You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated condensed financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , or the Annual Report, and with the information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report.
We use the terms "we," "us," "our," or the "Company" in this report to refer to
Overview
We are one of the world's leading global contract research organizations, or CROs, by revenue, providing outsourced clinical development services to the biotechnology and pharmaceutical industries. We believe we are one of a select group of CROs with the expertise and capability to conduct clinical trials across major therapeutic areas on a global basis. Our therapeutic expertise includes areas that are among the largest in pharmaceutical development, and we focus in particular on oncology, immunology, central nervous system inflammation, respiratory, cardiometabolic and infectious diseases. We believe that we further differentiate ourselves from our competitors through our investments in medical informatics and clinical technologies designed to enhance efficiencies, improve study predictability and provide better transparency for our clients throughout their clinical development processes. Our Data Solutions segment allows us to better serve our clients across their entire product lifecycle by (i) improving clinical trial design, recruitment, and execution; (ii) creating real-world data solutions based on the use of medicines by actual patients in normal situations; and (iii) increasing the efficiency of healthcare companies' commercial organizations through enhanced analytics and outsourcing services.
Overview of the Impact of COVID-19 to our Business
The recent outbreak of novel coronavirus COVID-19, or COVID-19, which surfaced inWuhan, China , inDecember 2019 , has been declared a pandemic and has spread to multiple global regions, includingthe United States andEurope . The impact of this pandemic has been and will likely continue to be extensive in many aspects of society, which has resulted in and will likely continue to result in significant disruptions to the global economy, as well as businesses around the world. In an effort to halt the outbreak of COVID-19, a number of countries, includingthe United States , have placed significant restrictions on travel and many businesses have announced extended closures. The disruptions caused by COVID-19 did not have a material impact on our financial results to start the year; however, as the global spread of the virus began to accelerate late in the first quarter of 2020, we began to experience an adverse impact to our financial results, which continued through the third quarter of 2020. We believe that we will continue to experience disruptions to our business due to the COVID-19 pandemic through the remainder of 2020 and into 2021. As the COVID-19 pandemic continues to evolve rapidly, we cannot at this time accurately predict the effects of these conditions on our operations. Uncertainties remain as to the duration of the pandemic, the geographic location of specific outbreaks, and the length and scope of the travel restrictions and business closures imposed by the governments of impacted countries. The COVID-19 outbreak has had, and a continuing outbreak or future outbreaks may have, several important impacts on our business: •Workforce: In response to the outbreak and business disruption, first and foremost, we have prioritized the health and safety of our employees and we closed the majority of our physical office locations worldwide in March. Although we have begun limited re-openings of some of our offices, most of our workforce is able to work remotely in an effective way. •Backlog: We have not experienced any material COVID-19 related trial cancellations. Although business development activities began to normalize during the second and third quarters, the nine month period endedSeptember 30, 2020 was impacted by COVID-19. Late in the first quarter, we experienced bid-defense meeting postponements due to travel restrictions and delays in study award decision-making. This has had an impact on new business awards in both the Clinical Research and Data Solutions segments, leading to lower growth in gross new business awards in the first nine months of 2020 as compared to prior years. •Clinical Research segment: DuringMarch 2020 , we began to experience global site closures, including some of our clinic facilities, which has led to a decline in site-based monitoring and the enrollment of 24 -------------------------------------------------------------------------------- Table of Contents patients. We have been able to implement remote monitoring activities through the use of our technology platforms in an effort to mitigate the impact of these site closures. Limitations on travel and business closures recommended by federal, state, and local governments, has and could continue to, among other things, impact our ability to enroll patients in clinical trials, recruit clinical site investigators, and obtain timely approvals from local regulatory authorities. •Data Solutions segment: Our Data Solutions segment is relatively more insulated from the effects of the virus, due to its high proportion of recurring license revenue. However, service offerings in this segment that rely on face-to-face interactions or are dependent on in-person gatherings, events or conferences may experience significant disruption. •Mitigation strategies: In light of the current situation, we have initiated proactive cost management strategies. These include, among other things, hiring restrictions, reductions in third-party costs and certain compensation adjustments. We have also implemented proactive cash conservation initiatives, including delaying some capital expenditures and halting voluntary debt repayments. •Liquidity position: We believe that we have a strong liquidity position, which includes cash on hand and access to our revolving credit facility. We are currently subject to two debt covenants in our Senior Secured Credit Facility: Requirement: As of
Total indebtedness to EBITDA ? 4.25x 1.61x Interest expense to EBITDA ? 3.00x 11.05x We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future.
