PRA Health Sciences, Inc. - FORM 10-Q

Attached files

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EX-32.2 - EX-32.2 - PRA Health Sciences, Inc.	prah-20160930ex322a27555.htm
EX-32.1 - EX-32.1 - PRA Health Sciences, Inc.	prah-20160930ex321ad1735.htm
EX-31.2 - EX-31.2 - PRA Health Sciences, Inc.	prah-20160930ex312649f58.htm
EX-31.1 - EX-31.1 - PRA Health Sciences, Inc.	prah-20160930ex311513765.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

◻TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number: 001-36732

PRA Health Sciences, Inc.

(Exact name of registrant as specified in its charter)

Delaware		46-3640387
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

4130 ParkLake Avenue, Suite 400, Raleigh, NC 27612

(Address of principal executive offices) (Zip Code)

(919) 786-8200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ◻

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☒	Accelerated filer ◻

Non-accelerated filer ◻	Smaller reporting company ◻
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ◻ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Number of Shares Outstanding
Common Stock $0.01 par value		61,408,892 shares outstanding as of October 31, 2016

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PRA HEALTH SCIENCES, INC.

FORM 10-Q

FOR QUARTER PERIOD ENDED SEPTEMBER 30, 2016

TABLE OF CONTENTS

Item Number		Page

	PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Consolidated Condensed Balance Sheets as of September 30, 2016 and December 31, 2015	3
	Consolidated Condensed Statements of Operations for the three and nine months ended September 30, 2016 and 2015	4
	Consolidated Condensed Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2016 and 2015	5
	Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2016 and 2015	6
	Notes to Consolidated Condensed Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31

	PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	32
SIGNATURES		33
EXHIBIT INDEX		34

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(UNAUDITED)

(in thousands, except share amounts)


	September 30,		December 31,
	2016		2015
ASSETS
Current assets:
Cash and cash equivalents	$	130,343	$	121,065
Restricted cash		5,235		5,060
Accounts receivable and unbilled services, net		447,146		415,077
Other current assets		42,286		32,574
Total current assets		625,010		573,776
Fixed assets, net		87,712		80,691
Goodwill		985,584		1,014,798
Intangible assets, net		492,243		533,938
Other assets		29,898		25,540
Total assets	$	2,220,447	$	2,228,743
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	36,743	$	57,096
Accrued expenses and other current liabilities		145,167		139,155
Advanced billings		318,218		333,729
Total current liabilities		500,128		529,980
Long-term debt, net		882,446		889,514
Other long-term liabilities		99,855		106,527
Total liabilities		1,482,429		1,526,021
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock, $0.01 par value, 100,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively		—		—
Common stock, $0.01 par value, 1,000,000,000 authorized shares at September 30, 2016 and December 31, 2015; 61,309,444 and 60,245,009 issued and outstanding at September 30, 2016 and December 31, 2015, respectively		613		602
Additional paid-in capital		863,334		828,347
Accumulated other comprehensive loss		(186,159)		(132,307)
Retained earnings		60,230		6,080
Total stockholders' equity		738,018		702,722
Total liabilities and stockholders' equity	$	2,220,447	$	2,228,743

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

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PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Revenue:
Service revenue	$	399,841	$	345,096	$	1,166,410	$	1,013,582
Reimbursement revenue		53,414		58,414		172,915		171,354
Total revenue		453,255		403,510		1,339,325		1,184,936
Operating expenses:
Direct costs		259,910		212,808		758,333		651,646
Reimbursable out-of-pocket costs		53,414		58,414		172,915		171,354
Selling, general and administrative		67,190		63,091		199,648		182,831
Transaction-related costs		—		—		31,785		—
Depreciation and amortization		17,708		19,762		52,246		58,217
Loss on disposal of fixed assets		219		256		290		451
Income from operations		54,814		49,179		124,108		120,437
Interest expense, net		(13,779)		(15,255)		(42,525)		(46,064)
Loss on extinguishment of debt		—		—		(21,485)		—
Foreign currency gains, net		1,182		3,697		9,264		8,797
Other income (expense), net		20		(947)		(85)		(1,507)
Income before income taxes and equity in gains (losses) of unconsolidated joint ventures		42,237		36,674		69,277		81,663
Provision for income taxes		10,821		10,696		17,869		24,341
Income before equity in gains (losses) of unconsolidated joint ventures		31,416		25,978		51,408		57,322
Equity in gains (losses) of unconsolidated joint ventures, net of tax		33		(2,319)		2,742		(4,061)
Net income	$	31,449	$	23,659	$	54,150	$	53,261
Net income per share attributable to common stockholders:
Basic	$	0.52	$	0.39	$	0.89	$	0.89
Diluted	$	0.49	$	0.37	$	0.84	$	0.84
Weighted average common shares outstanding:
Basic		60,937		60,050		60,579		59,917
Diluted		64,521		63,504		64,268		63,082

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

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PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Net income	$	31,449	$	23,659	$	54,150	$	53,261
Other comprehensive income (loss):
Foreign currency translation adjustments		(11,211)		(22,179)		(55,548)		(32,303)
Unrealized gains (losses) on derivative instruments, net of income tax expense (benefit) of $0, ($1,808), $0, and ($2,508)		127		(5,724)		(2,546)		(10,192)
Reclassification adjustments:
Losses on derivatives included in net income, net of income taxes of $0, $0, $0, and $0		1,617		158		4,242		227
Comprehensive income (loss)	$	21,982	$	(4,086)	$	298	$	10,993

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

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PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)


	Nine Months Ended September 30,
	2016		2015
Cash flows from operating activities:
Net income	$	54,150	$	53,261
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		52,246		58,217
Amortization of debt issuance costs and discount		3,514		4,822
Amortization of terminated interest rate swaps		3,334		—
Stock-based compensation		4,940		3,634
Non-cash transaction-related costs		29,421		—
Unrealized foreign currency gains		(9,380)		(11,749)
Loss on extinguishment of debt		3,661		—
Deferred income taxes		(8,076)		(2,213)
Equity in (gains) losses of unconsolidated joint ventures		(2,742)		4,061
Other reconciling items		41		2,766
Changes in operating assets and liabilities:
Accounts receivable, unbilled services, and advanced billings		(52,290)		(66,640)
Other operating assets and liabilities		(29,609)		26,043
Net cash provided by operating activities		49,210		72,202
Cash flows from investing activities:
Purchase of fixed assets		(25,657)		(26,035)
Cash paid for interest on interest rate swap		(913)		—
Cash paid to terminate interest rate swaps		—		(32,907)
Investment in unconsolidated joint venture		—		(23,000)
Proceeds from the sale of WuXiPRA		3,700		—
Acquisition of Value Health Solutions, Inc., net of cash acquired		—		(543)
Proceeds from the sale of fixed assets		—		44
Payment of ClinStar, LLC working capital settlement		—		(1,693)
Acquisition of Nextrials, Inc., net of cash acquired		(4,768)		—
Net cash used in investing activities		(27,638)		(84,134)
Cash flows from financing activities:
Proceeds from accounts receivable financing agreement		120,000		—
Repayment of senior notes		(133,559)		—
Repayment of term debt		—		(40,000)
Borrowings on line of credit		110,000		65,000
Repayments on line of credit		(110,000)		(45,000)
Payment of common stock issuance costs		—		(525)
Proceeds from stock option exercises		638		27
Payment of acquisition-related contingent consideration		—		(2,000)
Net cash used in financing activities		(12,921)		(22,498)
Effects of foreign exchange changes on cash and cash equivalents		627		(2,324)
Change in cash and cash equivalents		9,278		(36,754)
Cash and cash equivalents, beginning of period		121,065		85,192
Cash and cash equivalents, end of period	$	130,343	$	48,438

Supplemental cash flow data
Non-cash investing and financing activities:
Cashless exercises of stock options	$	5,278	$	1,451
Issuance of common stock for the acquisition of Value Health Solutions, Inc.	$	—	$	1,582

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

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PRA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

September 30, 2016

(1) Basis of Presentation

Unaudited Interim Financial Information

The interim consolidated condensed financial statements include the accounts of PRA Health Sciences, Inc. and its subsidiaries, or the Company. These financial statements are prepared in conformity with U.S. generally accepted accounting principles, or GAAP, and are unaudited. In the opinion of the Company’s management, all adjustments of a normal recurring nature necessary for a fair presentation have been reflected. Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been omitted. The accompanying interim consolidated condensed financial statements and related notes should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

The preparation of the interim consolidated condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim consolidated condensed financial statements and the reported amounts of revenues and claims and expenses during the reporting period. Actual results could differ from those estimates.

