Business context and reporting period
IQVIA Holdings Inc. provides analytics, technology and contract research services to the life sciences industry through Technology & Analytics Solutions, Research & Development Solutions, and Contract Sales & Medical Solutions. This unaudited Form 10-Q covers the three months ended March 31, 2019, compared with the same period in 2018.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 / comparator |
|---|---|---|
| Revenue | $2.684 billion | $2.563 billion; up 4.7% reported and approximately 7.2% in constant currency |
| Income from operations | $210 million | $183 million |
| Net income attributable to IQVIA | $58 million | $69 million |
| Diluted EPS | $0.29 | $0.32 |
| Operating cash flow | $113 million | $182 million |
| Cash and cash equivalents | $936 million at March 31, 2019 | $891 million at December 31, 2018 |
| Total debt principal | $11.332 billion | $11.056 billion at December 31, 2018 |
Costs of revenue, excluding depreciation and amortization, were 65.1% of revenue versus 64.5% a year earlier. SG&A was 15.6% of revenue versus 16.4%. Interest expense increased to $110 million from $96 million. The effective tax rate rose to 37.6% from 22.4%.
Segment results
- Technology & Analytics Solutions: revenue $1.075 billion, up 9.1%; segment profit $258 million versus $256 million.
- Research & Development Solutions: revenue $1.416 billion, up 3.7%; segment profit $289 million versus $268 million.
- Contract Sales & Medical Solutions: revenue $193 million, down 9.4%; segment profit $9 million versus $13 million.
Material changes and liquidity
Reported revenue growth was reduced by approximately $63 million from foreign exchange; constant-currency growth was led by Technology & Analytics and Research & Development. Operating income increased despite higher costs of revenue and depreciation, with lower restructuring charges ($12 million versus $26 million) and lower SG&A. Net income attributable to IQVIA declined, reflecting higher interest and taxes, lower equity earnings from unconsolidated affiliates, and greater income attributable to non-controlling interests.
Operating cash flow fell $69 million, primarily due to lower accounts payable and accrued expenses. Investing activities used $315 million, including $175 million for acquisitions and $141 million for property, equipment and software. Financing activities provided $228 million, including net revolving-credit borrowings; the company repurchased $145 million of stock. Cash increased by $45 million during the quarter.
At quarter-end, current liabilities were $3.502 billion and current assets were $3.999 billion. The company reported $11.332 billion of debt principal and $475 million of available borrowing capacity on its $1.5 billion revolving facility. It was in material compliance with debt covenants and said available cash, operating cash flow and credit facilities should fund operations, capital expenditures and debt obligations for at least the next 12 months. This is management’s assessment, not a guarantee.
Outlook, commentary, risks and unusual items
- Remaining performance obligations were approximately $19.7 billion; about 35% was expected to be recognized over the next 12 months. The filing does not provide formal full-year revenue or earnings guidance.
- Research & Development Solutions backlog was $17.19 billion after a $390 million estimated reduction following a client’s decision to cancel a trial. Approximately $4.9 billion was expected to convert to revenue over the next 12 months.
- Management said restructuring actions would continue into 2020, including facility closures, consolidation and workforce reductions; most of the $61 million restructuring accrual was expected to be paid in 2019.
- The company recorded a $20 million tax expense based on its best estimate of an unfavorable impact from proposed FDII tax guidance; the guidance was not yet authoritative and could change.
- Adoption of lease accounting on January 1, 2019 materially increased balance-sheet assets and liabilities; management reported no material effect on quarterly earnings or cash flows. March 31 included $517 million of operating lease right-of-use assets and $568 million of lease liabilities.
- Risks highlighted include short-notice contract termination, contract pricing and cost overruns, backlog conversion uncertainty, customer or therapeutic concentration, foreign exchange and international regulatory exposure, information-system and data-protection risks, clinical-trial liability, acquisition integration, restructuring execution and substantial indebtedness. The filing reported no material change to previously disclosed risk factors and no legal proceeding expected to materially adversely affect the financial statements.
Important facts for investors to verify
- Whether the cancelled-trial backlog reduction affects future R&D revenue, utilization or contract economics beyond the estimated $390 million adjustment.
- Conversion timing and cancellation terms behind the $19.7 billion of remaining performance obligations and the $17.19 billion R&D backlog.
- Drivers and sustainability of weaker operating cash flow, particularly working-capital movements, and the elevated investment and acquisition spending.
- Debt refinancing, interest-rate exposure and covenant headroom given $11.332 billion of debt principal and increased quarterly interest expense.
- Final regulatory treatment of FDII and the potential effect on the tax rate after the estimated $20 million charge.
- Execution and cash costs of restructuring through 2020, and whether planned savings materialize.