business Combinations," to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information. Incremental Public Company Expenses As a new public company, we have and will incur additional expenses on an ongoing basis that we did not incur as a private company. Those costs include additional director and officer liability insurance expenses, as well as third-party and internal resources related to accounting, auditing, Sarbanes-Oxley Act compliance, legal, investor and public relations expenses and additional stock-based compensation expense as we align our long-term incentive plan with other comparable public company plans. These costs are expected to generally be SG&A expenses. 35
-------------------------------------------------------------------------------- Results of Operations We have included the results of operations of acquired companies in our condensed consolidated results of operations from the date of their respective acquisitions, which impacts the comparability of our results of operations when comparing results for the three and nine months endedSeptember 30, 2020 to the three and nine months endedSeptember 30, 2019 . We have noted in the discussion below, to the extent meaningful and quantifiable, the impact on the comparability of our condensed consolidated results of operations to prior year results due to the inclusion of acquired companies when comparing the three and nine months endedSeptember 30, 2020 to the three and nine months endedSeptember 30, 2019 . During the first quarter of 2020, our Chief Operating Decision Maker began assessing performance and making resource allocation decisions based on total segment revenue, including direct and indirect revenue, and segment operating income, including reimbursed costs. Previously, certain revenue amounts were not allocated to segments, whereas following the change, all revenue and reimbursed costs are allocated to the respective segment. As a result, we have updated our segment presentation and all prior period information has been recast to reflect the change in the measurement of segment performance measures. Three Months EndedSeptember 30, 2020 versus Three Months EndedSeptember 30, 2019 Consolidated Results of Operations Revenue Three Months Ended September 30, (dollars in thousands) 2020 2019 Change Revenue$ 1,233,802 $ 1,023,864 $ 209,938 20.5 % Revenue increased$209.9 million , or 20.5%, to$1,233.8 million for the three months endedSeptember 30, 2020 as compared to the same period in 2019. Revenue increased (i) 19.4% from organic volume growth across our business due to higher opening backlog at the beginning of the period as compared to the prior year and overall growth in new business awards during 2020, including awards and associated revenue for COVID-19 work, (ii) 0.4% from inorganic growth due to our acquisition of Synarc and (iii) 0.7% from the favorable impact from foreign currency exchange rates. Direct Costs Three Months Ended September 30, (dollars in thousands) 2020 2019 Change Direct costs, exclusive of depreciation and amortization$ 433,422 $
369,476$ 63,946 17.3 % % of revenue 35.1 % 36.1 % Direct costs increased$63.9 million to$433.4 million for the three months endedSeptember 30, 2020 as compared to the same period in 2019. The increase in direct costs was primarily due to (i) a$54.4 million increase from growth in employee headcount to support current growth in revenue as well as compensation increases, (ii) a$9.0 million increase in laboratory supply costs from the growth in revenue, (iii) a$4.3 million increase from the acquisition of Synarc and (iv) a 0.3% increase from the unfavorable impact from foreign currency exchange rates. The increase in direct costs was partially offset by a reduction in certain project delivery costs. As a percentage of revenue, direct costs decreased to 35.1% for the three months endedSeptember 30, 2020 as compared to 36.1% in the same period in 2019 primarily due to the factors identified above. Reimbursed Costs Three Months Ended September 30, (dollars in thousands) 2020 2019 Change Reimbursed costs$ 335,866 $ 241,804 $ 94,062 38.9 % % of revenue 27.2 % 23.6 % 36
-------------------------------------------------------------------------------- Reimbursed costs increased$94.1 million to$335.9 million for the three months endedSeptember 30, 2020 as compared to the same period in 2019. Reimbursed costs increased primarily due to the increase in revenue, including growth related to certain awards of work for COVID-19 which have significant reimbursed costs and a 1.5% increase from the unfavorable impact of foreign currency exchange rates. The increase in reimbursed costs was also impacted by the general timing of costs incurred across our portfolio of work, which will vary over the course of clinical trials due to (i) the timing of the work performed, (ii) scope changes and (iii) the complexity and phase of