The Company

The Company is a full-service global contract research organization providing a broad range of product development services for pharmaceutical and biotechnology companies around the world. The Company’s integrated services include data management, statistical analysis, clinical trial management, and regulatory and drug development consulting.

Variable Interest Entities

Financial Accounting Standards Board, or FASB, accounting guidance concerning variable interest entities, or VIE, addresses the consolidation of a business enterprise to which the usual condition of consolidation (ownership of a majority voting interest) does not apply. This guidance focuses on controlling financial interests that may be achieved through arrangements that do not involve voting interests. The guidance requires an assessment of who the primary beneficiary is and whether the primary beneficiary should consolidate the VIE. The primary beneficiary is identified as the variable interest holder that has both the power to direct the activities of the variable interest entity that most significantly impacts the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. Application of the VIE consolidation requirements may require the exercise of significant judgment by management.

On March 22, 2016, the Company entered into a three-year accounts receivable financing agreement and related arrangements to securitize certain of its accounts receivable. Under the accounts receivable financing agreement, certain of the Company’s U.S. accounts receivable and unbilled services balances are sold by certain of its consolidated subsidiaries to another of its consolidated subsidiaries, a wholly-owned bankruptcy-remote special purpose entity, or SPE. The SPE in turn may borrow up to $140.0 million from a third party lender, secured by liens on the receivables and other assets of the SPE.

The Company retains the servicing of the securitized accounts receivable portfolio and has a variable interest in the SPE by holding the residual equity. The Company determined that the SPE is a VIE and it is the primary beneficiary because (i) the Company’s servicing responsibilities for the securitized portfolio gives it the power to direct the activities that most significantly impact the performance of the VIE and (ii) its variable interest in the VIE gives it the obligation to

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absorb losses and the right to receive residual returns that could potentially be significant. As a result, the Company has consolidated the VIE within its financial statements.

Refer to Note 8, Long-Term Debt, for additional information regarding the accounts receivable financing agreement.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued an Accounting Standards Update, or ASU, No. 2014-09, "Revenue from Contracts with Customers," to clarify the principles of recognizing revenue and create common revenue recognition guidance between GAAP and International Financial Reporting Standards. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted only as of reporting periods beginning after December 15, 2016. The FASB issued ASU No. 2016-08, 2016-10, and 2016-12 in March, April, and May 2016, respectively, all of which amend the guidance in ASU No. 2014-09. ASU No. 2016-08 clarifies implementation guidance on principal versus agent considerations. ASU No. 2016-10 clarifies implementation guidance on identifying performance obligations and accounting for licenses of intellectual property. ASU No. 2016-12 does not change the core revenue recognition principles, but instead addresses certain issues identified in the guidance on assessing collectability, presentation of sales taxes, noncash consideration, completed contracts and contract modifications at transition. The Company is currently assessing the potential impact of ASU No. 2014-09, 2016-08, 2016-10, and 2016-12 on the Company's consolidated condensed financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which revises the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The provisions of ASU No. 2016-02 are effective for fiscal years beginning after December 15, 2018 and should be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. The Company is currently assessing the potential impact of ASU No. 2016-02 on the Company’s consolidated condensed financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This update includes provisions intended to simplify various aspects of accounting for share-based compensation. ASU No. 2016-09 will take effect for public companies for the annual periods beginning after December 15, 2016. The adoption of this ASU is not expected to have a material effect on the consolidated condensed financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments,” which clarifies existing guidance related to accounting for cash receipts and cash payments and classification on the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. The Company is currently evaluating the impact of this new standard on the consolidated condensed financial statements.

Secondary Offerings

In March and May 2016, KKR PRA Investors L.P., or KKR, and certain executive officers of the Company sold a total of 10,000,000 shares of the Company’s common stock as part of the secondary offerings, or, collectively, the Secondary Offerings. The Company incurred professional fees in connection with the Secondary Offerings of $1.0 million during nine months ended September 30, 2016. The fees are included in transaction-related costs in the accompanying consolidated condensed statement of operations. As of September 30, 2016, KKR owned 49.3% of the Company’s outstanding common stock.

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(2) Business Combination

On March 18, 2016, the Company acquired all of the outstanding shares of Nextrials, Inc., or Nextrials, a developer of web-based software which integrates electronic health records with clinical trials, for $4.8 million in cash and contingent consideration in the form of potential earn-out payments of up to $3.0 million. Earn-out payments totaling $2.0 million and $1.0 million are contingent upon the achievement of project milestones and certain external software sales targets, respectively, during the 30-month period following closing. The Company recognized a liability of approximately $2.3 million as the estimated acquisition date fair value of the earn-out; $0.7 million is included in accrued expenses and other current liabilities and $1.6 million is included in other long-term liabilities in the consolidated condensed balance sheet as of September 30, 2016. The fair value of the contingent consideration was based on significant inputs not observed in the market and thus represented a Level 3 measurement. Changes in the fair value of the contingent consideration subsequent to the acquisition date are recognized in earnings in the period of the change. The fair value of the contingent consideration increased by $0.1 million during the three and nine months ended September 30, 2016. With this acquisition, the Company expects to enhance its ability to serve customers throughout the clinical research process with technologies that include improved efficiencies by reducing study durations and costs through integrated operational management.

The acquisition of Nextrials was accounted for as a business combination and, accordingly, the assets acquired and the liabilities assumed have been recorded at their respective fair values as of the acquisition date. In connection with the acquisition, the Company recorded approximately $2.7 million of goodwill, which is not deductible for income tax purposes. The goodwill is attributable to the workforce of the acquired business and expected synergies with the Company’s existing information technology operations.

The Company’s purchase price allocation is as follows (in thousands):


	Purchase		Weighted
	Price		Amortization
	Allocation		Period
Cash and cash equivalents	$	94
Accounts receivable		211
Other current assets		96
Property, plant and equipment		111
Software intangible		5,574	5 years
Accounts payable and accrued expenses		(1,585)
Other long-term liabilities		(11)
Estimated fair value of net assets acquired		4,490
Purchase price, including contingent consideration and net of working capital settlement		7,145
Total goodwill	$	2,655

Pro forma information is not provided as the acquisition did not have a material effect on the Company’s consolidated results.

(3) Joint Ventures

On May 6, 2016, the Company and WuXi AppTec (Shanghai) Co., Ltd. (“WuXi”) finalized an agreement to dissolve the WuXiPRA Clinical Research (Shanghai) Co., Ltd. joint venture (“WuXiPRA”). Under the agreement, the Company sold its 49% portion of the joint venture located in mainland China for $4.0 million, which subsequently became a wholly owned subsidiary of WuXi. The portion of the joint venture located in Hong Kong became a wholly owned subsidiary of the Company and was acquired for $0.3 million. In addition, the Company retained its Strategic Solutions business in China and Hong Kong. Upon termination, the Company and WuXi formed a preferred provider relationship under which WuXi will provide full-service clinical trial services for global clinical trials subcontracted by the Company in China. As a result of the transaction, the Company recognized a $3.3 million gain on the sale, which is recorded in the equity in gains (losses) of unconsolidated joint ventures in the accompanying consolidated condensed statement of operations.

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The acquisition of the WuXiPRA joint venture’s Hong Kong operations was accounted for as a business combination and, accordingly, the assets acquired and the liabilities assumed have been recorded at their respective fair values as of the acquisition date. In connection with the acquisition, the Company recorded approximately $0.6 million of goodwill, which is attributable to the workforce of the acquired business. Pro forma information is not provided as the acquisition did not have a material effect on the Company’s consolidated results.

(4) Fair Value Measurements

The Company records certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy that prioritizes the inputs used to measure fair value is described below. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs.

The three levels of inputs used to measure fair value are as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Unobservable inputs that are supported by little or no market activity. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The carrying amount of financial instruments, including cash and cash equivalents, accounts receivable, unbilled services, accounts payable and advanced billings, approximate fair value due to the short maturities of these instruments.

Recurring Fair Value Measurements

The following table summarizes the fair value of the Company’s financial assets and liabilities that are measured on a recurring basis as of September 30, 2016 (in thousands):


	Level 1		Level 2		Level 3		Total
Liabilities:
Interest rate swap	$	—	$	1,610	$	—	$	1,610
Contingent consideration		—		—		3,388		3,388
Total	$	—	$	1,610	$	3,388	$	4,998

The interest rate swap is measured at fair value using a market approach valuation technique. The valuation is based on an estimate of net present value of the expected cash flows using relevant mid-market observable data inputs and based on the assumption of no unusual market conditions or forced liquidation.

