Business context and reporting period
This is Quintiles Transnational Holdings Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2013—not a filing under the IQVIA name. Quintiles provided biopharmaceutical development and healthcare commercialization services through Product Development and Integrated Healthcare Services. It completed its IPO on May 14, 2013.
Key financial metrics
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Service revenue | $944.2 | $944.9 | $1,871.7 | $1,832.9 |
| Total revenue, including reimbursed expenses | $1,295.7 | $1,230.8 | $2,524.5 | $2,387.4 |
| Operating income | $94.9 | $100.9 | $210.1 | $192.9 |
| Net income attributable to Quintiles | $38.5 | $47.2 | $86.8 | $90.5 |
| Diluted EPS | $0.30 | $0.40 | $0.71 | $0.77 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $5.4 | $87.3 |
- Q2 service revenue was essentially flat year over year; total revenue grew 5.3%, mainly because reimbursed expenses rose 22.9%. These pass-through expenses generate little to no profit.
- For the first half, service revenue rose 2.1% and total revenue rose 5.7%. Management attributed service-revenue growth at constant currency to Product Development, partly offset by Integrated Healthcare Services and unfavorable foreign-exchange effects.
- Q2 operating income fell 5.9% and attributable net income fell 18.4%. Operating margin on service revenue was approximately 10.1%, versus 10.7% a year earlier. The quarter included a $16.5 million debt-extinguishment loss and elevated corporate costs.
- First-half operating income increased 8.9%, while attributable net income decreased 4.0%. Service costs were 65.7% of service revenue for the half, compared with 66.5% in 2012; SG&A was 22.9%, versus 22.3%.
- At June 30, cash and cash equivalents were $585.7 million; current assets were $1,673.9 million and current liabilities $1,238.7 million. Total debt and capital-lease obligations were approximately $2,045.3 million, including $141,000 current. The company also reported $300 million of available revolving-credit borrowings.
- First-half investing cash outflow was $67.4 million, including $64.3 million for property, equipment and software. Financing cash inflow was $105.8 million, reflecting IPO proceeds offset partly by debt repayments. Cash increased $18.0 million to $585.7 million.
Material changes versus the prior comparable period
- Product Development service revenue rose 4.6% in Q2 and 6.1% for the first half. Its operating margin improved to 18.8% from 17.2% in Q2 and to 18.8% from 17.1% for the half.
- Integrated Healthcare Services service revenue declined 13.0% in Q2 and 8.9% for the half; segment operating income fell 38.1% and 45.8%, respectively. Management cited the end of a major Japan contract, North American scope reductions and cancellations, and insufficient new business conversion.
- Backlog increased to $9.034 billion at June 30 from $8.704 billion at year-end 2012. Net new business was $1.014 billion in Q2, up 13%, and $2.259 billion for the half, up 16%. Management cautioned that backlog and net new business do not directly predict revenue timing.
- Operating cash flow fell by $81.9 million year over year for the first half. Management cited an eight-day increase in days sales outstanding, compared with a one-day increase in the prior-year period, as well as one-time payments.
- The May IPO generated approximately $489.9 million in net proceeds for the company. It used about $308.9 million to repay a term loan, $50 million to reduce other debt, and $25 million to terminate a management agreement. Selling shareholders also sold shares but those proceeds did not go to the company.
Outlook, commentary, risks and unusual items
- Management said available cash, expected operating cash flows and access to the revolving facility should fund operations, capital expenditures and debt obligations for at least 12 months. It does not currently intend to pay dividends in the foreseeable future.
- A 2013 restructuring plan targets service-delivery migration and selected overcapacity, with severance expected for approximately 400 positions. Management expects annual savings of $15 million to $20 million; actions were expected to continue through 2013.
- The 2013 effective tax rates benefited from discrete items, including tax benefits related to the management-agreement termination and debt repayment, and a change to treat most foreign-subsidiary earnings as indefinitely reinvested. The filing records an $8.1 million benefit from reversing deferred tax liabilities and a $7.3 million one-time tax benefit; these items make reported tax rates less representative of ongoing results.
- Approximately 47.3% of variable-rate borrowings, or $975 million, was effectively fixed through interest-rate swaps at approximately 2.53% plus the applicable 3.25% margin. The company reported $28.6 million of unrealized swap losses at quarter-end.
- Risks highlighted include customer contract termination or cancellation, backlog conversion and project delays, pricing and cost overruns, international and foreign-exchange exposure, regulatory and patient-liability risks, and substantial indebtedness. Management reported compliance with debt covenants in all material respects and no significant change in previously disclosed risk factors.
- The filing identifies a $25 million management-agreement termination payment to affiliates of significant shareholders and a $1.5 million payment concerning use of an aircraft owned by a company controlled by the Executive Chairman. Legal proceedings were described as incidental; management did not expect their resolution to materially adversely affect the financial statements.
Important facts for investors to verify
- Confirm the issuer and period: the supplied filing is Quintiles Transnational Holdings Inc.’s Q2 2013 10-Q, not an IQVIA-branded filing.
- Assess whether the Product Development gains can offset continued Integrated Healthcare Services weakness, and how much of the reported total-revenue increase reflects reimbursed pass-through costs.
- Monitor receivables, unbilled services and days sales outstanding, given the sharp first-half decline in operating cash flow.
- Review debt maturities, covenant terms, variable-rate exposure and the remaining availability under the revolving facility.
- Evaluate whether restructuring savings are achieved and whether tax benefits, IPO-related debt reduction and other unusual items distort comparisons of recurring earnings.
- Consider backlog conversion, customer cancellations and contract timing; the filing says $5.918 billion of June backlog was not expected to generate revenue within the next 12 months.