Coronavirus Aid, Relief, and Economic Security Act
OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted. The CARES Act is an approximate$2 trillion emergency economic stimulus package passed in response to the coronavirus outbreak. The CARES Act includes broad sweeping provisions including direct financial assistance to Americans in the form of one-time payments to individuals; aid to small businesses in the form of loans and grants; efforts to stabilize theU.S. economy and keep Americans employed in general; and support for healthcare professionals, patients and hospitals. Also included in the CARES Act are numerous tax provisions including, but not limited to, certain payroll tax benefits, changes to the net operating loss rules, and the business interest expense deduction rules under Code Section 163(j). Due to the recent enactment of this legislation, there is a high degree of uncertainty around its implementation and we continue to assess the potential impacts of this legislation on our business, results of operations, financial condition and cash flows. There can be no assurance that we will receive any funding under the CARES Act.
How We Assess the Performance of Our Business
The Company is managed through two reportable segments: (i) the Clinical Research segment; and (ii) the Data Solutions segment. Our chief operating decision-maker uses segment profit as the primary measure of each segment's operating results in order to allocate resources and in assessing the Company's performance. In addition to our financial measures in conformity withU.S. generally accepted accounting principles, or GAAP, including revenue, costs and expenses and other measures discussed below, we review various financial and operational metrics. For our Clinical Research segment, we review new business awards, cancellations, and backlog. Our gross new business awards for our Clinical Research segment for the nine months endedSeptember 30, 2020 and 2019 were$2,329.9 million and$2,300.3 million , respectively. New business awards arise when a client selects us to execute its trial and is documented by written or electronic correspondence, or for our Strategic Solutions offering when the amount of revenue expected to be recognized is measurable. The number of new business awards can vary significantly from year to year, and awards can have terms ranging from several months to several years. For our Strategic Solutions offering, the value of a new business award is the anticipated revenue to be recognized in the corresponding quarter of the next fiscal year. For the remainder of our Clinical Research segment, the value of a new award is the anticipated revenue over the life of the contract, which does not include reimbursable expenses. 25 -------------------------------------------------------------------------------- Table of Contents In the normal course of business, we experience contract cancellations, which are reflected as cancellations when the client provides us with written or electronic correspondence that the work should cease. During the nine months endedSeptember 30, 2020 and 2019, we had$285.6 million and$295.6 million , respectively, of cancellations for which we received correspondence from the client for our Clinical Research segment. The number of cancellations can vary significantly from period to period. The value of the cancellation is the remaining amount of unrecognized service revenue, less the estimated effort to transition the work back to the client. Our backlog consists of anticipated revenue from new business awards that either have not started or are in process but have not been completed for our Clinical Research segment. Backlog varies from period to period depending upon new business awards and contract modifications, cancellations, and the amount of revenue recognized under existing contracts. Our backlog atSeptember 30, 2020 and 2019 was$5.1 billion and$4.6 billion , respectively.
Sources of Revenue
Total revenues are comprised of revenues from the provision of our services and revenues from reimbursed expenses and reimbursable investigator grants that are incurred while providing our services. We do not have any material product revenues.
Costs and Expenses
Our costs and expenses are comprised primarily of our direct costs, selling, general and administrative costs, depreciation and amortization expense and income taxes.
Direct Costs (Exclusive of Depreciation and Amortization)
For our Clinical Research segment, direct costs consist primarily of labor-related charges. They include elements such as salaries, benefits and incentive compensation for our employees. In addition, we utilize staffing agencies to procure primarily part time individuals to perform work on our contracts. Labor-related charges as a percentage of the Clinical Research segment's total direct costs were 97.5% and 96.2% for the nine months endedSeptember 30, 2020 and 2019, respectively. The cost of labor procured through staffing agencies is included in these percentages and represents 3.0% and 3.1% of the Clinical Research segment's total direct costs for the nine months endedSeptember 30, 2020 and 2019, respectively. Our remaining direct costs are items such as travel, meals, postage and freight, patient costs, medical waste and supplies. The total of all these items as a percentage of the Clinical Research segment's total direct costs were 2.5% and 3.8% for the nine months endedSeptember 30, 2020 and 2019, respectively. Historically, direct costs have increased with an increase in revenues. The future relationship between direct costs and revenues may vary from historical relationships. Several factors will cause direct costs to decrease as a percentage of revenues. Deployment of our billable staff in an optimally efficient manner has the most impact on our ratio of direct cost to revenue. The most effective deployment of our staff is when they are fully engaged in billable work and are accomplishing contract related activities at a rate that meets or exceeds budgeted targets. We also seek to optimize our efficiency by performing work using the employee with the lowest cost. Generally, the following factors may cause direct costs to increase as a percentage of revenues: our staff are not fully deployed, as is the case when there are unforeseen cancellations or delays, or when our staff are accomplishing tasks at levels of effort that exceed budget, such as rework, as well as pricing pressure from increased competition. For our Data Solutions segment, direct costs consist primarily of data costs. Data costs as a percentage of the Data Solutions segment's total direct costs were 76.7% and 73.3% for the nine months endedSeptember 30, 2020 and 2019, respectively. Labor-related charges, such as salaries, benefits and incentive compensation for our employees, were 18.3% and 20.0% of the Data Solutions segment's total direct costs for the nine months endedSeptember 30, 2020 and 2019, respectively. Our remaining direct costs are items such as travel, meals, and supplies and were 5.1% and 6.7% of the Data Solutions segment's total direct costs for the nine months endedSeptember 30, 2020 and 2019, respectively.
