IQVIA HOLDINGS INC. quarterly report, Q1 FY2017

Business context and reporting period

Quintiles IMS Holdings, Inc. (now known as IQVIA Holdings Inc.) filed this unaudited Form 10-Q for the quarter ended March 31, 2017. The company provides healthcare information, technology, clinical research and commercial services, operating through Commercial Solutions, Research & Development Solutions, and Integrated Engagement Services. Results include IMS Health from its October 2016 merger; therefore, reported year-over-year comparisons are materially affected by the acquisition.

Financial results and liquidity

Metric	Q1 2017	Q1 2016
Service revenues	$1.911 billion	$1.108 billion
Total revenues, including reimbursed expenses	$2.322 billion	$1.490 billion
Operating income	$168 million	$179 million
Net income attributable to Quintiles IMS	$74 million	$107 million
Diluted EPS	$0.31	$0.88
Operating cash flow	$56 million	$112 million

• Revenue increased 72.5% reported, or 73.7% at constant currency; the company attributed $781 million of Q1 2017 revenue to the IMS merger. Q1 2016 pro forma revenue, assuming IMS had been included, was $1.881 billion before reimbursed expenses.
• Operating income fell despite higher revenue, with depreciation and amortization rising to $232 million from $32 million, primarily due to acquired IMS intangible assets. Interest expense increased to $75 million from $26 million. The effective tax rate was 13.5%, versus 28.6%, including a $64 million tax benefit related to merger purchase-accounting amortization.
• Costs of revenue excluding depreciation and amortization were 58.2% of service revenues, versus 62.6% reported in the income statement comparison; management cited a greater contribution from higher-margin Commercial Solutions. Segment profit margins were 26.1% for Commercial Solutions, 26.7% for Research & Development Solutions, and 9.6% for Integrated Engagement Services.
• Cash and equivalents were $862 million at March 31, down from $1.198 billion at year-end. Net cash used in investing was $240 million, including $150 million for acquisitions and $78 million for property, equipment and software. Financing used $176 million, including $1.316 billion of share repurchases, offset in part by debt issuance and repayments.
• Principal debt was $8.383 billion; the balance-sheet carrying amount was $8.345 billion, including discounts, issuance costs and current debt. The company reported $1.0 billion of revolving-credit availability, and said it was in compliance with financial covenants. Management believed cash, operating cash flows and facility access would meet requirements for at least 12 months.

Material changes versus the prior comparable period

• Commercial Solutions revenue rose to $847 million from $75 million, primarily reflecting IMS Health, while Research & Development Solutions revenue grew 3.7% to $866 million and Integrated Engagement Services revenue was unchanged at $198 million.
• Net income and diluted EPS declined, while the diluted weighted-average share count rose to 234.9 million from 121.4 million, reflecting the merger and share structure. Accordingly, reported EPS comparisons are not directly comparable.
• Q1 2017 included $19 million of restructuring costs versus $3 million a year earlier. Operating cash flow declined by $56 million, which management attributed largely to client-program payments, higher tax, interest and bonus payments, and collection and payable timing.
• The company issued €1.425 billion ($1.522 billion) of 3.25% senior notes due 2025 and refinanced approximately $2.465 billion of Term B loans, extending maturity to 2024 and reducing stated margins. It recorded a $3 million debt-extinguishment loss.
• The company repurchased 16.8 million shares for approximately $1.3 billion, including about $750 million in a private purchase from principal shareholders. Remaining program authorization was approximately $231 million at quarter-end.

Outlook, risks and unusual items

• No specific earnings or revenue guidance was provided. Research & Development Solutions backlog was $9.66 billion; $2.9 billion was expected to convert to revenue over the next 12 months. Trailing-12-month net new business was $4.08 billion, compared with $4.54 billion a year earlier.
• Management said merger integration, achieving expected synergies, retaining clients and key personnel, contract pricing and execution, restructuring, regulation, international operations and substantial indebtedness could affect results. Forward-looking statements are subject to these and other uncertainties.
• Restructuring actions are expected to continue into 2018; the company expected most of the $97 million quarter-end restructuring accrual to be paid in 2017 and 2018. The filing reports ordinary-course legal proceedings and states their resolution was not believed reasonably likely to materially adversely affect the financial statements.
• Foreign-currency exposure is meaningful: approximately 41% of Q1 revenue was denominated in currencies other than the U.S. dollar. The company used foreign-exchange and interest-rate derivatives for risk management, not speculation.
• The company was evaluating the impact of the forthcoming revenue-recognition standard, which it planned to adopt January 1, 2018; management anticipated that some revenue deferrals in certain Commercial and Integrated Engagement arrangements could be lower under the new standard.

Important facts for investors to verify

1. Assess underlying growth using the merger-adjusted comparison and constant-currency figures, rather than reported growth alone.
2. Track integration progress, expected synergies, restructuring charges and acquired-intangible amortization, which materially affected operating results.
3. Monitor operating cash conversion, working-capital movements, cash balance, debt maturities, interest costs and covenant headroom.
4. Review backlog conversion and net new business trends in Research & Development Solutions, alongside segment margins and client retention.
5. Evaluate the scale and funding of share repurchases relative to debt and cash generation, and confirm remaining authorization and subsequent activity.