the study, among other factors. As a percentage of revenue, reimbursed costs increased to 27.2% for the three months endedSeptember 30, 2020 as compared to 23.6% in the same period in 2019 primarily due to the factors identified above. Selling, General and Administrative Expenses Three Months Ended September 30, (dollars in thousands) 2020 2019 Change Selling, general and administrative expenses$ 249,320 $ 226,996 $ 22,324 9.8 % % of revenue 20.2 % 22.2 % SG&A expenses increased$22.3 million to$249.3 million for the three months endedSeptember 30, 2020 as compared to the same period in 2019. The increase in SG&A expenses was primarily due to (i) a$19.7 million increase from growth in employee headcount to support current growth in revenue as well as compensation increases, (ii) a$2.1 million increase from the acquisition of Synarc and (iii) a 0.4% 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 as a result of COVID-19 related cost reduction measures. As a percentage of revenue, SG&A expenses decreased to 20.2% for the three months endedSeptember 30, 2020 as compared to 22.2% in the same period in 2019 primarily due to the factors identified above as well as our efforts to effectively leverage our SG&A function. Interest Expense, Net Three Months Ended September 30, (in thousands) 2020 2019 Interest expense, net $ 49,882$ 85,754 Interest expense, net, was$49.9 million for the three months endedSeptember 30, 2020 as compared to$85.8 million in the same period in 2019. The decrease in interest expense was primarily related to the redemption of our HoldCo Notes, the lower interest rate on our New Notes as compared to the redeemed OpCo Notes and a decrease in the interest rate on our term loan under our senior secured credit facilities, partially offset by the impact from unfavorable interest rate swaps. Loss on Investments Three Months Ended September 30, (in thousands) 2020 2019
Loss on investments
Loss on investments was$53.1 million for the three months endedSeptember 30, 2020 as compared to a loss of$15.1 million in the same period in 2019. The losses for both periods were primarily a result of changes in the fair values of the net asset values of our investments, partially offset by changes to the discounts on certain investments during the current year and prior year. The decrease in net asset value for the three months endedSeptember 30, 2020 reflects primarily a decrease in the trading stock price of one of the underlying investments of a limited partnership during the quarter. 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 investments of the limited partnerships, including the volatility of trading stock prices of any 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 (Expense) Income, Net Three Months Ended September 30, (in thousands) 2020 2019 Other (expense) income, net $ (17,153 )$ 9,157 37
-------------------------------------------------------------------------------- Other expense, net, was$17.2 million for the three months endedSeptember 30, 2020 as compared to other income, net, of$9.2 million in the same period in 2019. Foreign exchange rate movement resulted in transaction and re-measurement losses of$17.5 million for the three months endedSeptember 30, 2020 and transaction and re-measurement gains of$10.7 million in the same period in 2019. Provision for Income Taxes Three Months Ended September 30, (dollars in thousands) 2020 2019 Provision for income taxes$ 11,169 $ 9,044 Effective income tax rate 50.0 % 33.5 % Our provision for income taxes was$11.2 million , resulting in an effective income tax rate of 50.0%, for the three months endedSeptember 30, 2020 as compared to a provision of$9.0 million , or an effective income tax rate of 33.5%, in the same period in 2019. 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 our domestic and foreign jurisdictions and the impacts of a tax rate change in theUnited Kingdom . Our provision for income taxes for the three months endedSeptember 30, 2019 was primarily due to the estimated tax effect on our pre-tax income. Segment Results of Operations Clinical Development Services and Laboratory Services segment revenue, segment direct costs, segment reimbursed costs, segment SG&A expenses and segment operating income for the three months endedSeptember 30, 2020 and 2019 are detailed below. Clinical Development Services Three Months Ended September 30, (dollars in thousands) 2020 2019 Change Segment revenue $ 1,008,639$ 846,068 $ 162,571 19.2 % Segment direct costs 330,281 287,538 42,743 14.9 Segment reimbursed costs 309,117 220,873 88,244 40.0 Segment SG&A expenses 137,984 130,576 7,408 5.7 Segment operating income $ 231,257$ 207,081 $ 24,176 11.7 Segment Revenue Clinical Development Services' revenue was$1,008.6 million for the three months endedSeptember 30, 2020 , an increase of$162.6 million as compared to the same period in 2019. Revenue increased (i) 18.0% from organic volume 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 2020, including awards and associated revenue for COVID-19 work, (ii) 0.7% from the favorable impact from foreign currency exchange rates and (iii) 0.5% from inorganic growth due to the acquisition of Synarc. 