Business context and reporting period
Quintiles IMS Holdings, Inc. (the registrant in this filing; now IQVIA Holdings Inc.) reported the three and six months ended June 30, 2017. The company provides healthcare information, technology and services through Commercial Solutions, Research & Development Solutions, and Integrated Engagement Services. The October 2016 IMS Health merger materially affects comparisons: 2016 results include no IMS Health operations, while 2017 includes them.
Financial performance and position
Amounts below are in millions of dollars except per-share data.
- Revenue: Q2 service revenue was $1,969, up 68.7% year over year; including reimbursed expenses, total revenue was $2,375 versus $1,553. First-half service revenue was $3,880, up 70.5%; total revenue was $4,697 versus $3,043. Management attributed most service-revenue growth to the merger.
- Profit and earnings: Q2 operating income was $151 versus $150; net income attributable to the company was $75 versus $86, and diluted EPS was $0.34 versus $0.71. First-half operating income was $319 versus $329; attributable net income was $149 versus $193, and diluted EPS was $0.65 versus $1.59. Higher interest and merger-related amortization weighed on results; 2017 EPS comparisons also reflect a substantially larger share count.
- Margins: Q2 operating margin on service revenue was approximately 7.7%, compared with 12.9% in 2016. Costs of revenue excluding depreciation and amortization declined to 58.6% of service revenue from 63.0%. The filing attributes that cost-ratio improvement partly to the larger share of higher-margin Commercial Solutions revenue. Purchase-accounting amortization increased sharply after the merger.
- Segments: Q2 segment profit was $239 for Commercial Solutions (27.5% margin), $243 for Research & Development Solutions (27.1%), and $22 for Integrated Engagement Services (10.8%). Commercial Solutions comparisons are especially affected by the merger. Research & Development Solutions revenue rose 1.0% in Q2; Integrated Engagement Services revenue declined 2.4%.
- Cash flow: First-half operating cash flow was $301 versus $153. Investing used $440, including $268 for acquisitions and $178 for property, equipment and software. Financing used $210, including $1,694 of share repurchases. Cash declined $296 to $902.
- Debt and liquidity: Total debt principal was $8,986 at June 30, compared with $7,219 at year-end; the balance-sheet carrying amount was $8,952 including current debt. Current assets were $3,259 and current liabilities $2,660. Cash was $902, of which $91 was in the United States. The company reported $662 of available capacity on its $1 billion revolving facility and said it expected available cash, operating cash flow and facility access to cover operating needs and debt obligations for at least 12 months. It was in compliance with financial covenants.
Changes, outlook, risks and unusual items
- In February 2017, the company issued €1.425 billion of 3.25% senior notes due 2025 and used proceeds for refinancing, fees and general corporate purposes, including repurchases. In March it refinanced term B loans, extending maturity to 2024 and reducing stated loan margins; it recorded a $3 million extinguishment loss.
- The company repurchased 21.3 million shares for approximately $1.7 billion in the first half. Remaining authorization at June 30 was approximately $853 million.
- A $40 million impairment charge related to Encore reflected continued performance deterioration. Encore was sold on July 12, 2017, after quarter-end.
- The effective tax rate was unusually low: (10.3)% for Q2 and 3.2% for the first half, favorably affected by merger purchase-accounting amortization tax benefits and excess stock-compensation tax benefits.
- Research & Development Solutions backlog was $9.99 billion at June 30; management expected $3.0 billion to convert to revenue over the next 12 months. Net new business for the trailing 12 months was $4.03 billion, versus $4.73 billion a year earlier. No broader earnings or revenue guidance is provided in the supplied filing text.
- Restructuring actions are expected to continue into 2018; $90 million of restructuring accruals remained at June 30, with most expected to be paid in 2017 and 2018. Management cautioned about merger integration and synergy execution, client-contract retention and pricing, service delivery and regulatory liability, international and currency exposure, and substantial indebtedness. It reported no significant change in previously disclosed risk factors; ordinary-course legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- Separate merger-driven growth from underlying organic and constant-currency performance; the prior-year comparison excludes IMS Health.
- Assess whether the merger’s expected synergies and integration benefits offset higher amortization, interest expense and corporate costs.
- Track debt, interest expense, refinancing terms, covenant headroom and cash available outside the United States.
- Review the drivers of the Encore impairment and sale, and monitor performance against the disclosed backlog and expected conversion.
- Evaluate the effect of substantial share repurchases and the larger post-merger share count on per-share results and liquidity.