Reimbursable Expenses
As is customary in our industry, we also routinely enter into separate agreements on behalf of our clients with independent physician investigators in connection with clinical trials. We also receive funds from our clients for investigator fees. We are not obligated either to perform the service or to pay the investigator in the event of default by the client. In addition, we do not pay the independent physician investigator until funds are received from the client. We include these 26 -------------------------------------------------------------------------------- Table of Contents investigator fees, as well as our out-of-pocket costs that are reimbursable by our customers, as reimbursable expenses in our consolidated condensed statements of operations.
Reimbursable expenses are not included in our backlog because they are pass-through costs to our clients.
We believe that the fluctuations in reimbursable expenses are not meaningful to the final economic performance as measured on a net basis given that such costs are passed through to the client. The reimbursable expenses are included in our measure of progress for our long-term contracts.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of administration payroll and benefits, marketing expenditures, and overhead costs such as information technology and facilities costs. These expenses also include central overhead costs that are not directly attributable to our operating business and include certain costs related to insurance, professional fees and property.
Transaction-related Costs
Transaction-related costs include fees associated with our secondary offerings, costs associated with acquisition related earn-out liabilities or adjustments to the initial fair value estimates, and expenses associated with our acquisitions.
Depreciation and Amortization Expense
Depreciation expense represents the depreciation charged on our fixed assets. The charge is recorded on a straight-line method, based on estimated useful lives of three to seven years for computer hardware and software and five to seven years for furniture and equipment. Leasehold improvements are depreciated over the lesser of the life of the lease term or the useful life of the improvements. Amortization expense consists of amortization recorded on acquisition-related intangible assets. Customer relationships, backlog and finite-lived trade names are amortized on an accelerated basis, which coincides with the period of economic benefit we expect to receive. All other finite-lived intangibles are amortized on a straight-line basis. In accordance with GAAP, we do not amortize goodwill and indefinite-lived intangible assets.
Income Taxes
Because we conduct operations on a global basis, our effective tax rate has depended and will continue to depend upon the geographic distribution of our pre-tax earnings among several different taxing jurisdictions. Our effective tax rate can also vary based on changes in the tax rates of the different jurisdictions. Our effective tax rate is also impacted by tax credits and the establishment or release of deferred tax asset valuation allowances and tax reserves, as well as significant non-deductible items such as portions of transaction-related costs. In addition, our effective income tax rate is influenced byU.S. tax law which has been substantially modified by theU.S. Tax Cuts and Jobs Act of 2017, or the Act. The following provisions of the Act could have an adverse effect on our tax rate: •global intangible low-taxed income, or GILTI; •limitations on theU.S. deductions for net business interest; •base erosion anti-abuse provisions, or BEAT; and •performance-based compensation subject to$1 million limit. Significant judgment is required related to the application of the Act, particularly with respect to GILTI and BEAT provisions. If changes occur in the Company's tax structure, the structure of its customer arrangements, or interpretations of regulations that clarify these or other provisions of the Act, these changes could have a material effect on the Company's tax provision. Foreign subsidiaries are taxed separately in their respective jurisdictions. We have foreign net operating loss carryforwards in some jurisdictions. The carryforward periods for these losses vary from four years to an indefinite carryforward period depending on the jurisdiction. Our ability to offset future taxable income with the net operating loss carryforwards may be limited in certain instances, including changes in ownership. 27 -------------------------------------------------------------------------------- Table of Contents Exchange Rate Fluctuations The majority of our foreign operations transact in the Euro, or EUR, or British pound, or GBP. As a result, our revenue and expenses are subject to exchange rate fluctuations with respect to these currencies. We have translated these currencies intoU.S. dollars using the following average exchange rates: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 U.S. dollars per: Euro 1.17 1.11 1.121.12 British pound 1.29 1.23 1.27 1.27 Results of Operations
Consolidated Results of Operations for the Three Months Ended
Three Months Ended