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$330.3 million for the three months endedSeptember 30, 2020 , an increase of$42.7 million as compared to the same period in 2019. The increase in direct costs was primarily due to (i) a$42.9 million increase from growth in employee headcount to support current growth in revenue as well as compensation increases, (ii) a$4.3 million increase from the acquisition of Synarc and (iii) a 0.2% increase from the unfavorable impact from foreign currency exchange rates. The increase in direct costs was partially offset by a reduction in certain project delivery costs. 38 -------------------------------------------------------------------------------- Segment Reimbursed Costs Clinical Development Services' reimbursed costs were$309.1 million for the three months endedSeptember 30, 2020 , an increase of$88.2 million as compared to the same period in 2019. 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 1.5% 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 will 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$138.0 million for the three months endedSeptember 30, 2020 , an increase of$7.4 million as compared to the same period in 2019. The increase in SG&A expenses was primarily due to (i) compensation increases, (ii) the impact of the acquisition of Synarc and (iii) a 0.5% 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 as a result of COVID-19 related cost reduction measures. Laboratory Services Three Months Ended September 30, (dollars in thousands) 2020 2019 Change Segment revenue $ 225,163$ 177,796 $ 47,367 26.6 % Segment direct costs 102,355 79,445 22,910 28.8 Segment reimbursed costs 26,749 20,931 5,818 27.8 Segment SG&A expenses 23,283 19,648 3,635 18.5 Segment operating income $ 72,776$ 57,772 $ 15,004 26.0 Segment Revenue Laboratory Services' revenue was$225.2 million for the three months endedSeptember 30, 2020 , an increase of$47.4 million as compared to the same period in 2019. Revenue increased from organic volume growth across the majority of 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 2020, 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. Segment Direct Costs Laboratory Services' direct costs were$102.4 million for the three months endedSeptember 30, 2020 , an increase of$22.9 million as compared to the same period in 2019. The increase in direct costs was primarily due to (i) a$13.4 million increase from growth in employee headcount to support current growth in revenue as well as compensation increases and (ii) a$9.0 million increase in laboratory supply costs associated with the growth in revenue. Segment Reimbursed Costs Laboratory Services' reimbursed costs were$26.7 million for the three months endedSeptember 30, 2020 , an increase of$5.8 million as compared to the same period in 2019. Reimbursed costs increased primarily due to the increase in revenue, as well as higher shipping costs and the general timing of costs incurred across our portfolio of work. Segment SG&A Expenses Laboratory Services' SG&A expenses were$23.3 million for the three months endedSeptember 30, 2020 , an increase of$3.6 million as compared to the same period in 2019. The increase in SG&A expenses was primarily due to a$3.6 million increase from growth in employee headcount to support current growth in revenue as well as compensation increases. 39 -------------------------------------------------------------------------------- Nine Months EndedSeptember 30, 2020 versus Nine Months EndedSeptember 30, 2019 Consolidated Results of Operations Revenue Nine Months Ended September 30, (dollars in thousands) 2020 2019 Change Revenue$ 3,317,182 $ 2,984,133 $ 333,049 11.2 % Revenue increased$333.0 million , or 11.2%, to$3,317.2 million for the nine months endedSeptember 30, 2020 as compared to the same period in 2019. Revenue increased 10.3% from organic volume growth across our business due to higher opening backlog at the beginning of the year as compared to the prior year and overall growth in new business awards during 2020, including awards and associated revenue for COVID-19 work. Additionally, revenue increased 1.0% from inorganic growth primarily due to our acquisitions of Synarc and Medimix (the "2019 Acquisitions"). Direct Costs Nine Months Ended September 30, (dollars in thousands) 2020 2019 Change Direct costs, exclusive of depreciation and amortization$ 1,222,700 $ 1,112,181 $ 110,519 9.9 % % of revenue 36.9 % 37.3 % Direct costs increased$110.5 million to$1,222.7 million for the nine months endedSeptember 30, 2020 as compared to the same period in 2019. The increase in direct