Business context and reporting period
Quintiles Transnational Holdings Inc. (the company identified in this 2014 filing; it later became IQVIA) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. It provided biopharmaceutical development and healthcare services through Product Development and Integrated Healthcare Services, operating in approximately 100 countries with about 30,700 employees.
Key financial metrics
Amounts are in millions of dollars, except per-share data. Comparisons are with the corresponding 2013 period.
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Service revenue | $1,035.5; up 9.7% (8.6% constant currency) | $2,040.8; up 9.0% (8.5% constant currency) |
| Total revenue, including reimbursed expenses | $1,341.0 vs. $1,295.7 | $2,648.9 vs. $2,524.5 |
| Operating income | $141.0 vs. $94.9 | $282.3 vs. $210.1 |
| Net income attributable to Quintiles | $85.1 vs. $38.5 | $175.3 vs. $86.8 |
| Diluted EPS | $0.64 vs. $0.30 | $1.32 vs. $0.71 |
| Operating margin on service revenue | 13.6% vs. 10.1% | 13.8% vs. 11.2% |
| Operating cash flow | Not presented separately for the quarter | $38.7 vs. $1.4 |
Service costs were 65.1% of service revenue in Q2 and 64.6% in the first half, compared with 65.4% and 65.7% in 2013. SG&A was $219.0 million for Q2 and $438.3 million for the first half. Reimbursed expenses, which the company described as pass-through costs with little or no profit, declined to $305.6 million in Q2 and $608.1 million in the first half.
At June 30, cash and cash equivalents were $636.5 million, total current assets were $1,864.7 million and current liabilities were $1,353.1 million. Total debt was approximately $2.05 billion; the company also had an undrawn $300 million revolving facility. Shareholders’ deficit was $621.6 million. Cash was $778.1 million at December 31, 2013.
Material changes versus the prior comparable period
- Service revenue growth reflected increases in both segments, including the Novella acquisition completed in 2013. Q2 constant-currency growth was 6.7% in Product Development and 15.1% in Integrated Healthcare Services.
- Product Development’s Q2 operating margin rose to 20.3% from 18.8%; Integrated Healthcare Services’ margin fell to 4.6% from 5.7%. The latter faced higher service-cost ratios, which management linked partly to competitive pricing in Europe.
- Lower interest expense reflected reduced average debt and lower borrowing rates. The $16.5 million debt-extinguishment loss recorded in first-half 2013 did not recur.
- First-half operating cash flow improved year over year, but remained modest relative to net income. Cash used in financing was $154.1 million, principally reflecting a $165.1 million private share repurchase; first-half 2013 financing inflows included IPO proceeds.
Outlook, commentary, risks and unusual items
- Management expected a February 2014 restructuring plan, with costs of up to $13 million and approximately 400 positions affected, to generate annualized savings of about $20–25 million. The company recorded $2.0 million of restructuring costs in the first half and expected most accrued costs to be paid in 2014.
- Backlog was $10.264 billion at June 30, up from $9.855 billion at year-end. Net new business was $1.228 billion in Q2 and $2.503 billion for the first half. About $6.708 billion of backlog was not expected to generate revenue within the next 12 months. Management cautioned that historical backlog-to-revenue relationships may not persist.
- Management believed available cash, operating cash flows and revolving-credit access would fund operating needs, capital expenditures and debt obligations for at least 12 months. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- On July 1, 2014, after quarter-end, the company acquired Encore Health Resources for approximately $93.6 million in cash to add electronic health-record implementation and advisory capabilities. Preliminary fair values of assets acquired were not available at filing.
- Risks highlighted include short-notice customer contract termination, contract pricing and cost overruns, project delays or cancellations, customer and therapeutic concentration, international and foreign-exchange exposure, regulatory and patient-safety liabilities, dependence on information systems, acquisition integration, and substantial indebtedness. The company said it was in compliance with debt covenants. It reported ordinary-course legal proceedings that management did not believe were reasonably likely to have a material adverse financial effect.
- Foreign-subsidiary earnings were considered indefinitely reinvested outside the United States; repatriating cash or changing that assertion could create additional tax liabilities. The company reported no significant changes to previously disclosed risk factors or market-risk disclosures.
Important facts for investors to verify
- Whether revenue and backlog convert into completed work and cash collections, particularly given the low first-half operating cash flow and five-day increase in days sales outstanding.
- Whether the restructuring delivers the stated $20–25 million annualized savings and how associated costs and headcount reductions affect service capacity.
- Whether Integrated Healthcare Services can improve profitability amid higher service-cost ratios and the planned end of the Italian pharmaceutical distribution agreement in Q4 2014.
- The impact of the Encore acquisition on liquidity, debt, integration costs and segment performance.
- Debt maturities, borrowing costs, covenant headroom and the company’s capacity to fund repurchases and growth while maintaining liquidity.
- Potential earnings volatility from taxes, foreign exchange, investment gains and losses, and noncash or unusual items; 2013 comparisons included significant tax benefits and transaction-related charges.