The Company values contingent consideration, related to business combinations, using a weighted probability of potential payment scenarios discounted at rates reflective of the weighted average cost of capital for the businesses acquired. Key assumptions used to estimate the fair value of contingent consideration include operational milestones and the probability of achieving the specific milestones.

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The following table summarizes the changes in Level 3 financial liabilities measured on a recurring basis for the nine months ended September 30, 2016 (in thousands):


	Contingent Consideration - Accrued expenses and other long-term liabilities
Balance at December 31, 2015	$	999
Initial estimate of Nextrials contingent consideration		2,282
Revaluations included in earnings		107
Balance at September 30, 2016	$	3,388

Non-recurring Fair Value Measurements

Certain assets and liabilities are carried on the accompanying consolidated condensed balance sheets at cost and are not remeasured to fair value on a recurring basis. These assets include finite-lived intangible assets which are tested when a triggering event occurs and goodwill and identifiable indefinite-lived intangible assets which are tested for impairment annually on October 1 or when a triggering event occurs.

As of September 30, 2016, assets carried on the balance sheet and not remeasured to fair value on a recurring basis totaling approximately $1,477.8 million were identified as Level 3. These assets are comprised of goodwill of $985.6 million and identifiable intangible assets, net of $492.2 million.

Refer to Note 8, Long-Term Debt, for additional information regarding the fair value of long-term debt balances.

(5) Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents, accounts receivable, and unbilled services. As of September 30, 2016, substantially all of the Company’s cash and cash equivalents were held in or invested with large financial institutions. Accounts receivable include amounts due from pharmaceutical and biotechnology companies. The Company establishes an allowance for potentially uncollectible receivables. In management’s opinion, there is no additional material credit risk beyond amounts provided for such losses.

Service revenue from individual customers greater than 10% of consolidated service revenue in the respective periods was as follows:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2016	2015	2016	2015
Customer C	11.7%	-	10.8%	-
Customer A	10.4%	11.4%	10.7%	11.0%
Customer D	10.2%	-	-	-

Accounts receivable and unbilled receivables from individual customers that were equal to or greater than 10% of consolidated accounts receivable and unbilled receivables at the respective dates were as follows:


	September 30,	December 31,
	2016	2015
Customer C	13.7%	-
Customer A	12.5%	13.4%
Customer B	-	10.1%

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(6) Accounts Receivable and Unbilled Services

Accounts receivable and unbilled services include service revenue, reimbursement revenue, and amounts associated with work performed by investigators. Accounts receivable and unbilled services were as follows (in thousands):


	September 30,		December 31,
	2016		2015
Accounts receivable	$	312,018	$	290,963
Unbilled services		136,644		126,755
		448,662		417,718
Less allowance for doubtful accounts		(1,516)		(2,641)
Total accounts receivable and unbilled services, net	$	447,146	$	415,077

(7) Goodwill and Intangible Assets

Goodwill

The changes in the carrying amount of goodwill are as follows (in thousands):


Balance at December 31, 2015	$	1,014,798
Acquisition of Nextrials		2,655
Acquisition of the WuXiPRA joint venture’s Hong Kong operations		570
Currency translation		(32,439)
Balance at September 30, 2016	$	985,584

There are no accumulated impairment charges as of September 30, 2016 and December 31, 2015.

Intangible Assets

Intangible assets consist of the following (in thousands):


	September 30,		December 31,
	2016		2015
Customer relationships	$	367,866	$	380,721
Customer backlog		121,735		127,871
Trade names (definite-lived)		25,731		25,693
Patient list and other intangibles		28,974		23,400
Non-competition agreements		2,721		2,657
Total finite-lived intangible assets, gross		547,027		560,342
Accumulated amortization		(172,794)		(144,414)
Total finite-lived intangible assets, net		374,233		415,928
Trade names (indefinite-lived)		118,010		118,010
Total intangible assets, net	$	492,243	$	533,938

Amortization expense was $11.3 million and $34.3 million for the three and nine months ended September 30, 2016, respectively, and $14.3 million and $42.6 million for the three and nine months ended September 30, 2015, respectively.

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The estimated future amortization expense of finite-lived intangible assets is expected to be as follows (in thousands):


2016 (remaining)	$	11,258
2017		35,762
2018		31,592
2019		26,275
2020		25,016
2021 and thereafter		244,330
Total	$	374,233

The estimated fair value of the Early Development Services, or EDS, reporting unit closely approximated its carrying value when the Company performed its annual goodwill impairment test during the fourth quarter of 2014. The Company made operational improvements during 2015 in order to improve the profitability of the EDS reporting unit. As a result of these changes, EDS saw growth in both backlog and new business awards that contributed to its improved financial performance during the year and led the Company to update its forecast for future periods. The Company considered all of these factors when it performed its most recent goodwill impairment test during the fourth quarter of 2015 and it was concluded that the estimated fair value of the EDS reporting unit exceeded its carrying value by $48.9 million or 23%. Any negative changes in assumptions on revenue, new business awards, cancellations, or the Company's ability to improve operations while maintaining a competitive cost structure could adversely affect the fair value of EDS and result in significant goodwill impairment charges in the fourth quarter of 2016.

(8) Long-Term Debt

Long-term debt consists of the following (in thousands):


	September 30,		December 31,
	2016		2015
Term loans, first lien	$	689,000	$	689,000
Senior notes		91,441		225,000
Accounts receivable financing agreement		120,000		—
		900,441		914,000
Less debt issuances costs and discount		(17,995)		(24,486)
Total long-term debt, net	$	882,446	$	889,514

Principal payments on long-term debt are due as follows (in thousands):


2016 (remaining)	$	—
2017		—
2018		—
2019		120,000
2020		689,000
2021 and thereafter		91,441
Total	$	900,441

As collateral for borrowings under the credit agreement, or 2013 Credit Agreement, the Company granted a pledge on primarily all of its assets, and the stock of designated subsidiaries. The Company is subject to certain financial covenants, which require the Company to maintain certain debt-to-EBITDA ratios. The 2013 Credit Agreement also contains covenants that, among other things, restrict the Company's ability to incur additional indebtedness, grant liens, make investments, loans, guarantees or advances, make restricted junior payments, including dividends, redemptions of capital stock and voluntary prepayments or repurchase of certain other indebtedness, engage in mergers, acquisitions or sales of assets, enter into sale and leaseback transactions or engage in certain transactions with affiliates and otherwise restrict certain corporate activities. After giving effect to the applicable restrictions on the payment of dividends under the 2013 Credit Agreement, subject to compliance with applicable law, as of September 30, 2016 and December 31,

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2015, there was approximately $30.1 million and $3.0 million, respectively, free of restriction, which was available for the payment of dividends. The Company does not expect to pay dividends in the foreseeable future. The Company does not expect these covenants to restrict its liquidity, financial condition or access to capital resources in the foreseeable future. The 2013 Credit Agreement also contains customary representations, warranties, affirmative covenants, and events of default.

Revolving Credit Facilities

The Company’s revolving credit facilities provide for $125.0 million of potential borrowings and expire on September 23, 2018. The interest rate on the revolving credit facilities is based on LIBOR plus an applicable rate, based on the leverage ratio of the Company. The Company, at its discretion, may choose interest periods of 1, 2, 3 or 6 months. In addition, the Company is required to pay to the lenders a commitment fee of 0.5% quarterly for unused commitments on the revolver, subject to a step-down to 0.375% based upon achievement of a certain leverage ratio. At September 30, 2016 and December 31, 2015, the Company had no outstanding borrowings under the revolving credit facilities. In addition, at September 30, 2016 and December 31, 2015, the Company had $3.7 million and $4.4 million, respectively, in letters of credit outstanding, which are secured by the revolving credit facilities.

Senior Notes

On March 17, 2016, the Company repaid $133.6 million aggregate principal amount of its 9.5% senior notes due 2023, or Senior Notes, as part of a cash tender offer. In accordance with the guidance in FASB’s Accounting Standards Codification, or ASC, No. 470-50, "Debt—Modifications and Extinguishments," the debt repayment was accounted for as a partial debt extinguishment. The repayment resulted in a $21.5 million loss on extinguishment of debt, which consists of a $17.4 million early tender premium, a $3.7 million write-off of unamortized debt issuance costs and $0.4 million of fees associated with the transaction for the nine months ended September 30, 2016.

