Quintiles Transnational Holdings Inc. (2015 predecessor to IQVIA) — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The filing is by Quintiles Transnational Holdings Inc.; it is not filed under the IQVIA name. Financial statements are unaudited interim statements.
Business context and results
Quintiles provided biopharmaceutical clinical-development services through Product Development and commercialization, analytics, and other healthcare services through Integrated Healthcare Services. Reimbursed expenses are pass-through costs and are matched by corresponding costs of revenue.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Service revenues | $1,074.4 million | $1,035.5 million | $2,104.3 million | $2,040.8 million |
| Total revenues | $1,443.5 million | $1,341.0 million | $2,791.1 million | $2,648.9 million |
| Operating income | $158.4 million | $141.0 million | $301.6 million | $282.3 million |
| Net income attributable to Quintiles | $85.0 million | $85.1 million | $171.3 million | $175.3 million |
| Diluted EPS | $0.67 | $0.64 | $1.35 | $1.32 |
Q2 service revenue rose 3.8% reported and 9.8% at constant currency; six-month service revenue rose 3.1% reported and 9.0% at constant currency. Foreign exchange reduced service revenue by approximately $62.2 million in Q2 and $121.2 million for the six months. Q2 operating income increased 12.3%, while attributable net income was essentially flat; six-month attributable net income declined about 2.3%.
Operating income as a share of service revenue was approximately 14.7% in Q2 2015 versus 13.6% in Q2 2014, and 14.3% for the first half versus 13.8%. Consolidated service costs fell to 63.7% of service revenue in Q2 from 65.1%, and to 63.9% for the first half from 64.6%. Segment operating margins improved: Product Development was 22.4% in Q2 (20.3% prior year) and 21.7% for the first half (20.6%); Integrated Healthcare Services was 6.5% in Q2 (4.6%) and 6.5% for the first half (4.2%).
Cash flow, balance sheet and debt
- Cash and cash equivalents were $803.6 million at June 30, 2015, down from $867.4 million at year-end; $265.6 million was held in the United States.
- Operating cash flow was a use of $13.6 million for the first half, compared with $38.7 million provided in 2014. Management attributed the decline mainly to working-capital use associated with a nine-day increase in days sales outstanding, versus a five-day increase in the prior-year period.
- Investing cash outflow was $45.5 million; financing provided $16.5 million. Cash declined $63.7 million in the period. Capital spending on property, equipment and software was $31.9 million.
- Total debt was approximately $2.5 billion, with no revolving-credit borrowings and $534.7 million of additional available borrowing capacity. Current assets were $2.22 billion and current liabilities $1.35 billion. Shareholders’ deficit was $701.7 million.
- May refinancing replaced the prior term loan with $850 million Term Loan A due 2020, $600 million Term Loan B due 2022, and $800 million of 4.875% senior notes due 2023; the new facilities also included a $500 million revolver. A $7.8 million debt-extinguishment loss was recorded. The company reported compliance with debt covenants.
Material changes, outlook and risks
- Backlog was $11.369 billion at June 30, up from $11.244 billion at December 31. Net new business increased 7.6% in Q2 to $1.322 billion and 6.6% for the first half to $2.668 billion. Approximately $7.745 billion of backlog was not expected to generate revenue within the next 12 months.
- Product Development’s Q2 revenue increased only 0.7% reported, reflecting currency headwinds, while constant-currency growth was 5.5%. Management cited increased clinical-services volume and expected recent project awards to ramp up in the second half, while noting prior-year cancellations and lower advisory-services activity.
- Integrated Healthcare Services revenue increased 13.2% in Q2 and 16.3% for the first half, including the Encore acquisition and growth in commercial and real-world research services. The segment remained lower-margin than Product Development.
- A February 2015 restructuring plan is expected to cost approximately $30 million through 2015–2016; management estimated annualized savings of $50–$60 million. The company recorded $11.6 million of restructuring costs in the first half, primarily severance.
- The company repurchased 3,855,050 shares for approximately $250 million in May at $64.85 per share; $109.5 million of authorization remained at quarter-end.
- On July 1, 2015, after quarter-end, Quintiles and Quest Diagnostics closed a clinical-trials laboratory joint venture in which Quintiles owns 60%. Purchase-accounting valuations were incomplete at filing.
- Management said available cash, operating cash flows and credit facilities were expected to fund operating needs, capital expenditures and debt service for at least 12 months. No formal earnings or revenue guidance was provided in the supplied filing text.
- Key risks include substantial and partly variable-rate debt, foreign-currency exposure (about 33% of first-half service revenue was denominated in non-U.S. currencies), contract termination and execution risks, and regulatory, patient-safety and international-operating risks. The company also disclosed a transition period to meet certain NYSE independence requirements after losing controlled-company status. Management said legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether backlog converts to revenue on the expected schedule, and whether new awards offset cancellations and project delays.
- Whether working-capital pressure and elevated DSO reverse, restoring positive operating cash flow.
- Actual restructuring charges, timing and realization of the stated annual savings.
- Debt service, floating-rate exposure, refinancing terms and covenant headroom, particularly as mandatory excess-cash-flow repayments begin in 2016.
- The completed valuation, accounting effects and operating performance of the Quest joint venture.
- The extent to which reported results remain affected by currency movements and acquisition-related growth.