IQVIA HOLDINGS INC. quarterly report, Q2 FY2016

Business context and reporting period

Quintiles Transnational Holdings Inc. (the registrant named in this filing) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. Its businesses are Product Development, including clinical research services, and Integrated Healthcare Services, including commercialization and healthcare analytics. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.

Financial performance and position

Metric	Q2 2016	Q2 2015	Six months 2016	Six months 2015
Service revenue	$1,167.1	$1,074.4	$2,275.1	$2,104.3
Total revenue, including reimbursed expenses	$1,552.7	$1,443.5	$3,042.8	$2,791.1
Operating income	$150.7	$158.4	$329.5	$301.6
Net income attributable to Quintiles	$86.8	$85.0	$193.4	$171.3
Diluted EPS	$0.71	$0.67	$1.59	$1.35

Service revenue grew 8.6% in Q2 and 8.1% in the first half. Operating margin measured against service revenue was about 12.9% in Q2 versus 14.7% a year earlier, and 14.5% for the first half versus 14.3%.
Product Development service revenue rose 13.2% in Q2 and 12.5% in the first half; Integrated Healthcare Services revenue fell 3.8% and 3.7%, respectively. Q2 segment operating margins were 21.0% and 9.3%, respectively, compared with 22.4% and 6.5% a year earlier.
Six-month operating cash flow was $152.7, versus cash used of $13.6 in 2015. Investing cash outflow was $59.6; financing cash outflow was $102.5. Cash and equivalents were $955.7 at June 30, including $212.0 held in the United States.
Total debt was approximately $2.5 billion, excluding $532.5 of additional available revolving-credit borrowings; no revolver borrowings were drawn in the first half. Balance-sheet debt, including current maturities, was approximately $2.45 billion. The company said it was in compliance with debt covenants.
Current assets were $2,436.6 and current liabilities $1,600.3. Shareholders’ deficit was $228.7. Trade receivables and unbilled services, net, were $1,257.4.

Material changes and management commentary

Product Development drove consolidated service-revenue growth, supported by clinical-services volume, execution on higher opening backlog, and the Q2 Solutions contribution. Its costs grew faster than revenue in Q2, including higher compensation, investment in delivery capacity, and a $10.1 million reserve for potentially non-reimbursable expenses.
Integrated Healthcare Services revenue remained pressured by lower commercial-services activity in North America and Japan and lower payer-provider services. Lower costs helped lift its operating margin. Management cited generally soft commercial-services conditions in Europe and Japan when discussing weaker new business signings.
Backlog was $12.538 billion at June 30; $8.611 billion was not expected to generate revenue in the next 12 months. Q2 net new business increased 24.4% year over year to $1.645 billion, but first-half net new business was essentially unchanged at $2.671 billion.
Restructuring charges were $25.1 million in Q2 and $28.3 million in the first half. Management said the plans were expected to produce $90–$100 million of annualized savings; actions were expected to continue through 2016 and 2017. The 2016 plan’s approved scope was increased to approximately $41 million.
The company repurchased 1.49 million shares for $97.6 million in the first half, leaving $46.8 million of authorization at June 30.

Outlook, risks and unusual items

Management said available cash, operating cash flows, and access to revolving-credit and receivables facilities were expected to fund operations, capital expenditures, and debt obligations for at least the next 12 months. No broader numerical revenue or earnings guidance is provided in the filing text.
A proposed merger with IMS Health, announced May 3, 2016, was expected to close in Q4 2016, subject to stockholder, regulatory, and other conditions. IMS Health shareholders would receive 0.3840 Quintiles shares per share; approximately 127 million shares were expected to be issued. Either party could owe a $250 million termination fee in specified circumstances. Management’s preliminary estimate anticipated adjusted diluted EPS accretion in 2017, but noted that estimates and anticipated benefits could change and were not assured.
Merger risks include failure or delay to close, integration challenges, employee and client disruption, regulatory conditions, and failure to realize expected synergies. The company also cited substantial indebtedness, contract termination and pricing risks, international and foreign-exchange exposure, and restructuring execution risks. Approximately 32% of first-half service revenue was denominated in currencies other than the U.S. dollar.
Other notable items: Q2 operating income declined despite revenue growth, reflecting higher restructuring and operating expenses; 2015 included a $7.8 million debt-extinguishment loss that did not recur. First-half comprehensive income was affected by foreign-currency translation and derivative losses. Legal proceedings were described as incidental, with no reasonably likely material adverse effect expected by management.

Important facts for investors to verify

Merger approval, regulatory clearances, financing/refinancing plans, closing timing, expected share issuance, and the basis for projected accretion and synergies.
Whether restructuring delivers the stated $90–$100 million annualized savings, and the timing and cash cost of remaining actions.
Product Development cost growth and margin trajectory, including the Q2 Solutions contribution and the potentially non-reimbursable-expense reserve.
Integrated Healthcare Services demand and new-business trends, particularly commercial services and real-world research.
Receivables quality and collections: the allowance for doubtful accounts increased to $12.6 million from $2.3 million at year-end; monitor unbilled services and cash conversion.
Debt maturities, refinancing terms, covenant compliance, and liquidity available after the proposed merger.