Quintiles IMS Holdings, Inc. (now IQVIA) — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is for Quintiles IMS Holdings, Inc., not under the IQVIA name. Quintiles completed its merger of equals with IMS Health on October 3, 2016; 2016 includes IMS Health results only from that date, so reported year-over-year comparisons are not like-for-like. The filing also provides fourth-quarter results, but this is an annual report rather than a standalone Q4 filing.
Business context
The combined company provides healthcare information, technology and outsourced services, including clinical research, commercial analytics and engagement services. It reported more than 50,000 employees and operations in over 100 countries. Its three segments are Commercial Solutions, Research & Development Solutions, and Integrated Engagement Services.
Key financial metrics
| Metric | FY2016 | FY2015 |
|---|---|---|
| Service revenues, excluding reimbursed expenses | $5.364 billion | $4.326 billion |
| Total revenues, including reimbursed expenses | $6.878 billion | $5.737 billion |
| Income from operations | $642 million | $646 million |
| Net income | $130 million | $388 million |
| Net income attributable to Quintiles IMS | $115 million | $387 million |
| Diluted EPS | $0.76 | $3.08 |
| Cash from operating activities | $860 million | $476 million |
| Capital expenditures | $164 million | $78 million |
| Cash and cash equivalents at year-end | $1.198 billion | $977 million |
| Total debt and capital leases | $7.219 billion | $2.501 billion |
Reimbursed expenses were $1.514 billion in 2016 and are principally pass-through costs. Costs of revenue were 60.3% of service revenues, down from 62.5%. Segment profit margins were 21.5% for Commercial Solutions, 27.1% for Research & Development Solutions, and 9.4% for Integrated Engagement Services. The filing does not provide a consolidated EBITDA figure.
At year-end, total assets were $21.208 billion and stockholders’ equity was $8.860 billion. The company reported $656 million of additional available borrowings under its revolving credit facilities; it was in compliance with financial covenants. Operating cash flow less capital expenditures was approximately $696 million, calculated from reported amounts.
Material changes versus prior period
- Service revenues rose 24.0% as reported, principally because IMS Health contributed $806 million after the merger; constant-currency growth was 24.1%. The inclusion of only a partial year of IMS makes this comparison incomplete.
- Research & Development Solutions revenue increased 9.9% to $3.472 billion; segment profit rose 14.3% to $942 million. Integrated Engagement Services revenue declined 5.7% to $796 million, with management citing cancellations and lower activity in North America, Japan and Europe.
- Income from operations was approximately flat, while net income attributable to the company fell to $115 million. The 2016 result included a $252 million deferred tax expense tied to changing the reinvestment assertion on foreign earnings, as well as merger, restructuring and impairment costs.
- Cash from operations increased by $384 million. Investing cash flow was positive $1.731 billion, largely reflecting $1.887 billion of net cash assumed in business acquisitions, including the merger. Financing activities used $2.284 billion, including $1.097 billion of common-stock repurchases.
- Total debt rose substantially with the merger and related financing. The company ended 2016 with $7.219 billion of debt and capital leases, compared with $2.501 billion a year earlier.
Outlook, risks and unusual items
- Outlook: Management said available cash, expected operating cash flows and access to revolving and receivables facilities should fund operations, capital expenditures and debt obligations for at least the next 12 months. No specific company revenue or earnings guidance is provided in the supplied filing text. Management cited $200 million of annualized merger cost synergies expected exiting 2019; realization and timing are uncertain.
- Backlog: Research & Development Solutions backlog was $9.5 billion at year-end, versus $8.9 billion at year-end 2015; $2.9 billion was expected to convert to revenue in the next 12 months. Contracts can be delayed, reduced or terminated, so backlog is not a guarantee of revenue.
- Merger and accounting items: Merger-related costs were $87 million; restructuring costs were $71 million; impairment charges were $28 million, including a $23 million goodwill impairment in the Encore reporting unit. Increased acquired intangible amortization also affected earnings. The merger’s purchase-price allocation was preliminary.
- Tax: The effective tax rate was 72.0%, versus 29.5% in 2015, primarily due to the change in treatment of foreign earnings. Deferred tax expense and purchase accounting recorded substantial liabilities; management said some foreign earnings would incur additional tax if repatriated.
- Legal and regulatory: IMS Korea faced a South Korean civil privacy lawsuit seeking approximately $6 million plus interest and related criminal indictments involving the handling of sensitive health information. The company disputed the claims and said it would defend itself. A separate government-contract voluntary disclosure matter remained unresolved, and ultimate liability could exceed reserves. Management did not expect pending matters in aggregate to have a material adverse effect, but noted an unfavorable outcome could be material in the period resolved.
- Principal risks: Integration and synergy execution; client cancellations and project delays; data-supplier access and data quality; privacy, cybersecurity and regulatory compliance; competition and technology change; foreign-exchange exposure; and substantial debt, restrictive covenants and variable interest rates. No regular cash dividend was planned.
Most important facts for investors to verify
- Use merger-adjusted or pro forma comparisons when assessing growth: the filing’s unaudited pro forma total revenue was $9.298 billion for 2016, but pro forma net income attributable to the company was $42 million; these figures include estimates and are not a substitute for reported results.
- Reconcile the reported 2016 tax expense and effective rate to the foreign-earnings tax provision, and assess likely cash taxes and repatriation plans.
- Review debt maturities, variable-rate exposure, covenant headroom and the effect of the substantial 2021 maturities; reported debt is $7.219 billion before cash.
- Track whether backlog converts as expected and whether cancellations, delays or scope changes alter revenue timing or margins.
- Monitor merger integration, the stated $200 million synergy target, restructuring spending and the impact of acquired intangible amortization.
- Follow developments in the South Korean privacy proceedings and the unresolved U.S. government-contract disclosure matter, including changes to reserves or potential liabilities.