2020 2019 (in thousands) Revenue$ 796,307 $ 780,691 Operating expenses: Direct costs (exclusive of depreciation and amortization) 412,076 389,304 Reimbursable expenses 156,389 169,965 Selling, general and administrative expenses 115,409 95,542 Transaction-related costs (45,074) 572 Depreciation and amortization expense 33,315 29,264 Loss on disposal of fixed assets 32 256 Income from operations 124,160 95,788 Interest expense, net (10,721) (12,974) Loss on modification or extinguishment of debt - (1,855) Foreign currency (losses) gains, net (9,128) 5,408 Other (expense) income, net (1) 15 Income before income taxes 104,310 86,382 Provision for income taxes 13,058 3,375 Net income$ 91,252 $ 83,007 Revenue increased by$15.6 million , or 2.0%, from$780.7 million during the three months endedSeptember 30, 2019 to$796.3 million during the three months endedSeptember 30, 2020 . Revenue for the three months endedSeptember 30, 2020 benefited from an increase in billable hours as well as by a favorable impact of$5.4 million from foreign currency exchange rate fluctuations offset by a decrease in the reimbursable portion of revenue, which were impacted by the continued disruption from the COVID-19 pandemic. Direct costs, exclusive of depreciation and amortization, increased by$22.8 million , or 5.8%, from$389.3 million during the three months endedSeptember 30, 2019 to$412.1 million during the three months endedSeptember 30, 2020 . Salaries and related benefits in our Clinical Research segment increased$24.2 million due to hiring of billable staff to support our portfolio of studies prior toMarch 2020 , when COVID-19 began to have an adverse impact on our operations. Data costs in our Data Solutions segment increased$1.7 million due to increased costs on the renewal of existing contracts and the addition of new sources of data to expand our data offerings. There was an unfavorable impact of$1.3 million from foreign currency exchange rate fluctuations, which was offset by a decrease in travel and other project-related costs of$4.2 million . Direct costs as a percentage of revenue were 51.7% and 49.9% during the three months endedSeptember 30, 2020 and 2019, respectively. Reimbursable expenses decreased by$13.6 million from$170.0 million during the three months endedSeptember 30, 2019 to$156.4 million during the three months endedSeptember 30, 2020 . We believe that the fluctuations in reimbursable expenses from period to period are not meaningful to our underlying performance over the full terms of the relevant contracts. 28 -------------------------------------------------------------------------------- Table of Contents Selling, general and administrative expenses increased by$19.9 million , or 20.8%, from$95.5 million during the three months endedSeptember 30, 2019 to$115.4 million during the three months endedSeptember 30, 2020 . The increase in selling, general and administrative expenses is primarily related to an increase in salaries and related benefits, including stock-based compensation expense, due to increased headcount and additional office space added prior toMarch 2020 when COVID-19 began to have an adverse impact on our operations. Selling, general and administrative expenses as a percentage of revenue were 14.5% and 12.2% during the three months endedSeptember 30, 2020 and 2019, respectively. Transaction-related costs are primarily related to changes in the fair value of contingent consideration and other expenses incurred in conjunction with our recent acquisitions. During the three months endedSeptember 30, 2020 , we recorded a$45.1 million reduction in the fair value of the earn-out liability associated with the acquisition ofCare Innovations, Inc. , or Care Innovations, as it was determined that the two 2020 financial targets would not be met. Specifically, the revenue and earnings before interest, taxes, depreciation, and amortization of the acquired business are expected to be lower than initial forecasts. The initial growth estimates for the service offering were negatively impacted by changes in market conditions, which negatively impacted Care Innovations' ability to contract and deliver services on new commercial opportunities within the one-year earn-out period. Depreciation and amortization expense was$33.3 million and$29.3 million during the three months endedSeptember 30, 2020 and 2019, respectively. Depreciation and amortization expense as a percentage of revenue was 4.2% during the three months endedSeptember 30, 2020 and 3.7% during the three months endedSeptember 30, 2019 . The increase is due to the amortization of the intangible assets acquired in connection with the acquisition of Care Innovations as well as an increase in depreciation expense due to an increase in our depreciable asset base. Interest expense, net, decreased by$2.3 million , or 17.4%, from$13.0 million during the three months endedSeptember 30, 2019 to$10.7 million during the three months endedSeptember 30, 2020 . The decrease is primarily due to a decrease in the weighted average interest rate on the unhedged portion of our debt and was partially offset by an increase in the average outstanding debt balance as compared to the three months endedSeptember 30, 2019 . Foreign currency (losses) gains, net, changed by$14.5 million from foreign currency gains of$5.4 million during the three months endedSeptember 30, 2019 to foreign currency losses of$9.1 million during the three months endedSeptember 30, 2020 . Foreign currency gains and losses are due to fluctuations in theU.S. dollar, gains or losses that arise in connection with the revaluation of short-term inter-company balances between our domestic and international subsidiaries, and gains or losses from foreign currency transactions, such as those resulting from the settlement of third-party accounts receivables and payables denominated in a currency other than the local currency of the entity making the payment. During the three months endedSeptember 30, 2020 , foreign