Accounts Receivable Financing Agreement

In March 2016, the Company entered into a $140.0 million accounts receivable financing agreement, of which $120.0 million was outstanding as of September 30, 2016. The borrowings were used to repay amounts outstanding on the Company’s revolving credit facility that were used to fund the cash tender offer for the Senior Notes.

Loans under the accounts receivable financing agreement accrue interest at either a reserve-adjusted LIBOR or a base rate, plus 1.6%. The Company may prepay loans upon one business day prior notice and may terminate the accounts receivable financing agreement with 15 days’ prior notice. As of September 30, 2016, the weighted average interest rate on the accounts receivable financing agreement was 2.30%.

The accounts receivable financing agreement contains various customary representations and warranties and covenants, and default provisions which provide for the termination and acceleration of the commitments and loans under the agreement in circumstances including, but not limited to, failure to make payments when due, breach of representations, warranties or covenants, certain insolvency events or failure to maintain the security interest in the trade receivables, and defaults under other material indebtedness.

The accounts receivable financing agreement terminates on March 22, 2019, unless terminated earlier pursuant to its terms. At September 30, 2016, there was $20.0 million of remaining capacity available under the accounts receivable financing agreement.

Fair Value of Debt

The estimated fair value of borrowings under credit facilities and long-term debt was $914.5 million and $924.9 million at September 30, 2016 and December 31, 2015, respectively. The fair value of the Senior Notes, which totaled $102.9 million and $246.2 million at September 30, 2016 and December 31, 2015, respectively, was determined based on Level 2 inputs using the market approach, which is primarily based on rates at which the debt is traded among financial institutions. The fair value of the term loans, borrowings under credit facilities, and accounts receivable

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financing agreement which totaled $811.6 million and $678.7 million at September 30, 2016 and December 31, 2015, respectively, was determined based on Level 3 inputs, which is primarily based on rates at which the debt is traded among financial institutions adjusted for the Company's credit standing.

(9) Stockholders’ Equity

Authorized Shares

The Company is authorized to issue up to one billion shares of common stock, with a par value of $0.01. The Company is authorized to issue up to one hundred million shares of preferred stock, with a par value of $0.01.

(10) Stock-Based Compensation

The Company granted 394,000 service-based options and 47,987 restricted stock awards, or RSAs, with a total grant date fair value of $5.9 million and $2.1 million, respectively, during the nine months ended September 30, 2016.

Aggregated information regarding the Company’s option plans is summarized below:


	Options	Wtd. Average Exercise Price		Wtd. Average Remaining Contractual Life (in years)	Intrinsic Value (millions)
Outstanding at December 31, 2015	6,839,129	$	11.39	6.8	$	231.7
Granted	394,000		44.16
Exercised	(1,131,008)		5.23
Expired or forfeited	(270,345)		16.86
Outstanding at September 30, 2016	5,831,776	$	14.54	6.9	$	244.7
Exercisable at September 30, 2016	3,166,936	$	10.13	6.1	$	146.9

The Company’s RSAs and restricted stock units or, RSUs, collectively RSAs/RSUs, activity in 2016 is as follows:


	Awards	Wtd. Average Grant-Date Fair Value		Intrinsic Value (millions)
Unvested at December 31, 2015	143,984	$	28.42	$	6.5
Granted	47,987		43.28
Vested	(1,812)		27.60
Unvested at September 30, 2016	190,159	$	32.17	$	10.7

Stock-based compensation expense related to employee stock options and RSAs/RSUs is summarized below (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Direct costs	$	438	$	385	$	1,319	$	812
Selling, general and administrative		1,228		1,229		3,621		2,822
Transaction-related costs		—		—		29,421		—
Total stock-based compensation expense	$	1,666	$	1,614	$	34,361	$	3,634

All stock options granted under the 2013 Stock Incentive Plan for Key Employees of PRA Health Sciences, Inc. and its Subsidiaries, or the Plan, are subject to transfer restrictions of the stock option's underlying shares once vested and exercised. This lack of marketability was included as a discount when calculating the grant date value of these options. In conjunction with the Secondary Offerings, the transfer restrictions on a portion of such shares issuable upon

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exercise of vested options granted under the Plan were released. The release of the transfer restrictions is considered a modification under FASB's ASC Topic 718, Stock Compensation. As a result of these modifications, the Company incurred approximately $4.9 million of incremental compensation expense associated with service-based options during the nine months ended September 30, 2016, which is included in transaction-related costs in the accompanying consolidated condensed statement of operations.

In December 2013, the Company granted certain employees market-based options under the Plan that vest only upon the achievement of a specified internal rate of return from a liquidity event (“2.0x Options”). At the time of grant, no compensation expense was recorded as the 2.0x Options vest upon a liquidity event, which is not considered probable until the date it occurs. On January 20, 2016, the Compensation Committee of the Board of Directors adopted a resolution to adjust the vesting criteria for all 2.0x Options granted and still outstanding on such date. Under the revised vesting criteria, the 2.0x Options vest upon the announcement of a secondary offering. This modification resulted in Type IV Improbable-to-Improbable modification. Since the secondary offering was deemed improbable due to the fact that it is outside of the Company’s control and cannot be considered probable until the date it occurs, no compensation expense was recognized on the January 20, 2016 modification date. On March 2, 2016, the Company announced a secondary offering of shares by KKR and certain management stockholders, and it became probable that the 2.0x Options would vest. In total, 835,551 2.0x Options held by current employees were modified. As a result of this modification, and the modifications associated with the transfer restrictions releases noted above, the Company incurred approximately $24.5 million of incremental compensation expense associated with the 2.0x Options during the nine months ended September 30, 2016, which is included in transaction-related costs in the accompanying consolidated condensed statement of operations.

(11) Income Taxes

The Company’s effective income tax rate was 25.8% and 29.8% for the nine months ended September 30, 2016 and 2015, respectively. The variation between the Company’s effective income tax rate and the U.S. statutory rate of 35% for the nine months ended September 30, 2016 is primarily due to (i) income from foreign subsidiaries being taxed at rates lower than the U.S. statutory rate and (ii) the favorable impact of research and development tax credits.

GAAP requires a two-step approach when evaluating uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence demonstrates that it is more likely than not that the position will be sustained upon audit, including resolution of any related appeals or litigation processes. The second step is to quantify the amount of tax benefit to recognize as the amount that is cumulatively more than 50% likely to be realized upon ultimate settlement with the taxing authorities.

As of September 30, 2016, the Company’s liability for unrecognized tax benefits was $11.2 million. If any portion of this $11.2 million is recognized that impacts the effective tax rate, the Company will then include that portion in the computation of its effective tax rate. Although the ultimate timing of the resolution of audits is highly uncertain, the Company believes it is reasonably possible that approximately $0.2 million of gross unrecognized tax benefits will change in the next 12 months as a result of pending audit settlements or statute of limitations expirations.

The Company files U.S. federal, U.S. state, and foreign tax returns. For U.S. federal purposes, the Company is generally no longer subject to tax examinations for years ended December 31, 2012 and prior. For U.S. state tax returns, the Company is generally no longer subject to tax examinations for years prior to 2011. For foreign purposes, the Company is generally no longer subject to examination for tax periods 2008 and prior. Certain carryforward tax attributes generated in prior years remain subject to examination and adjustment.

(12) Commitments and Contingencies

Legal Proceedings

The Company is involved in legal proceedings from time to time in the ordinary course of its business, including employment claims and claims related to other business transactions. Although the outcome of such claims is

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uncertain, management believes that these legal proceedings will not have a material adverse effect on the financial condition or results of future operations of the Company.

The Company is currently a party to litigation with the City of Sao Paulo, Brazil. The dispute relates to whether the export of services provided by the Company is subject to a local tax on services. The Company has not recorded a liability associated with the claim, which totaled $4.9 million at September 30, 2016, given that it is not deemed probable the Company will incur a loss related to this case. However, a deposit totaling $4.9 million has been made to the Brazilian court in order to annul the potential tax obligation and to avoid the accrual of additional interest and penalties. This balance is recorded in other assets on the consolidated condensed balance sheet. During June 2015, the Judiciary Court of Justice of the State of Sao Paulo ruled in the favor of the Company, however, the judgment was appealed by the City of Sao Paulo. The Company expects to recover the full amount of the deposit when the case is final.

(13) Derivatives

The Company is exposed to certain risks relating to our ongoing business operations. The primary risk that the Company seeks to manage by using derivative instruments is interest rate risk. Accordingly, the Company has instituted interest rate hedging programs that are accounted for in accordance with ASC 815, “Derivatives and Hedging.” The interest rate hedging program is a cash flow hedge program designed to minimize interest rate volatility. The Company swaps the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount, at specified intervals. The Company’s interest rate contracts are designated as hedging instruments.