costs was due to (i) a$98.1 million increase from growth in employee headcount to support current growth in revenue as well as compensation increases, (ii) an$8.5 million increase in compensation costs related to the acceleration of remaining expenses under the terminated cash-based long-term incentive plan ("LTIP"), (iii) a$21.5 million increase from the impact of the 2019 Acquisitions and (iv) a$17.9 million increase in laboratory supply costs from the growth in revenue. The increase in direct costs was partially offset by (i) a decrease in certain project delivery costs, including media-related costs for patient recruitment services, (ii) the impacts of limited voluntary and involuntary temporary furloughs of certain employees as a result of COVID-19 related cost reduction measures and (iii) a 0.8% decrease from the favorable impact from foreign currency exchange rates. As a percentage of revenue, direct costs decreased to 36.9% for the nine months endedSeptember 30, 2020 as compared to 37.3% in the same period in 2019 primarily due to the factors identified above. Reimbursed Costs Nine Months Ended September 30, (dollars in thousands) 2020 2019 Change Reimbursed costs$ 810,523 $ 688,696 $ 121,827 17.7 % % of revenue 24.4 % 23.1 % Reimbursed costs increased$121.8 million to$810.5 million for the nine months endedSeptember 30, 2020 as compared to the same period in 2019. Reimbursed costs increased primarily due to the increase in revenue, including growth related to certain awards of work for COVID-19 which have significant reimbursed costs. The increase in reimbursed costs was also impacted by the general timing of costs incurred across our portfolio of work, which will vary over the course of clinical trials due to (i) the timing of the work performed, (ii) scope changes and (iii) the complexity and phase of the study, among other factors. The increase in reimbursed costs was partially offset by a 0.4% decrease from the favorable impact from foreign currency exchange rates. As a percentage of revenue, reimbursed costs increased to 24.4% for the nine months endedSeptember 30, 2020 as compared to 23.1% in the same period in 2019 primarily due to the factors identified above. Selling, General and Administrative Expenses Nine Months Ended September 30, (dollars in thousands) 2020 2019
Change
Selling, general and administrative expenses$ 734,712 $ 681,431 $ 53,281 7.8 % % of revenue 22.1 % 22.8 % 40
-------------------------------------------------------------------------------- SG&A expenses increased$53.3 million to$734.7 million for the nine months endedSeptember 30, 2020 as compared to the same period in 2019. The increase in SG&A expenses was primarily due to (i) a$51.0 million increase from growth in employee headcount to support current growth in revenue as well as compensation increases, (ii) a$10.5 million increase from the impact of the 2019 Acquisitions, (iii) an$8.1 million increase in technology costs related to software licensing and cloud services and (iv) a$3.0 million increase in compensation costs related to the acceleration of remaining expense under the terminated cash-based LTIP. The increase in SG&A expenses was partially offset by lower travel and associated expenses as a result of COVID-19 related cost reduction measures and a 0.6% decrease from the favorable impact from foreign currency exchange rates. As a percentage of revenue, SG&A expenses decreased to 22.1% for the nine months endedSeptember 30, 2020 as compared to 22.8% in the same period in 2019 primarily due to the factors identified above as well as our efforts to effectively leverage our SG&A function. Interest Expense, Net Nine Months Ended September 30, (in thousands) 2020 2019
Interest expense, net
Interest expense, net, was$166.0 million for the nine months endedSeptember 30, 2020 as compared to$229.1 million in the same period in 2019. The decrease in interest expense was primarily related to the redemption of our HoldCo Notes, the lower interest rate on our New Notes as compared to the redeemed OpCo Notes and a decrease in the interest rate on our term loan under our senior secured credit facilities, partially offset by the impact from unfavorable interest rate swaps. Loss on Extinguishment of Debt Nine Months Ended September 30, (in thousands) 2020 2019
Loss on extinguishment of debt