currency losses were primarily due to movement of theU.S. dollar versus the British pound, Euro, Canadian dollar and Russian ruble. Provision for income taxes increased by$9.7 million from$3.4 million during the three months endedSeptember 30, 2019 to$13.1 million during the three months endedSeptember 30, 2020 . Our effective tax rate was 3.9% and 12.5% during the three months endedSeptember 30, 2019 and 2020, respectively. The comparative increase in income tax expense was primarily driven by the impact of a cumulative reduction in the Company's BEAT liability for the three months endedSeptember 30, 2019 related to revisions to contractual arrangements which reduced the effective tax rate. For the three months endedSeptember 30, 2020 , the annual estimated effective tax rate varied from theU.S. statutory rate of 21% primarily due to (i) geographic distribution of global pre-tax income, (ii) theU.S. inclusion of amounts related to the estimated tax on GILTI, (iii) theU.S. inclusion of amounts related to Foreign-Derived Intangible Income, and (iv) a decrease in the fair value of the earn-out liability related to the stock acquisition of Care Innovations, which was not included in taxable income, but instead decreased the tax basis. 29 -------------------------------------------------------------------------------- Table of Contents Consolidated Results of Operations for the Nine Months EndedSeptember 30, 2020 Compared to the Nine Months EndedSeptember 30, 2019 Nine Months Ended September 30, 2020 2019 (in thousands) Revenue$ 2,309,907 $ 2,266,022 Operating expenses: Direct costs (exclusive of depreciation and amortization) 1,211,278 1,153,441 Reimbursable expenses 481,497 471,682 Selling, general and administrative expenses 332,346 291,439 Transaction-related costs (44,465) 572 Depreciation and amortization expense 98,078 85,462 Loss on disposal of fixed assets 207 900 Income from operations 230,966 262,526 Interest expense, net (36,102) (37,834) Loss on modification or extinguishment of debt - (1,855) Foreign currency (losses) gains, net (12,036) 1,864 Other expense, net (1) (66) Income before income taxes 182,827 224,635 Provision for income taxes 37,041 56,317 Net income 145,786 168,318 Net income attributable to noncontrolling interest - (99) Net income attributable to PRA Health Sciences, Inc. $ 145,786$ 168,219 Revenue increased by$43.9 million or 1.9%, from$2,266.0 million during the nine months endedSeptember 30, 2019 to$2,309.9 million during the nine months endedSeptember 30, 2020 . Revenue for the nine months endedSeptember 30, 2020 benefited from an increase in billable hours and the reimbursable portion of revenue, offset by an unfavorable impact of$4.6 million from foreign currency exchange rate fluctuations. For the nine months endedSeptember 30, 2020 , our revenue growth was impacted by the COVID-19 pandemic. Although we saw an increase in billable hours during the nine months endedSeptember 30, 2020 , our billable hours, particularly during the second quarter, were impacted by the inaccessibility of investigator sites and an inability to screen and enroll patients due to the continued disruption from the COVID-19 pandemic. The growth in revenue and the increase in billable hours for the nine months endedSeptember 30, 2020 was due largely to the increase in our backlog as we entered the year, the type of services we are providing on our active studies, which was driven by the life cycles of projects that were active during the period, the growth in new business awards as a result of higher demand for our services across the industries we serve, more effective sales efforts and the growth in the overall CRO market. Direct costs, exclusive of depreciation and amortization, increased by$57.8 million , or 5.0%, from$1,153.4 million during the nine months endedSeptember 30, 2019 to$1,211.3 million during the nine months endedSeptember 30, 2020 . Salaries and related benefits in our Clinical Research segment increased$67.6 million due to hiring of billable staff to support our portfolio of studies prior toMarch 2020 , when COVID-19 began to have an adverse impact on our operations. Data costs in our Data Solutions segment increased$15.1 million due to increased costs on the renewal of existing contracts and the addition of new sources of data to expand our data offerings. These were offset by a decrease in travel and other project-related costs of$12.1 million and a favorable impact of$12.9 million from foreign currency exchange rate fluctuations. Direct costs as a percentage of revenue were 52.4% and 50.9% during the nine months endedSeptember 30, 2020 and 2019, respectively. Reimbursable expenses increased by$9.8 million from$471.7 million during the nine months endedSeptember 30, 2019 to$481.5 million during the nine months endedSeptember 30, 2020 . We believe that the fluctuations in reimbursable expenses from period to period are not meaningful to our underlying performance over the full terms of the relevant contracts. Selling, general and administrative expenses increased by$40.9 million , or 14.0%, from$291.4 million during the nine months endedSeptember 30, 2019 to$332.3 million during the nine months endedSeptember 30, 2020 . The increase in selling, general and administrative expenses is primarily related to an increase in salaries and related benefits, including stock-based compensation expense, due to increased headcount and additional office space added prior toMarch 2020 when COVID-19 began to have an adverse impact on our operations. Selling, general and administrative expenses as a percentage of revenue were 14.4% and 12.9% during the nine months endedSeptember 30, 2020 and 2019, respectively. 30