The following table presents the notional amounts and fair values (determined using level 2 inputs) of the Company’s derivatives as of September 30, 2016 and December 31, 2015 (in thousands):


		September 30, 2016				December 31, 2015
	Balance Sheet Classification	Notional amount		Asset/ (Liability)		Notional amount		Asset/ (Liability)
Derivatives in an asset position:
Interest rate swap	Other assets	$	—	$	—	$	250,000	$	28
Derivatives in a liability position:
Interest rate swap	Other long-term liabilities		250,000		(1,610)		—		—

The Company records the effective portion of any change in the fair value of derivatives designated as hedging instruments under ASC 815 to other accumulated comprehensive loss in our consolidated condensed balance sheet, net of deferred taxes, and will later reclassify into earnings when the hedged item affects earnings or is no longer expected to occur. Gains and losses from the ineffective portion of any hedge are recognized in earnings immediately. For other derivative contracts that do not qualify or no longer qualify for hedge accounting, changes in the fair value of the derivatives are recognized in earnings each period.

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The table below presents the effect of our derivatives on the consolidated condensed statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2016 and 2015 (in thousands):


		Three Months Ended September 30,				Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationships (Interest Rate Contracts)	2016		2015		2016		2015
Amount of pre-tax gain (loss) recognized in other comprehensive income (loss) on derivatives	$	127	$	(7,532)	$	(2,546)	$	(12,700)
Amount of loss recognized in other income (expense), net on derivatives (ineffective portion)		—		(359)		—		(444)
Amount of loss recognized in other income (expense), net on derivatives (no longer qualify for hedge accounting)		—		(628)		—		(1,137)
Amount of loss reclassified from accumulated other comprehensive loss into interest expense, net on derivatives		(1,617)		(158)		(4,242)		(227)

The Company expects that $7.2 million of unrealized losses will be reclassified out of accumulated other comprehensive loss and into interest expense, net over the next 12 months.

(14) Related Party Transactions

At September 30, 2016 and December 31, 2015, KKR held $9.8 million and $14.7 million, respectively, in first lien term debt.

(15) Accumulated Other Comprehensive Loss

Below is a summary of the components of accumulated other comprehensive loss (in thousands):


	Foreign Currency Translation		Derivative Instruments		Total
Balance at December 31, 2015	$	(106,072)	$	(26,235)	$	(132,307)
Other comprehensive loss before reclassifications, net of tax		(55,548)		(2,546)		(58,094)
Reclassification adjustments, net of tax		—		4,242		4,242
Balance at September 30, 2016	$	(161,620)	$	(24,539)	$	(186,159)

The change in our foreign currency translation adjustment was due primarily to the movements in the British Pound exchange rates against the U. S. Dollar. The U. S. Dollar strengthened by 12.3% versus the British Pound between December 31, 2015 and September 30, 2016. The movement in the British Pound represented $65.6 million out of the $55.5 million foreign currency translation adjustment during the nine months ended September 30, 2016. The remaining foreign currency translation adjustment is primarily attributable to the U. S. Dollar’s depreciation against other major world-wide currencies, including the Euro and Russian Ruble.

(16) Net Income Per Share

Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding for the applicable period. Diluted net income per share is calculated after adjusting the denominator of the basic net income per share calculation for the effect of all potentially dilutive common shares, which, in the Company’s case, includes shares issuable under the stock option and incentive award plan.

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The following table reconciles the basic to diluted weighted average shares outstanding (in thousands):


	Three Months Ended September 30,		Nine Months Ended September 30,
	2016	2015	2016	2015
Basic weighted average common shares outstanding	60,937	60,050	60,579	59,917
Effect of dilutive stock options and RSAs/RSUs	3,584	3,454	3,689	3,165
Diluted weighted average common shares outstanding	64,521	63,504	64,268	63,082

Anti-dilutive shares	359	212	314	96

The anti-dilutive shares disclosed above were calculated using the treasury stock method. The treasury stock method calculates dilution assuming the exercise of all in-the-money options and vesting of RSAs/RSUs, reduced by the repurchase of shares with the proceeds from the assumed exercises, and unrecognized compensation expense for outstanding awards.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 ended December 31, 2015 and with the information under the heading “Management Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

We use the terms “we,” “us,” “our,” or the “Company” in this report to refer to PRA Health Sciences, Inc. and its subsidiaries.

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 that 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, 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.

Contracts define the relationships with our clients and establish the way we earn revenue. Three types of relationships are most common: a fixed-price contract, a time and materials contract and fee-for-service arrangements. In cases where the contracts are fixed price, we may bear the cost of overruns for the contracted scope, or we may benefit if the costs are lower than we anticipated for the contracted scope. In cases where our contracts are fee-for-service, the contracts contain an overall budget for contracted resources. If actual resources used are lower than anticipated, the client generally keeps the savings and we may be responsible for covering the cost of the unused resource if we are unable to redeploy the resource. For time and material contracts, we bill the client only for the actual hours we spend to complete the contracted scope based upon stated hourly rates by position. The duration of our contracts range from a few months to several years. Revenue for services is recognized only after persuasive evidence of an arrangement exists, the sales price is determinable, services have been rendered, and collectability is reasonably assured. Once these criteria have been met, we recognize revenue for the services provided on fixed-fee contracts based on the proportional performance methodology, which determines the proportion of outputs or performance obligations, which have been completed or delivered compared to the total contractual outputs for performance obligations. To measure performance, we compare the contract costs incurred to estimated total contract costs through completion. As part of the client proposal and contract negotiation process, we develop a detailed project budget for the direct costs based on the scope of the work, the complexity of the study, the geographical location involved and our historical experience. We then establish the individual contract pricing based on our internal pricing guidelines, discount agreements, if any, and negotiations with the client. The estimated total contract costs are reviewed and revised periodically throughout the lives of the contracts, with adjustments to revenue resulting from such revisions being recorded on a cumulative basis in the period in which the revisions are first identified. Our costs consist of expenses necessary to carry out the clinical development project undertaken by us on behalf of the client. These costs primarily include the expense of obtaining appropriately qualified labor to administer the project, which we refer to as direct cost headcount. Other costs we incur are attributable to the expense of operating our business generally, such as leases and maintenance of information technology and equipment. Revenue from time and materials contracts is recognized as hours are incurred. Revenues and the related costs of fee-for-service contracts are recognized in the period in which services are performed.

How We Assess the Performance of Our Business

In addition to our U.S. generally accepted accounting principles, or GAAP, financial measures, we review various financial and operational metrics, including new business awards, cancellations, and backlog. Many of our current contracts include clinical trials covering multiple geographic locations. We utilize the same management systems

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and reporting tools to monitor and manage these activities on the same basis worldwide. For this reason, we consider our operations to be a single business segment, and we present our results of operations as a single reportable segment.

Our gross new business awards for the nine months ended September 30, 2016 and 2015 were $1,686.4 million and $1,414.2 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 service revenue to be recognized in the corresponding quarter of the next fiscal year. For the remainder of our business, the value of a new award is the anticipated service revenue over the life of the contract, which does not include reimbursement activity or investigator fees.

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 ended September 30, 2016 and 2015 we had $197.2 million and $177.0 million, respectively, of cancellations for which we received correspondence from the client. The number of cancellations can vary significantly from year to year. 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 service revenue from new business awards that either have not started or are in process but have not been completed. Backlog varies from period to period depending upon new business awards and contract modifications, cancellations, and the amount of service revenue recognized under existing contracts. Our backlog at September 30, 2016 and 2015 was $2.8 billion and $2.3 billion, respectively.

Sources of Revenue

Total revenues are comprised of service revenue and reimbursement revenue, each of which is described below.

Service Revenue

We generally enter into contracts with customers to provide services with payments based on either fixed-fee, time and materials, or fee-for-service arrangements. Revenue for services is recognized only after persuasive evidence of an arrangement exists, the sales price is determinable, services have been rendered, and collectability is reasonably assured.