Loss on extinguishment of debt was$93.5 million for the nine months endedSeptember 30, 2020 . The loss resulted from the early extinguishment of our HoldCo and 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$43.1 million . There was no loss on extinguishment of debt for the nine months endedSeptember 30, 2019 . Gain (Loss) on Investments Nine Months Ended September 30, (in thousands) 2020 2019 Gain (loss) on investments$ 16,649 $ (22,716 ) Gain on investments was$16.6 million for the nine months endedSeptember 30, 2020 as compared to a loss of$22.7 million in the same period in 2019. The gain and loss for the current year and prior year, respectively, was primarily a result of changes in the fair values of the net asset values of our investments, partially offset by changes to the discounts on certain investments for the current year and prior year. The gains or losses from our investments will likely continue to fluctuate from period to period primarily based on the changes in fair value of the underlying investments of the limited partnerships, including the volatility of stock prices of any underlying publicly traded investments within the partnerships, and changes in the discounts applied to such investments for our lack of control and lack of marketability, where applicable. Other Expense, Net Nine Months Ended September 30, (in thousands) 2020 2019 Other expense, net$ (14,097 ) $ (3,158 ) Other expense, net, was$14.1 million for the nine months endedSeptember 30, 2020 as compared to other expense, net, of$3.2 million in the same period in 2019. Foreign exchange rate movement resulted in transaction and re-measurement losses of$3.1 million for the nine months endedSeptember 30, 2020 and transaction and re-measurement losses of$1.4 million in the same period in 2019. Undesignated interest rate swap activity resulted in losses of$11.4 million for the nine months endedSeptember 30, 2020 and no losses or gains for the nine months endedSeptember 30, 2019 . 41 --------------------------------------------------------------------------------
Provision for Income Taxes Nine Months Ended September 30, (dollars in thousands) 2020 2019 Provision for income taxes$ 20,682 $ 12,387 Effective income tax rate 24.5 % 25.3 % Our provision for income taxes was$20.7 million , resulting in an effective income tax rate of 24.5%, for the nine months endedSeptember 30, 2020 as compared to a provision of$12.4 million , or an effective income tax rate of 25.3%, in the same period in 2019. Our provision for income taxes for the nine months endedSeptember 30, 2020 was primarily due to the estimated tax effect on our pre-tax income. Our provision for income taxes for the nine months endedSeptember 30, 2019 was primarily due to the estimated tax effect on our pre-tax income. Segment Results of Operations Clinical Development Services and Laboratory Services segment revenue, segment direct costs, segment reimbursed costs, segment SG&A expenses and segment operating income for the nine months endedSeptember 30, 2020 and 2019 are detailed below. Clinical Development Services Nine Months Ended September 30, (dollars in thousands) 2020 2019 Change Segment revenue$ 2,694,775 $ 2,488,773 $ 206,002 8.3 % Segment direct costs 922,737 871,753 50,984 5.8 Segment reimbursed costs 730,872 633,466 97,406 15.4 Segment SG&A expenses 415,334 391,551 23,783 6.1 Segment operating income$ 625,832 $ 592,003 $ 33,829 5.7 Segment Revenue Clinical Development Services' revenue was$2,694.8 million for the nine months endedSeptember 30, 2020 , an increase of$206.0 million as compared to the same period in 2019. Revenue increased 7.3% 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 year as compared to the prior year and overall growth in new business awards during 2020, including awards and associated revenue for COVID-19 work and 1.2% from inorganic growth due to the 2019 Acquisitions. The increase in revenue was partially offset by a 0.2% decrease from the unfavorable impact from foreign currency exchange rates. The higher opening backlog was primarily due to increased net authorizations for our Phase II-IV clinical trial management services in 2019. Segment Direct Costs Clinical Development Services' direct costs were$922.7 million for the nine months endedSeptember 30, 2020 , an increase of$51.0 million as compared to the same period in 2019. The increase in direct costs was primarily due to a$59.1 million increase from growth in employee headcount to support current growth in revenue as well as compensation increases and a$21.5 million increase from the impact of the 2019 Acquisitions. The increase in direct costs was partially offset by (i) a decrease in certain project delivery costs, including media-related costs for patient recruitment services, (ii) the impacts of limited voluntary and involuntary temporary furloughs of certain employees as a result of COVID-19 related cost reduction measures and (iii) a 1.0% decrease from the favorable impact from foreign currency exchange rates. Segment Reimbursed Costs Clinical Development Services' reimbursed costs were$730.9 million for the nine months endedSeptember 30, 2020 , an increase of$97.4 million as compared to the same period in 2019. 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 will 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 increase in reimbursed costs was partially offset by a 0.4% decrease from the favorable impact from foreign currency exchange rates. 