Business context and reporting period
Issuer: Quintiles IMS Holdings, Inc. (the filing metadata identifies IQVIA Holdings Inc.). This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017. The company provides healthcare information, technology and services across more than 100 countries, through Commercial Solutions, Research & Development Solutions, and Integrated Engagement Services.
Comparisons require caution: the October 2016 merger with IMS Health materially changed the company’s scale. The 2017 results include the combined business, while reported 2016 results do not include a comparable full period of IMS Health.
Financial performance and position
Amounts below are in millions of dollars except per-share data.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Service revenues | $2,019 | $1,137 | $5,899 | $3,412 |
| Total revenues, including reimbursed expenses | $2,465 | $1,497 | $7,162 | $4,540 |
| Income from operations | $197 | $168 | $516 | $497 |
| Net income attributable to Quintiles IMS | $84 | $100 | $233 | $293 |
| Diluted EPS | $0.38 | $0.82 | $1.04 | $2.41 |
| Operating cash flow | Not separately presented | Not separately presented | $737 | $413 |
- Reported service revenue increased 77.6% in Q3 and 72.9% for the first nine months, largely reflecting the merger. Management reported Q3 constant-currency growth of $880 million; nine-month constant-currency growth was $2.513 billion.
- Operating margin on service revenues was approximately 9.8% in Q3 and 8.7% for the nine months, versus approximately 14.8% and 14.6%, respectively, in 2016. Merger-related acquired-intangible amortization was a significant expense; depreciation and amortization was $256 million in Q3 and $733 million year to date.
- Cash and cash equivalents were $1.103 billion at September 30, 2017, down from $1.198 billion at year-end 2016. Current assets were $3.492 billion and current liabilities $2.853 billion.
- Debt principal was $9.8 billion, compared with $7.219 billion at December 31, 2016; the balance sheet reported $9.754 billion of current and long-term debt. Cash less reported debt was approximately negative $8.7 billion. The company had $900 million of availability on its $1.0 billion revolving credit facility.
- Interest expense was $93 million in Q3 and $249 million for the nine months, versus $25 million and $73 million in the comparable 2016 periods.
Material changes versus the prior comparable period
- Commercial Solutions drove most of the reported expansion, with Q3 revenue of $887 million versus $72 million and nine-month revenue of $2.603 billion versus $218 million. Research & Development Solutions revenue rose 7.9% in Q3 and 4.2% year to date; Integrated Engagement Services revenue declined 1.0% and 1.2%, respectively.
- Net income attributable to the company and diluted EPS declined despite higher revenue. The comparison reflects higher debt and interest expense, substantially greater acquired-intangible amortization, and a much larger weighted-average share count following the merger and share repurchases.
- Operating cash flow rose $324 million year over year to $737 million for the nine months. Investing cash outflow increased to $774 million, including $525 million for acquisitions and $267 million for property, equipment and software.
- The company repurchased 27.3 million shares for approximately $2.3 billion in the first nine months. Remaining authorization at September 30 was approximately $295 million.
Outlook, commentary, risks and unusual items
- Outlook: No specific earnings or revenue guidance is provided in the supplied filing text. Management said available cash, expected operating cash flow, and access to credit facilities should fund operations, capital spending and debt obligations for at least the next 12 months.
- R&D backlog: Ending backlog was $10.32 billion; management expected $3.0 billion to convert to revenue in the next 12 months. Trailing-12-month net new business was $4.37 billion, versus $4.44 billion a year earlier. Management cautioned that historical backlog-to-revenue relationships may not predict future results.
- Taxes and special items: The effective tax rate was (0.5)% in Q3 and 2.1% for the nine months, favorably affected by merger purchase-accounting tax benefits of $58 million and $189 million, respectively, and stock-award tax benefits. Encore-related goodwill and intangible impairment charges totaled $40 million for the nine months; the business was sold in July. Restructuring costs were $38 million year to date, with actions expected to continue into 2018.
- Debt actions: The company issued euro-denominated 2025 notes and added a $750 million term B loan in Q3, using proceeds in part to refinance debt, reduce revolver borrowings, and fund general corporate purposes. It recorded an $18 million Q3 loss on debt extinguishment ($21 million year to date). It reported compliance with material financial covenants.
- Principal risks: Management highlighted merger integration and synergy execution, contract pricing and delivery, client retention, information-system and data risks, international and foreign-exchange exposure, regulation and clinical-trial liabilities, acquisition and restructuring execution, and substantial indebtedness. It reported no significant change to previously disclosed risk factors; routine legal proceedings were not expected to have a material adverse effect.
Most important facts for investors to verify
- Separate underlying organic growth from merger contributions, acquisitions, currency movements and the Encore sale; reported year-over-year growth is not a like-for-like comparison.
- Track whether backlog converts as expected and whether net new business stabilizes or improves.
- Assess leverage, interest costs, floating-rate exposure, refinancing needs and remaining revolver capacity against cash generation.
- Review cash conversion and working-capital movements, including receivables and unbilled services, which increased to $1.859 billion.
- Evaluate the sustainability of unusually low tax rates, the effect of acquired-intangible amortization, restructuring charges, and ongoing share repurchases on per-share performance.