Once these criteria have been met, we recognize revenue for the services provided on fixed-fee contracts based on the proportional performance methodology, which determines the proportion of outputs or performance obligations which have been completed or delivered compared to the total contractual outputs for performance obligations. To measure performance, we compare the contract costs incurred to estimated total contract costs through completion. As part of the client proposal and contract negotiation process, we develop a detailed project budget for the direct costs based on the scope of the work, the complexity of the study, the geographical location involved and our historical experience. We then establish the individual contract pricing based on our internal pricing guidelines, discount agreements, if any, and negotiations with the client. The estimated total contract costs are reviewed and revised periodically throughout the lives of the contracts, with adjustments to revenue resulting from such revisions being recorded on a cumulative basis in the period in which the revisions are first identified. Revenue from time and materials contracts is recognized as hours are incurred. Billable hours typically fluctuate during the terms of individual contracts, as services we provide generally increase at the beginning of a study and decrease toward the end of a study. Revenues and the related costs of fee-for-service contracts are recognized in the period in which services are performed.

A majority of our contracts undergo modifications over the contract period and our contracts provide for these modifications. During the modification process, we recognize revenue to the extent we incur costs, provided client acceptance and payment is deemed reasonably assured.

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We often offer volume discounts to our large customers based on annual volume thresholds. We record an estimate of the annual volume rebate as a reduction of revenue throughout the period based on the estimated total rebate to be earned for the period.

Most of our contracts can be terminated by the client either immediately or after a specified period, typically 30 to 60 days, following notice. In the case of early termination, these typical contracts require payment to us of fees earned to date, and in some cases, a termination fee or some portion of the fees or profit that we could have earned under the contract if it had not been terminated early. Based on ethical, regulatory, and health considerations, this wind-down activity may continue for several quarters or years. Therefore, revenue recognized prior to cancellation generally does not require a significant adjustment upon cancellation.

Increases in the estimated total direct costs to complete a contract without a corresponding proportional increase to the total contract price result in a cumulative adjustment to the amount of revenue recognized in the period the change in estimate is determined.

Our service revenue was $1,166.4 million and $1,013.6 million during the nine months ended September 30, 2016 and 2015, respectively. Changes in service revenue from period to period are driven primarily by changes in backlog at the beginning of a period, as well as new business awards during such period. Additionally, service revenue and billable hours will generally be impacted by the mix of studies that are active during a period, as different studies have different staffing requirements, as well as the life cycles of projects that are active during a period.

Reimbursement Revenue and Reimbursable Out-of-Pocket Costs

We incur out-of-pocket costs, which are reimbursable by our customers. We include these out-of-pocket costs as reimbursement revenue and reimbursable out-of-pocket expenses in our consolidated condensed statement of operations.

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, which are netted against the related costs, since such fees are the obligation of our clients, without risk or reward to us. 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. Accordingly, unlike reimbursable out-of-pocket costs, we do not recognize these investigator fees in revenue.

Reimbursement costs and investigator fees are not included in our backlog because they are pass-through costs to our clients.

We believe that the fluctuations in reimbursement costs and reimbursement revenue from period to period are not meaningful to our underlying performance.

Costs and Expenses

Our costs and expenses are comprised primarily of our direct costs, selling, general and administrative costs, depreciation and amortization and income taxes. In addition, we incur reimbursable out-of-pocket expenses; however, as noted above, our reimbursable out-of-pocket expenses are directly offset by our reimbursement revenue. Since reimbursement revenue is offset by our out-of-pocket reimbursable expenses, we monitor and measure costs as a percentage of service revenue rather than total revenue as we believe this is a more meaningful comparison and better reflects the operations of our business.

Direct Costs

Our direct costs are primarily 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. For the nine months ended September 30, 2016 and 2015, the labor-related

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charges were 96.6% and 95.4% of our total direct costs, respectively. The cost of labor procured through staffing agencies is included in these percentages and represented 5.0% and 3.9% of total direct costs for the nine months ended September 30, 2016 and 2015, 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 was 3.4% and 4.6% of total direct costs for the nine months ended September 30, 2016 and 2015, respectively.

Historically, direct costs have increased with an increase in service revenues. The future relationship between direct costs and service revenues may vary from historical relationships. Several factors will cause direct costs to decrease as a percentage of service revenues. Deployment of our billable staff in an optimally efficient manner has the most impact on our ratio of direct cost to service 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 service 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.

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.

Loss on Extinguishment of Debt

Loss on extinguishment of debt consists of an early tender premium, the write-off of unamortized debt issuance costs and miscellaneous costs incurred as a result of our repayment of $133.6 million of our 9.5% senior notes due 2023, or Senior Notes.

Depreciation and Amortization

Depreciation 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 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.

We have federal, state, and foreign net operating loss carryforwards. The carryforward periods for these losses vary from five 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.

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Exchange Rate Fluctuations

The majority of our foreign operations transact in the Euro or British Pound. As a result, our revenue and expenses are subject to exchange rate fluctuations with respect to these currencies. We have translated these currencies into U.S. Dollars using the following average exchange rates:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2016	2015	2016	2015
U.S. Dollars per:
Euro	1.12	1.11	1.12	1.11
British Pound	1.31	1.55	1.39	1.53

Results of Operations

Three Months Ended September 30, 2016 Compared to the Three Months Ended September 30, 2015


	Three Months Ended September 30,
	2016		2015
(in thousands)
Revenue
Service revenue	$	399,841	$	345,096
Reimbursement revenue		53,414		58,414
Total revenue		453,255		403,510
Operating expenses
Direct costs		259,910		212,808
Reimbursable out-of-pocket costs		53,414		58,414
Selling, general and administrative		67,190		63,091
Depreciation and amortization		17,708		19,762
Loss on disposal of fixed assets		219		256
Income from operations		54,814		49,179
Interest expense, net		(13,779)		(15,255)
Foreign currency gains, net		1,182		3,697
Other income (expense), net		20		(947)
Income before income taxes and equity in gains (losses) of unconsolidated joint ventures		42,237		36,674
Provision for income taxes		10,821		10,696
Income before equity in gains (losses) of unconsolidated joint ventures		31,416		25,978
Equity in gains (losses) of unconsolidated joint ventures, net of tax		33		(2,319)
Net income	$	31,449	$	23,659

Service revenue increased by $54.7 million, or 15.9%, from $345.1 million during the three months ended September 30, 2015 to $399.8 million during the three months ended September 30, 2016. Service revenue for the three months ended September 30, 2016 benefited from an increase in billable hours and an increase in the effective rate of the hours billed on our studies. The growth in service revenue and the increase in billable hours were due largely to the increase in our backlog as we entered the year, the type of services we provided 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. New business awards arise when a client selects us to execute its trial. The number of awards can vary significantly from period to period and our studies have terms ranging from several months to several years. The increase in our effective rate of the hours billed on our studies is attributable to the contract pricing terms on our current mix of active studies and the mix of clients and services that we provide to those clients.

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Direct costs increased by $47.1 million, or 22.1%, from $212.8 million during the three months ended September 30, 2015 to $259.9 million during the three months ended September 30, 2016. The increase in direct costs is primarily due to an increase in salaries and related benefits of $50.6 million, as we continue to hire billable staff to support our current projects and as we hire additional staff in anticipation of our growing portfolio of studies, offset by a favorable impact of $3.9 million from foreign currency exchange rate fluctuations. Direct costs as a percentage of service revenue increased from 61.7% during the three months ended September 30, 2015 to 65.0% during the three months ended September 30, 2016. This increase in direct costs as a percentage of service revenue is primarily due to the $8.5 million impact of research and development credits, or R&D Credits, recorded during the three months ended September 30, 2015 that related to prior years.

Selling, general and administrative expenses increased by $4.1 million, or 6.5%, from $63.1 million during the three months ended September 30, 2015 to $67.2 million during the three months ended September 30, 2016. The increase in selling, general and administrative expenses is primarily due to an increase in salaries and related benefits, as we continue to hire staff to support our growing business. Selling, general and administrative expenses as a percentage of service revenue decreased from 18.3% during the three months ended September 30, 2015 to 16.8% during the three months ended September 30, 2016. This decrease in selling, general and administrative expenses as a percentage of service revenue is primarily related to our continued efforts to effectively manage our selling and administrative functions as we continue to grow revenue.

Depreciation and amortization expense decreased by $2.1 million, or 10.4%, from $19.8 million during the three months ended September 30, 2015 to $17.7 million for the three months ended September 30, 2016. Depreciation and amortization expense as a percentage of service revenue was 5.7% during the three months ended September 30, 2015 and 4.4% during the three months ended September 30, 2016. The decrease in depreciation and amortization expense as a percentage of service revenue is primarily due to the continued amortization of our acquired intangibles, which are amortized on an accelerated basis.