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Transaction-related costs are primarily related to changes in the fair value of contingent consideration and other expenses incurred in conjunction with our recent acquisitions. During the nine months endedSeptember 30, 2020 , we recorded a$44.5 million reduction in the fair value of the earn-out liability associated with the acquisition of Care Innovations, as it was determined that the two 2020 financial targets would not be met. Specifically, the revenue and earnings before interest, taxes, depreciation, and amortization of the acquired business are expected to be lower than initial forecasts. The initial growth estimates for the service offering were negatively impacted by changes in market conditions, which negatively impacted Care Innovations' ability to contract and deliver services on new commercial opportunities within the one-year earn-out period. Depreciation and amortization expense increased by$12.6 million , or 14.8%, from$85.5 million during the nine months endedSeptember 30, 2019 to$98.1 million during the nine months endedSeptember 30, 2020 . Depreciation and amortization expense as a percentage of revenue was 4.2% during the nine months endedSeptember 30, 2020 and 3.8% during the nine months endedSeptember 30, 2019 . The increase is due to the amortization of the intangible assets acquired in the acquisition of Care Innovations as well as an increase in depreciation expense due to an increase in our depreciable asset base. Interest expense, net, decreased by$1.7 million , or 4.6%, from$37.8 million during the nine months endedSeptember 30, 2019 to$36.1 million during the nine months endedSeptember 30, 2020 . The decrease is primarily due to a decrease in the weighted average interest rate on the unhedged portion of our debt and was partially offset by an increase in the average outstanding debt balance as compared to the nine months endedSeptember 30, 2019 . Foreign currency (losses) gains, net, changed by$13.9 million from foreign currency gains of$1.9 million during the nine months endedSeptember 30, 2019 to foreign currency losses of$12.0 million during the nine months endedSeptember 30, 2020 . Foreign currency gains and losses are due to fluctuations in theU.S. dollar, gains or losses that arise in connection with the revaluation of short-term inter-company balances between our domestic and international subsidiaries, and gains or losses from foreign currency transactions, such as those resulting from the settlement of third-party accounts receivables and payables denominated in a currency other than the local currency of the entity making the payment. During the nine months endedSeptember 30, 2020 , foreign currency losses were primarily due to movement of theU.S. dollar versus the British pound, Euro, Canadian dollar and Russian ruble. Provision for income taxes decreased by$19.3 million from$56.3 million during the nine months endedSeptember 30, 2019 to$37.0 million during the nine months endedSeptember 30, 2020 . Our effective tax rate was 25.1% and 20.3% during the nine months endedSeptember 30, 2019 and 2020, respectively. The decrease in the effective tax rate of 4.8% was primarily attributable to the effect of a decrease in the fair value of the earn-out liability related to the stock acquisition of Care Innovations, which was not included in taxable income, but instead decreased the tax basis.
Segment Results of Operations for the Three Months Ended
Clinical Research Three Months Ended September 30, 2020 2019 (in thousands) Revenue$ 732,126 $ 719,005 Segment profit 211,186 206,345 Segment profit % 28.8 % 28.7 % Revenue increased by$13.1 million , or 1.8%, from$719.0 million during the three months endedSeptember 30, 2019 to$732.1 million during the three months endedSeptember 30, 2020 . Revenue for the three months endedSeptember 30, 2020 benefited from an increase in billable hours and an increase in the effective rate of hours billed on our studies. We saw a decrease in the reimbursable portion of revenue, primarily driven by a lack of access to investigator sites and an inability to screen and enroll patients due to the continued disruption from the COVID-19 pandemic. Segment profit increased by$4.8 million , or 2.3%, from$206.3 million during the three months endedSeptember 30, 2019 to$211.2 million during the three months endedSeptember 30, 2020 primarily due to an increase in revenue. Segment profit as a percentage of revenue increased from 28.7% during the three months endedSeptember 30, 2019 to 28.8% for the same period in 2020. 31
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Table of Contents Data Solutions Three Months Ended September 30, 2020 2019 (in thousands) Revenue$ 64,181 $ 61,686 Segment profit 16,656 15,077 Segment profit % 26.0 % 24.4 % Revenue increased by$2.5 million , or 4.0%, from$61.7 million during the three months endedSeptember 30, 2019 to$64.2 million during the three months endedSeptember 30, 2020 . The increase in revenue was related to an increase in services provided during the quarter. Segment profit increased by$1.6 million , or 10.5%, from$15.1 million during the three months endedSeptember 30, 2019 to$16.7 million during the three months endedSeptember 30, 2020 primarily due to an increase in revenue. Segment profit as a percentage of revenue increased from 24.4% during the three months endedSeptember 30, 2019 to 26.0% for the same period in 2020 primarily due to factors noted above.
