IQVIA Holdings Inc. — Q2 2019 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2019. IQVIA provides analytics, technology and contract research services to the life sciences industry through Technology & Analytics Solutions, Research & Development Solutions, and Contract Sales & Medical Solutions.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $2.740bn | $2.567bn | $5.424bn | $5.130bn |
| Operating income | $197m | $170m | $407m | $353m |
| Operating margin | 7.2% | 6.6% | 7.5% | 6.9% |
| Net income attributable to IQVIA | $60m | $61m | $118m | $130m |
| Diluted EPS | $0.30 | $0.29 | $0.59 | $0.62 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $504m | $493m |
Q2 revenue rose 6.7% reported, including 8.5% constant-currency growth offset by $45m of unfavorable foreign exchange. Six-month revenue rose 5.7% reported, including 7.8% constant-currency growth offset by $108m of unfavorable FX. Costs of revenue grew faster than revenue in both periods: 7.5% reported in Q2 and 6.6% for the first half; as a share of revenue they increased to 65.7% and 65.4%, respectively.
For the first half, operating cash flow was $504m. Investing activities used $510m, including $296m for property, equipment and software and $201m for acquisitions. Operating cash flow less property, equipment and software purchases was $208m, compared with $295m in the prior-year period. Cash and cash equivalents were $938m at June 30, 2019, including $294m in the U.S.
Changes, debt and liquidity
- Q2 revenue growth was led by Technology & Analytics Solutions (up 9.0%) and Research & Development Solutions (up 6.3%); Contract Sales & Medical Solutions declined 1.5%. For the first half, the respective changes were +9.1%, +5.0% and -5.5%.
- Q2 operating income increased to $197m, while net income attributable to IQVIA edged down to $60m. First-half net income attributable to IQVIA fell to $118m from $130m despite higher revenue and operating income. Higher interest expense and lower equity earnings from unconsolidated affiliates were among the factors discussed.
- Total indebtedness was approximately $11.5bn at June 30, excluding $1.5bn of available revolving capacity. Long-term debt on the balance sheet was $11.299bn, plus a $100m current portion. The company issued $1.1bn of 5.00% senior notes due 2027 and used net proceeds primarily to repay revolving-credit borrowings. It reported compliance with financial covenants.
- Current assets were $3.978bn and current liabilities $3.495bn. Management said cash, expected operating cash flows and available credit facilities should cover operating needs, capital expenditures and debt obligations for at least the next 12 months.
Outlook, commentary and risks
- No specific full-year revenue or earnings guidance is provided in the filing. At June 30, remaining performance obligations were approximately $20.5bn; about 35% was expected to be recognized over the next 12 months. Research & Development Solutions backlog was $18.03bn, with approximately $4.9bn expected to convert to revenue in the next 12 months.
- Restructuring actions to streamline operations and integrate acquisitions are expected to continue into 2020; the company expected most of the $49m restructuring accrual to be paid in 2019 and 2020.
- The Q2 effective tax rate was 10.3%, versus 27.3% a year earlier; the first-half rate was 26.2%, versus 24.9%. The company recorded $20m of first-quarter tax expense based on its estimate of an unfavorable impact from proposed FDII guidance.
- Key disclosed risks include short-notice contract termination, pricing and cost overruns, backlog not predicting future revenue, information-system and data-protection risks, international and currency exposure, regulatory and clinical-trial risks, acquisition integration, restructuring outcomes and substantial indebtedness. The company reported no material change to previously disclosed risk factors. It did not believe the resolution of its incidental legal proceedings was reasonably likely to materially adversely affect its financial statements.
- Adoption of the new lease standard materially increased balance-sheet assets and liabilities but did not materially affect results or cash flows. Operating lease liabilities included $155m in other current liabilities and $398m in long-term operating lease liabilities.
Investor verification priorities
- Assess whether constant-currency growth, particularly in Technology & Analytics and Research & Development, translates into sustained operating-margin improvement as costs rise.
- Track cash conversion, capital spending, receivables and unbilled services; the net balance of unbilled services less unearned income increased by $237m from year-end, mainly reflecting contract billing and payment timing.
- Review debt maturities, refinancing and interest-rate exposure, covenant headroom and the impact of continued share repurchases; $376.7m was spent on repurchases in the first half, with approximately $1.9bn of authorization remaining.
- Monitor conversion of the disclosed remaining performance obligations and R&D backlog, noting that these measures are not identical and may not predict future revenue.
- Follow the final regulatory treatment of FDII and resulting tax effects, along with restructuring costs and expected savings.