Interest expense, net decreased by $1.5 million from $15.3 million during the three months ended September 30, 2015 to $13.8 million for the three months ended September 30, 2016. Principal repayments on our long-term debt during 2015 and the first quarter of 2016, as well as a 1.0% decrease in the weighted average interest rate on our outstanding debt as compared to the three months ended September 30, 2015, resulted in a $2.5 million reduction in interest expense. Additionally, interest expense decreased $0.3 million due to lower amortization of debt issuance costs, which was offset by an increase of $1.5 million related to the amortization of our terminated interest rate swaps and interest expense on our current interest rate swap.

Foreign currency gains, net decreased by $2.5 million from $3.7 million during the three months ended September 30, 2015 to $1.2 million during the three months ended September 30, 2016. Foreign exchange gains and losses are due to fluctuations in the U.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 ended September 30, 2015, foreign currency gains were primarily due to the devaluation of the Canadian Dollar and British Pound against the U.S. Dollar by 7.9% and 3.5%, respectively. During the three months ended September 30, 2016, the British Pound weakened against the U.S. Dollar by 3.0% following the decision by voters in the United Kingdom, or the U.K., to approve a referendum to exit the European Union, commonly referred to as Brexit, in June 2016.

Provision for income taxes increased by $0.1 million from $10.7 million during the three months ended September 30, 2015 to $10.8 million during the three months ended September 30, 2016. Our effective tax rate was 29.2% and 25.6% during the three months ended September 30, 2015 and 2016, respectively. The decrease in the effective tax rate of 3.6% was primarily attributable to the change in our overall distribution of projected income among our domestic and foreign subsidiaries which are typically taxed at a lower rate, the inclusion of certain research and development tax credits, and the enactment of a decrease in the U.K. statutory rate which had the impact of decreasing our net deferred tax liability.

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Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015


	Nine Months Ended September 30,
	2016		2015
(in thousands)
Revenue
Service revenue	$	1,166,410	$	1,013,582
Reimbursement revenue		172,915		171,354
Total revenue		1,339,325		1,184,936
Operating expenses
Direct costs		758,333		651,646
Reimbursable out-of-pocket costs		172,915		171,354
Selling, general and administrative		199,648		182,831
Transaction-related costs		31,785		—
Depreciation and amortization		52,246		58,217
Loss on disposal of fixed assets		290		451
Income from operations		124,108		120,437
Interest expense, net		(42,525)		(46,064)
Loss on extinguishment of debt		(21,485)		—
Foreign currency gains, net		9,264		8,797
Other expense, net		(85)		(1,507)
Income before income taxes and equity in gains (losses) of unconsolidated joint ventures		69,277		81,663
Provision for income taxes		17,869		24,341
Income before equity in gains (losses) of unconsolidated joint ventures		51,408		57,322
Equity in gains (losses) of unconsolidated joint ventures, net of tax		2,742		(4,061)
Net income	$	54,150	$	53,261

Service revenue increased by $152.8 million, or 15.1%, from $1,013.6 million during the nine months ended September 30, 2015 to $1,166.4 million during the nine months ended September 30, 2016. Service revenue for the nine months ended September 30, 2016 benefited from an increase in billable hours, offset by an unfavorable impact of $3.7 million from foreign currency exchange rate fluctuations. The growth in service revenue and the increase in billable hours were 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, and more effective sales efforts and the growth in the overall CRO market. New business awards arise when a client selects us to execute its trial. The number of awards can vary significantly from period to period and our studies have terms ranging from several months to several years.

Direct costs increased by $106.7 million, or 16.4%, from $651.6 million during the nine months ended September 30, 2016 to $758.3 million during the nine months ended September 30, 2016. The increase in direct costs is primarily due to an increase in salaries and related benefits of $126.6 million, as we continue to hire billable staff to support our current projects and as we hire additional staff in anticipation of our growing portfolio of studies, offset by a favorable impact of $16.3 million from foreign currency exchange rate fluctuations. Direct costs as a percentage of service revenue increased from 64.3% during the nine months ended September 30, 2015 to 65.0% during the nine months ended September 30, 2016. This increase in direct costs as a percentage of service revenue is primarily due to the $8.5 million impact of R&D Credits recorded in the nine months ended September 30, 2015 that related to prior years.

Selling, general and administrative expenses increased by $16.8 million, or 9.2%, from $182.8 million during the nine months ended September 30, 2015 to $199.6 million during the nine months ended September 30, 2016. The increase in selling, general and administrative expenses is primarily due to an increase in salaries and related benefits, as we continue to hire staff to support our growing business. Selling, general and administrative expenses as a percentage of service revenue decreased from 18.0% during the nine months ended September 30, 2015 to 17.1% during the nine months ended September 30, 2016. The decrease in selling, general and administrative expenses as a percentage of

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service revenue is primarily related to our continued efforts to effectively manage our selling and administrative functions.

For the nine months ended September 30, 2016, we incurred transaction-related expenses of $31.8 million. The costs consist of $4.9 million of stock-based compensation expense associated with the release of the transfer restrictions on a portion of shares issuable upon exercise of vested service-based options in connection with the announcement of our March and May 2016 secondary offerings. The costs also consist of $24.5 million of one-time stock-based compensation expense related to the accelerated vesting and release of the transfer restrictions of certain performance-based stock options. In addition, we incurred $2.4 million of third-party fees associated with the secondary offerings and the closing of our accounts receivable financing agreement. There were no transaction-related expenses incurred for the nine months ended September 30, 2015.

Depreciation and amortization expense decreased by $6.0 million, or 10.3%, from $58.2 million during the nine months ended September 30, 2015 to $52.2 million during the nine months ended September 30, 2016. Depreciation and amortization expense as a percentage of service revenue was 5.7% during the nine months ended September 30, 2015 and 4.5% during the nine months ended September 30, 2016. The decrease in depreciation and amortization expense as a percentage of service revenue is primarily due the continued amortization of our acquired intangibles which are amortized on an accelerated basis.

Interest expense, net, decreased by $3.5 million from $46.1 million during the nine months ended September 30, 2015 to $42.5 million during the nine months ended September 30, 2016. Principal repayments on our long-term debt during 2015 and the first quarter of 2016, as well as a 1.0% decrease in the weighted average interest rate on our outstanding debt as compared to the nine months ended September 30, 2015, resulted in a $6.1 million reduction in interest expense. Additionally, interest expense decreased by $1.3 million due to lower amortization of debt issuance costs, which was offset by an increase of $4.1 million related to the amortization of our terminated interest rate swaps and interest expense on our current interest rate swap.

Loss on extinguishment of debt was $21.5 million during the nine months ended September 30, 2016 and there were no losses on extinguishment of debt during the nine months ended September 30, 2015. The loss on extinguishment of debt incurred during the nine months ended September 30, 2016 was associated with our cash tender offer on our Senior Notes. The loss consists of the $17.4 million early tender premium, the write-off of $3.7 million of unamortized debt issuance costs, and $0.4 million of other costs associated with the transaction.

Foreign currency gains, net increased by $0.5 million from $8.8 million during the nine months ended September 30, 2015 to $9.3 million during the nine months ended September 30, 2016. Foreign exchange gains and losses are due to fluctuations in the U.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 ended September 30, 2015 foreign currency gains were primarily due to the devaluation of the Canadian Dollar and Euro against the U.S. Dollar by 13.3% and 7.4%, respectively. During the nine months ended September 30, 2016, the foreign currency gains were primarily a result of the weakening of the British Pound against the U.S. Dollar by 12.3%, primarily due to Brexit.

Provision for income taxes decreased by $6.5 million from $24.3 million during the nine months ended September 30, 2015 to $17.9 million during the nine months ended September 30, 2016. Our effective tax rate was 29.8% and 25.8% during the nine months ended September 2015 and 2016, respectively. The decrease in the effective tax rate of 4.0% was primarily attributable to the change in our overall distribution of projected income among our domestic and foreign subsidiaries which are typically taxed at a lower rate, the inclusion of certain research and development tax credits, and the enactment of a decrease in the U.K. statutory rate which had the impact of decreasing our net deferred tax liability.

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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 of September 30, 2016, we had approximately $130.3 million of cash and cash equivalents of which $43.1 million was held by our foreign subsidiaries. Our expected primary cash needs on both a short and long-term basis are for capital expenditures, expansion of services, geographic expansion, 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, and personal injury, environmental or other material litigation claims.