Segment Results of Operations for the Nine Months Ended
Clinical Research
Nine Months Ended September 30, 2020 2019 (in thousands) Revenue$ 2,125,510 $ 2,087,863 Segment profit 577,991 593,852 Segment profit % 27.2 % 28.4 % Revenue increased by$37.6 million , or 1.8%, from$2,087.9 million during the nine months endedSeptember 30, 2019 to$2,125.5 million during the nine months endedSeptember 30, 2020 . Revenue for the nine months endedSeptember 30, 2020 benefited from an increase of billable hours and the reimbursable portion of revenue. For the nine months endedSeptember 30, 2020 , our revenue growth was impacted by the COVID-19 pandemic. Although we saw an increase in billable hours during the nine months endedSeptember 30, 2020 , our billable hours, particularly during the second quarter, were impacted by the inaccessibility of investigator sites and an inability to screen and enroll patients due to the continued disruption from the COVID-19 pandemic. The growth in revenue and the increase in billable hours for the nine months endedSeptember 30, 2020 was due largely to the increase in our backlog as we entered the year, the type of services we are providing on our active studies, which was driven by the life cycles of projects that were active during the period, the growth in new business awards as a result of higher demand for our services across the industries we serve, more effective sales efforts and the growth in the overall CRO market. Segment profit decreased by$15.9 million , or 2.7%, from$593.9 million during the nine months endedSeptember 30, 2019 to$578.0 million during the nine months endedSeptember 30, 2020 primarily due to an increase in direct costs (exclusive of depreciation and amortization) and reimbursable expenses. Segment profit as a percentage of revenue decreased from 28.4% during the nine months endedSeptember 30, 2019 to 27.2% for the same period in 2020. Segment profit as a percentage of revenue decreased primarily due to the factors noted above. 32 --------------------------------------------------------------------------------
Table of Contents Data Solutions Nine Months Ended September 30, 2020 2019 (in thousands) Revenue$ 184,397 $ 178,159 Segment profit 39,141 47,047 Segment profit % 21.2 % 26.4 % Revenue increased by$6.2 million , or 3.5%, from$178.2 million during the nine months endedSeptember 30, 2019 to$184.4 million during the nine months endedSeptember 30, 2020 . The increase in revenue was related to an increase in the volume of data services provided during the nine-month period offset by a decrease in the amount of consulting and service in kind services provided during the nine month period. Segment profit decreased by$7.9 million , or 16.8%, from$47.0 million during the nine months endedSeptember 30, 2019 to$39.1 million during the nine months endedSeptember 30, 2020 due to an increase in direct costs (exclusive of depreciation and amortization). The increase in direct costs is attributable to increased costs on the renewal of existing contracts and the addition of new sources of data to expand our data offerings. Segment profit as a percentage of revenue decreased from 26.4% during the nine months endedSeptember 30, 2019 to 21.2% for the same period in 2020 primarily due to the factors noted above.
Seasonality
Although our business is not generally seasonal, we typically experience a slight decrease in our revenue growth rate during the fourth quarter due to holiday vacations and a similar decrease in new business awards in the first quarter due to our clients' budgetary cycles and vacations during the year-end holiday period.
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our principal source of liquidity is operating cash flows. As ofSeptember 30, 2020 , we had$336.2 million of cash and cash equivalents of which$56.4 million was held by our foreign subsidiaries. Additionally, as ofSeptember 30, 2020 our Revolver and Accounts Receivable Financing Agreement provided for$640.4 million of potential borrowings. Our expected primary cash needs on both a short and long-term basis are for capital expenditures, expansion of services, geographic expansion, debt repayments, acquisitions and other strategic transactions, and other general corporate purposes. We have historically funded our operations and growth, including acquisitions, with cash flow from operations, borrowings, and issuances of equity securities. We expect to continue expanding our operations through internal growth and strategic acquisitions and investments. We expect these activities will be funded from existing cash, cash flow from operations and, if necessary or appropriate, borrowings under our existing or future credit facilities. Our sources of liquidity could be affected by our dependence on a small number of industries and clients, compliance with regulations, international risks (including the ongoing COVID-19 pandemic), and personal injury, environmental or other material litigation claims.
Cash Collections
Cash collections from accounts receivable were$2,363.1 million during the nine months endedSeptember 30, 2020 , including$331.8 million of funds received from customers to pay independent physician investigators, or investigators, as compared to$2,195.2 million during the nine months endedSeptember 30, 2019 , including$261.5 million of funds received from customers to pay investigators. The increase in cash collections during the nine months endedSeptember 30, 2020 is related to our increase in revenue, driven by an increase in new business awards and an increase in our backlog, as well as improvements in our days sales outstanding. Discussion of Cash Flows
Cash Flow from Operating Activities
During the nine months endedSeptember 30, 2020 , net cash provided by operations was$267.1 million compared to$66.0 million for the same period in 2019. Cash provided by operating activities increased over the prior year primarily due to 33
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Table of Contents improvements in cash flows from working capital changes, driven by an improvement in our days sales outstanding as compared to the prior year. Additionally, the prior year included the impact of an acquisition related earn-out payment.
Cash Flow from Investing Activities
Net cash used in investing activities was$219.2 million during the nine months endedSeptember 30, 2020 compared to$59.7 million for the same period in 2019. The increase in cash outflows is primarily attributable to the acquisition of Care Innovations.
Cash Flow from Financing Activities
Net cash provided by financing activities was$55.5 million during the nine months endedSeptember 30, 2020 compared to$31.0 million for the same period in 2019. During the nine months endedSeptember 30, 2020 our long-term debt balances increased by$26.3 million compared to a$305.0 million increase for the same period in 2019. Additionally, the prior year included a$300.0 million cash outflow for the repurchase and retirement of common stock as well as a$4.1 million outflow for the acquisition of a non-controlling interest.