42 -------------------------------------------------------------------------------- Segment SG&A Expenses Clinical Development Services' SG&A expenses were$415.3 million for the nine months endedSeptember 30, 2020 , an increase of$23.8 million as compared to the same period in 2019. The increase in SG&A expenses was primarily due to a$25.0 million increase from growth in employee headcount to support current growth in revenue as well as compensation increases and a$10.5 million increase from the impact of the 2019 Acquisitions. The increase in SG&A expenses was partially offset by lower travel and associated expenses as a result of COVID-19 related cost reduction measures and a 0.8% decrease from the favorable impact from foreign currency exchange rates. Laboratory Services Nine Months Ended September 30, (dollars in thousands) 2020 2019 Change Segment revenue$ 622,407 $ 495,360 $ 127,047 25.6 % Segment direct costs 279,154 227,171 51,983 22.9 Segment reimbursed costs 79,651 55,230 24,421 44.2 Segment SG&A expenses 66,929 58,551 8,378 14.3 Segment operating income$ 196,673 $ 154,408 $ 42,265 27.4 Segment Revenue Laboratory Services' revenue was$622.4 million for the nine months endedSeptember 30, 2020 , an increase of$127.0 million as compared to the same period in 2019. Revenue increased from organic volume growth across all our laboratory services in part due to higher opening backlog at the beginning of the year as compared to the prior year and overall growth in new business awards during 2020, including awards and associated revenue for COVID-19 work. The higher opening backlog was primarily due to increased net authorizations across all of our labs businesses in 2019. Segment Direct Costs Laboratory Services' direct costs were$279.2 million for the nine months endedSeptember 30, 2020 , an increase of$52.0 million as compared to the same period in 2019. The increase in direct costs was primarily due to a$32.8 million increase from growth in employee headcount to support current growth in revenue as well as compensation increases and a$17.9 million increase in laboratory supply costs associated with the growth in revenue. Segment Reimbursed Costs Laboratory Services' reimbursed costs were$79.7 million for the nine months endedSeptember 30, 2020 , an increase of$24.4 million as compared to the same period in 2019. Reimbursed costs increased primarily due to the increase in revenue, as well as higher shipping costs and the general timing of costs incurred across our portfolio of work. Segment SG&A Expenses Laboratory Services' SG&A expenses were$66.9 million for the nine months endedSeptember 30, 2020 , an increase of$8.4 million as compared to the same period in 2019. The increase in SG&A expenses was primarily due to a$9.2 million increase from growth in employee headcount to support current growth in revenue as well as compensation increases. 43 -------------------------------------------------------------------------------- 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 and 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. While we have not seen a significant impact to our liquidity and capital resources as a result of the COVID-19 pandemic to date, we continue to monitor and assess the impact and have already taken certain measures to preserve those resources. For example, inJune 2020 , we issued$1,200.0 million of New Notes, and used the proceeds to redeem our previously outstanding OpCo Notes. We expect this transaction to lower our interest expense and cash paid for interest in the future. Additionally, inMarch 2020 , we borrowed$150.0 million under our revolving credit facility as a precautionary measure in order to further strengthen our cash position and to preserve financial flexibility due to the uncertainty in the global markets as a result of the COVID-19 pandemic. InJune 2020 , we repaid the$150.0 million borrowed under the revolving credit facility, using cash on hand. In addition, we may implement future measures to preserve or increase cash on-hand and create financial flexibility. For example, we may look to obtain additional financing or engage in refinancing our variable rate long-term debt outstanding under our senior secured credit facilities. However, due to the ongoing impact of the COVID-19 pandemic on the capital and credit markets, we might not be able to successfully obtain additional financing or refinancing of our senior secured credit facilities on reasonable terms and within a reasonable time period acceptable to us, or at all. The following table presents key measures of our liquidity on the dates set forth below: (in thousands) September 30, 2020 December 31, 2019 Cash and cash equivalents: Cash held in the United States $ 523,257 $ 135,917 Cash held in foreign locations 279,833 209,270 Total $ 803,090 $ 345,187 Revolving Credit Facility availability (net of letters