Business context and reporting period
Quintiles Transnational Holdings Inc. (the registrant named in this filing; the filing metadata identifies IQVIA Holdings Inc.) reported unaudited results for the three months ended March 31, 2016, compared with the same period in 2015. Its businesses were Product Development, providing clinical research and related services, and Integrated Healthcare Services, providing commercialization, analytics, real-world research and other healthcare services. Results are not necessarily indicative of full-year performance.
Key financial results
| Metric | Q1 2016 | Q1 2015 / comparator |
|---|---|---|
| Total revenues | $1,490.1 million | $1,347.6 million |
| Service revenues | $1,108.0 million | $1,030.0 million |
| Operating income | $178.8 million | $143.2 million |
| Net income attributable to Quintiles | $106.7 million | $86.4 million |
| Diluted EPS | $0.88 | $0.68 |
| Cash from operating activities | $112.1 million | $(64.3) million |
Service revenue increased 7.6% reported and 8.4% at constant currency. Reimbursed expenses were $382.1 million; these are pass-through costs with little or no profit. Operating margin was 16.1% of service revenue, versus 13.9%; net income attributable to Quintiles was 9.6% of service revenue, versus 8.4%. The effective tax rate was 28.6%, compared with 29.7%.
At March 31, 2016, cash and cash equivalents were $1,053.2 million, including $228.1 million in the United States. Total debt was approximately $2.5 billion, with $533.4 million of additional revolving-credit and receivables-facility capacity available and no revolver borrowings during the quarter. Shareholders’ deficit was $205.9 million. Management said cash, expected operating cash flows and available facilities were expected to fund operations and debt obligations for at least 12 months; the company reported covenant compliance.
Material changes versus the prior comparable period
- Product Development service revenue rose 11.7% to $837.5 million, including the contribution of Quest’s laboratory businesses to Q² Solutions. Segment operating margin increased to 22.6% from 20.9%.
- Integrated Healthcare Services revenue fell 3.5% to $270.5 million, mainly due to lower commercial-services revenue following cancellations in 2015. Segment operating margin was 6.6%, versus 6.5%.
- Net new business declined 23.8% to $1,026 million. Management attributed the decline in both segments partly to large opportunities delayed until Q2. Backlog was $11,991 million at quarter-end, versus $12,038 million at the start of 2016; $8,152 million was not expected to convert to revenue in the next 12 months.
- Operating cash flow improved from a use of $64.3 million to generation of $112.1 million, reflecting higher earnings, lower interest and tax payments, and improved DSO-related cash use. Investing activities used $43.5 million, including purchases of trading securities; financing activities used $5.0 million, primarily including debt repayments.
Outlook, risks and unusual items
- No quantified full-year revenue or earnings guidance is provided in the filing. Management noted that some large business opportunities were delayed into Q2 and described its liquidity as sufficient for at least the next 12 months.
- The board approved a new restructuring plan of approximately $22 million, primarily severance and exit costs, with actions expected through 2016. Q1 restructuring expense was $3.1 million; restructuring actions under existing plans were expected to continue into 2017.
- On May 3, 2016, after quarter-end, Quintiles and IMS Health Holdings agreed to a merger of equals. Each IMS share would convert into 0.3840 shares of the surviving company; closing was expected in the second half of 2016, subject to customary conditions including shareholder and regulatory approvals. The filing describes risks including delay or failure to close, integration challenges, disruption, and a possible $250 million termination fee in certain circumstances.
- Approximately 32% of Q1 service revenue was denominated in foreign currencies. Currency movements reduced reported service revenue growth by about $8.1 million; Q1 other expense included $4.2 million of net foreign-exchange losses. The company also identified risks involving contract termination, pricing and cost overruns, regulation, patient safety and liability, international operations, indebtedness, and execution of the proposed merger.
- Venture-fund investments had estimated maximum exposure to loss of $73.4 million, including remaining funding commitments. The company also agreed to sell part of its Samsung joint-venture interest for approximately $26 million, with closing expected in Q2.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting. It stated that pending legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Confirm the registrant and reporting entity: this 10-Q is filed under Quintiles Transnational Holdings Inc., despite the IQVIA metadata.
- Track net new business, backlog conversion and whether delayed large opportunities closed, particularly given the year-over-year bookings decline.
- Assess Product Development growth and margins alongside Q² Solutions’ contribution, and monitor continued weakness or recovery in Integrated Healthcare Services.
- Verify cash generation, debt levels, facility availability, covenant compliance and the effect of restructuring and interest-rate exposure.
- Follow required approvals, closing conditions, timing, termination-fee exposure and integration risks for the proposed IMS merger.