Indebtedness
As of
See Note 9 to our consolidated condensed financial statements included in this Quarterly Report on Form 10-Q, and "Management's Discussion and Analysis of Financial Condition and Results of Operations- Liquidity and Capital Resources" and Note 11 to our audited consolidated financial statements, each included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , for additional details regarding our credit arrangements.
Contractual Obligations and Commercial Commitments
We have various contractual obligations, which are recorded as liabilities in our consolidated condensed financial statements. Other items are not recognized as liabilities in our consolidated condensed financial statements but are required to be disclosed. There have been no material changes, outside of the ordinary course of business, to our contractual obligations as previously disclosed in our Annual Report on Form 10-K for fiscal year endedDecember 31, 2019 .
Critical Accounting Policies and Estimates
There have been no material changes to our critical accounting policies as
previously disclosed in our Annual Report on Form 10-K for the fiscal year ended
Disclosure Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition to historical consolidated condensed financial information, this Quarterly Report on Form 10-Q contains forward-looking statements that reflect, among other things, our current expectations and anticipated results of operations, all of which are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, market trends, or industry results to differ materially from those expressed or implied by such forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may constitute forward-looking statements. Without limiting the foregoing, words such as "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "should," "targets," "will" and the negative thereof and similar words and expressions are intended to identify forward-looking statements. These forward-looking statements speak only as of the date hereof, and unless legally required, we assume no obligation to update any such forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information. The Company cautions you that actual results may differ materially from the Company's expectations due to a number of factors, including that the current COVID-19 pandemic has adversely affected and may continue to affect adversely our business and results of operations; most of the Company's contracts may be terminated on short notice and that the Company may be unable to maintain large customer contracts or to enter into new contracts; the Company may underprice contracts, overrun its cost estimates, or fail to receive approval for, or experience delays in, documenting change orders; the historical 34 -------------------------------------------------------------------------------- Table of Contents indications of the relationship of backlog to revenues may not be indicative of their future relationship; the Company may be unable to attract suitable investigators and patients for its clinical trials; the Company could be subject to employment liability with its embedded and functional outsourcing solutions as it places employees at the physical workplaces of its clients; the Company may lose key personnel or be unable to recruit and retain experienced personnel; the Company may be unable to maintain information systems or effectively update them; a failure or breach of the Company's IT systems could result in customer information being compromised or otherwise significantly disrupt the Company's business operations; client or therapeutic concentration or competition among clients could harm the Company's business; if the Company does not keep pace with rapid technological changes, its services may become less competitive or obsolete; the Company may be unable to successfully identify, acquire and integrate businesses, services and technologies or to manage joint ventures; the Company's business is subject to economic, political and other risks associated with international operations, including foreign currency exchange rate fluctuations; the Company may be exposed to liabilities under anti-corruption laws due to the global nature of its business; the Company's failure to perform services in accordance with contractual requirements, certain laws and regulatory standards, and ethical considerations may subject it to significant costs or liability, damage its reputation and cause it to lose existing business or not receive new business; the Company's services are related to treatment of human patients, and it could face liability if a patient is harmed; the Company's relationships with existing or potential clients who are in competition with each other may adversely impact the degree to which other clients or potential clients use its services; the Company may be unable to compete effectively with other players in the biopharmaceutical services industry; changes in accounting standards may adversely affect the Company's financial statements; the Company's effective income tax rate may fluctuate which may adversely affect its operations, earnings, and earnings per share; the Company may not realize the full value of its goodwill and intangible assets, and may be unable to use net operating loss carry-forwards; the Company's suppliers may increase its costs to obtain, restrict its use of or refuse to license its data, or the Company may otherwise be unable to continue to obtain products, services and licenses from third parties; the Company may be unable to protect its intellectual property; patent and other intellectual property litigation could be time-consuming and costly; biopharmaceutical industry outsourcing trends could change and adversely affect the Company's operations and growth rate; government regulators or customers may limit the scope of prescriptions or withdraw products from the market; theU.S. and international healthcare industry is subject to political, economic and/or regulatory influences and changes, such as healthcare reform; current and proposed laws and regulations regarding the protection of personal data could result in increased risks of liability or increased cost or could limit the Company's service offerings; the Company has substantial indebtedness, some of which have interest rates pricing using a spread over LIBOR, and may incur additional indebtedness in the future, which could adversely affect the Company's financial condition; circumstances beyond the Company's control could cause industry-wide reduction in demand for its services; and other factors that are set forth in our filings with theSecurities and Exchange Commission , including our most recent Annual Report on Form 10-K filed onFebruary 21, 2020 .
Website and Social Media Disclosure
We use our website (www.prahs.com) as a channel of distribution of company information. The information we post through this channel may be deemed material. Accordingly, investors should monitor this channel, in addition to following our press releases,Securities and Exchange Commission , orSEC , filings and public conference calls and webcasts. The contents of our website are not, however, a part of this report.
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