of credit) $ 298,370 $ 298,370 As a result of our recapitalization in 2017, we incurred certain future obligations associated with potential additional recapitalization consideration. We do not expect the payment of the recapitalization investment portfolio liability to impact our future liquidity or capital resources as the right for the pre-closing holders to receive any such payment depends upon receipt of future cash proceeds from the applicable portion of the investment portfolio. We have classified in long-term liabilities the portion of the investment portfolio we estimate to be payable beyond the next 12 months, net of taxes and other expenses, to the pre-closing holders. Future payments will be required to be made, if and when, cash proceeds are received and are payable under the recapitalization transaction merger agreement. During the three and nine months endedSeptember 30, 2020 and 2019, we did not make any cash distributions related to the recapitalization investment portfolio liability. The Company expects to make a cash distribution related to the recapitalization investment portfolio liability of approximately$14.9 million during the fourth quarter of 2020. The expected cash distribution has been recorded as a component of other accrued expenses on the condensed consolidated balance sheet included elsewhere in this Quarterly Report on Form 10-Q. See Note 2, "Recapitalization Transaction," of our audited consolidated financial statements included in ourMay 2020 Form 8-K for additional information. We expect to continue funding our operations from existing cash, cash flows from operations and, if necessary or appropriate, borrowings under our revolving credit facility, which is currently undrawn. We believe that these sources of liquidity will be sufficient to fund our operations and service our debt and interest for the foreseeable future, as well as address impacts from the COVID-19 pandemic. 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 revolving credit facility or additional long-term financing. We may seek to take advantage of market opportunities to refinance existing variable rate debt instruments with new debt instruments at interest rates, maturities and terms we deem attractive. We may also, from time to time at our sole discretion, purchase, redeem or retire our existing debt instruments, through tender offers, in privately negotiated or open market transactions, or otherwise. 44
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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 related to the COVID-19 pandemic and in Part II, Item 1A, "Risk Factors," included elsewhere in this Quarterly Report on Form 10-Q, as well as factors described under "Indemnification and Insurance," within Part I, Item 1, "Business," Part I, Item 1A, "Risk Factors," within Part II, Item 7, "Contractual Obligations and Commercial Commitments," "Critical Accounting Policies and Estimates" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , as superseded by, and solely to the extent set forth in, ourMay 2020 Form 8-K. Indebtedness OnJune 5, 2020 ,Jaguar Holding Company II andPPD Development, L.P. (collectively, the "Issuers"), issued in a private placement the 2025 Notes and 2028 Notes. The 2025 Notes mature onJune 15, 2025 , and the 2028 Notes mature onJune 15, 2028 . Interest on the New Notes is payable semi-annually onJune 15 andDecember 15 of each year. The Issuers can redeem the New Notes, at their option, in whole at any time or in part from time to time, upon notice, at the various redemption prices (expressed as a percentage of principal amount) or a "make-whole" premium, plus accrued and unpaid interest, if any, to the redemption date. The New Notes do not have registration rights. See Note 6, "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 on the New Notes. As ofSeptember 30, 2020 andDecember 31, 2019 , we had total long-term debt and finance lease obligations outstanding of approximately$4,298.7 million and$5,705.9 million , respectively. Other than the customary covenants and default provisions related to the issuance of the New Notes, there were no changes to the debt covenants or default provisions related to our outstanding debt under the credit agreement governing our senior secured credit facilities (the "Credit Agreement") or other obligations during the first nine months of 2020. InJune 2020 , we repaid in full the outstanding balance of our revolving credit facility and therefore we were not subject to a net secured leverage ratio test, as defined in the Credit Agreement, as ofSeptember 30, 2020 . We were in compliance with all covenants for all long-term debt arrangements as ofSeptember 30, 2020 andDecember 31, 2019 . See Note 6, "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 on our long-term debt and finance lease obligations.
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