Cash Collections

Cash collections from accounts receivable were $1,513.6 million during the nine months ended September 30, 2016, including $188.1 million of funds received from customers to pay independent physician investigators, or investigators, as compared to $1,305.2 million during the nine months ended September 30, 2015, including $167.3 million of funds received from customers to pay investigators. The increase in cash collections during the nine months ended September 30, 2016 months is related to our increase in revenue, driven by an increase in new business awards, an increase in our backlog, and improved cash payment schedules contained in our master service agreements and our statements of work.

Discussion of Cash Flows

Cash Flow from Operating Activities

During the nine months ended September 30, 2016, net cash provided by operations was $49.2 million, compared to $72.2 million for the same period of 2015. Cash provided by operating activities decreased over the prior year primarily due to the $17.4 million early tender premium associated with our extinguishment of debt, which was partially offset by increased cash flows from our operating performance as well as an increase in cash outflows from working capital. The changes in working capital were driven by a $14.3 million decrease in accounts payable and accrued expenses during the nine months ended September 30, 2016 as compared to $31.0 million increase during the same period of 2015 and is attributable to the timing and payment of invoices. This is partially offset by an improvement in cash outflows from our accounts receivable, unbilled services, and advanced billings accounts, driven by a slower rate of increase in our days sales outstanding during the nine months ended September 30, 2016, as compared to the same period of 2015.

Cash Flow from Investing Activities

Net cash used in investing activities was $27.6 million during the nine months ended September 30, 2016, compared to $84.1 million for the same period of 2015. The decrease in cash outflows was primarily due to the $32.9 million payment for the termination of our interest rate swaps during the nine months ended September 30, 2015 and a $26.7 million change in cash flows related to our unconsolidated joint ventures. During the nine months ended September 30, 2015, we made $23.0 million in capital contributions to our unconsolidated joint ventures, and during the nine months ended September 30, 2016, we received $3.7 million from the sale of our ownership stake in our WuXiPRA joint venture.

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Cash Flow from Financing Activities

Net cash used in financing activities during the nine months ended September 30, 2016 was $12.9 million compared to $22.5 million for the same period of 2015. During 2016, we borrowed $120.0 million under our new accounts receivable financing agreement and we repaid $133.6 million aggregate principal amount of our Senior Notes as part of the cash tender offer. During the nine months ended September 30, 2015, we voluntarily repaid $40.0 million of our term loan and had net borrowings of $20.0 million on our line of credit. In addition, we made a $2.0 million payment on our ClinStar acquisition-related contingent consideration in the prior year.

Indebtedness

As of September 30, 2016, we had $900.4 million of total indebtedness. Additionally, our senior secured credit agreement provides for a $125.0 million revolving credit facility. There were no amounts drawn on this revolving credit facility on September 30, 2016. In addition, at September 30, 2016, we had $3.7 million in letters of credit outstanding, which are secured by the revolving credit facility. Our long-term debt arrangements contain usual and customary restrictive covenants, and, as of September 30, 2016, we were in compliance with these covenants.

Accounts Receivable Financing Agreement

In March 2016, we entered into a $140.0 million accounts receivable financing agreement, of which $120.0 million was outstanding on September 30, 2016. These borrowings were used to repay our revolving credit facility that funded the cash tender offer for the Senior Notes. As of September 30, 2016, the weighted average interest rate on the accounts receivable financing agreement was 2.30%.

Loans under the accounts receivable financing agreement accrue interest at either a reserve-adjusted LIBOR or a base rate, plus 1.6%. We may prepay loans upon one business day prior notice and may terminate the accounts receivable financing agreement with 15 days’ prior notice.

The accounts receivable financing agreement terminates on March 22, 2019, unless terminated earlier pursuant to its terms. At September 30, 2016, there was $20.0 million remaining capacity available under the accounts receivable financing agreement.

See “Management’s Discussion and Analysis — Liquidity and Capital Resources” and Note 9 to our audited consolidated financial statements, each included in our Annual Report on Form 10-K for fiscal year ended December 31, 2015, for additional details regarding our credit arrangements.

Contractual Obligations and Commercial Commitments

In March 2016, we repaid $133.6 million aggregate principal amount of our Senior Notes and also entered into a $140.0 million accounts receivable financing agreement. See Note 8 to our consolidated condensed financial statements for information about the Senior Note repayment and the terms of the accounts receivable financing agreement.

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As a result of these changes, our long-term debt obligations as of September 30, 2016 are as follows:


		Payments Due by Period
		Remaining 2016 (3 Months)		2017 to 2018		2019 to 2020		Thereafter		Total
		(in thousands)
Principal payments on long-term debt (1)	$	—	$	—	$	809,000	$	91,441	$	900,441
Interest payments on long-term debt (1)		10,801		85,842		72,227		23,888		192,758
Total	$	10,801	$	85,842	$	881,227	$	115,329	$	1,093,199

(1)

Principal payments are based on the terms contained in our agreements. Interest payments are based on the interest rate in effect on September 30, 2016.

Other than the item included above, 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 ended December 31, 2015.

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 fiscal year ended December 31, 2015.

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. Therefore, any statements contained herein that are not statements of historical fact may be forward-looking statements and should be evaluated as such. Without limiting the foregoing, the words “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. 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.

We caution you that any such forward-looking statements are further qualified by important factors that could cause our actual operating results to differ materially from those in the forward-looking statements, including without limitation, that most of our contracts may be terminated on short notice, and we may be unable to maintain large customer contracts or to enter into new contracts; our financial results may be adversely affected if we underprice our contracts, overrun our cost estimates or fail to receive approval for or experience delays in documenting change orders; the historical indications of the relationship of our backlog to revenues may not be indicative of their future relationship; we may be unable to maintain our information systems or effectively update them; customer or therapeutic concentration could harm our business; our business is subject to risks associated with international operations, including economic, political and other risks, such as compliance with a myriad of laws and regulations, complications from conducting clinical trials in multiple countries simultaneously and changes in exchange rates; the market for our services may not grow as we expect; government regulators or our customers may limit the scope of prescription or withdraw products from the market, and government regulators may impose new regulatory requirements or may adopt new regulations affecting the biopharmaceutical industry; we may be unable to successfully develop and market new services or enter new markets; our failure to perform services in accordance with contractual requirements, regulatory standards and ethical considerations may subject us to significant costs or liability, which could also damage our reputation and cause us to lose existing business or not receive new business; our services are related to treatment of human patients, and we could face liability if a patient is harmed; we may be unable to successfully identify, acquire and integrate businesses,

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services and technologies; and we have substantial indebtedness and may incur additional indebtedness in the future, which could adversely affect our financial condition. For a further discussion of the risks relating to our business, see “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

Website and Social Media Disclosure

We use our website (www.prahs.com) and our corporate Twitter account (@PRAHSciences) as channels of distribution of company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, Securities and Exchange Commission, or SEC, filings and public conference calls and webcasts. The contents of our website and social media channels are not, however, a part of this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our quantitative and qualitative disclosures about market risk as compared to the quantitative and qualitative disclosures about market risk described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

Item 4. Controls and Procedures

As of September 30, 2016, we carried out an evaluation under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Regulations under the Exchange Act require public companies, including us, to maintain “disclosure controls and procedures,” which are defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required or necessary disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to accomplish their objective of a reasonable assurance level.

There were no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We are party to legal proceedings incidental to our business. While the outcome of these matters could differ from management’s expectations, we do not believe that the resolution of these matters is reasonably likely to have a material adverse effect to our financial statements.

Item 1A. Risk Factors

There have been no material changes to the risk factors set forth in Item 1A. to Part I of our Form 10-K, as filed on February 25, 2016 and in Part II of our Form 10-Q, as filed on July 29, 2016.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

The exhibits in the accompanying Exhibit Index following the signature page are filed or furnished as a part of this report and are incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	PRA HEALTH SCIENCES, INC.

	/s/ Linda Baddour
	Linda Baddour
	Executive Vice President and Chief Financial Officer
	(Authorized Signatory)

Date: November 3, 2016

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EXHIBIT INDEX

Exhibit
Number		Description of Exhibit

31.1*		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following financial information from PRA Health Sciences, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 formatted in XBRL: (i) Consolidated Condensed Balance Sheets as of September 30, 2016 and December 31, 2015, (ii) Consolidated Condensed Statements of Operations for the three and nine months ended September 30, 2016 and 2015, (iii) Consolidated Condensed Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2016 and 2015, (iv) Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2016 and 2015, and (v) Notes to Consolidated Condensed Financial Statements.


*		Filed herewith

PRA Health Sciences, Inc. - FORM 10-Q - November 3, 2016

Attached files

PRA Health Sciences, Inc. Reports