IQVIA Holdings Inc. — Q3 2019 Form 10-Q
Business context and period. Unaudited results for the three and nine months ended September 30, 2019, compared with the same 2018 periods. IQVIA provides analytics, technology and contract research services to the life sciences industry. It reports Technology & Analytics Solutions (TAS), Research & Development Solutions (R&D), and Contract Sales & Medical Solutions (CSM).
Financial results and key metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $2.769bn | $2.594bn | $8.193bn | $7.724bn |
| Operating income | $204m | $181m | $611m | $534m |
| Net income attributable to IQVIA | $57m | $60m | $175m | $190m |
| Diluted EPS | $0.29 | $0.29 | $0.87 | $0.91 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $834m | $837m |
- Growth and margins: Q3 revenue rose 6.7% reported and 7.9% in constant currency; nine-month revenue rose 6.1% reported and 7.9% constant currency. Foreign exchange reduced revenue by approximately $30m in Q3 and $138m over nine months. Calculated gross margin was 33.1% in Q3 versus 35.3%, and 34.1% for nine months versus 35.2%. Operating margin was 7.4% versus 7.0% in Q3 and 7.5% versus 6.9% for nine months.
- Cash flow and investment: Nine-month operating cash flow was nearly flat year over year. Capital spending on property, equipment and software was $445m versus $321m; acquisitions, net of cash acquired, used $461m versus $255m. Operating cash flow less that capital spending was approximately $389m, compared with $516m. Cash declined $28m from year-end to $863m.
- Liquidity and debt: Cash was $863m; current assets were $3.995bn and current liabilities $3.576bn. Debt principal was $11.605bn, with $1.1bn available under the revolving facility; balance-sheet debt, net of unamortized costs and current portion, was $11.444bn long-term plus $98m current. Management said liquidity, expected cash flows and available facilities should cover operating needs, capital spending and debt obligations for at least 12 months. The company reported compliance with material financial covenants.
Material changes and segment performance
- TAS revenue increased 8.0% in Q3 and 8.7% for nine months; segment profit rose 11.1% and 5.9%, respectively. Growth reflected real-world and analytical services and acquisitions; cost-saving initiatives reduced SG&A.
- R&D revenue increased 6.1% in Q3 and 5.4% for nine months. Segment profit fell 1.0% in Q3 but rose 6.3% for nine months, as costs grew faster than Q3 revenue. Clinical services, data management and lab testing volumes contributed to growth.
- CSM revenue increased 5.1% in Q3 but declined 2.1% for nine months; nine-month segment profit fell 11.1%. Management cited regional volume weakness outside the Americas for the year-to-date decline.
- SG&A fell to $395m from $429m in Q3 and to $1.250bn from $1.273bn for nine months. Costs of revenue grew faster than revenue in both periods.
Outlook, commentary, risks and unusual items
- No specific company-wide revenue or EPS forecast is provided in the supplied filing text. At September 30, remaining performance obligations were approximately $20.0bn, with about 35% expected to be recognized over the next 12 months. R&D contracted backlog was $18.30bn, of which approximately $5.1bn was expected to convert to revenue in the next 12 months; backlog and remaining performance obligations are distinct measures.
- Restructuring actions to streamline operations and integrate acquisitions are expected to continue into 2020. Nine-month restructuring expense was $45m; $53m remained accrued at September 30, mostly expected to be paid in 2019 and 2020.
- In 2019, the company issued $1.1bn of 5.00% senior notes due 2027 and €720m of 2.25% notes due 2028. The latter, together with cash, funded redemption of $800m of 4.875% notes due 2023. Refinancing generated a $24m debt-extinguishment loss; interest expense increased to $338m for nine months from $308m.
- IQVIA repurchased approximately $690m of stock during the first nine months and had approximately $1.6bn of remaining authorization. Acquisitions during the period cost $525m in total, net of cash acquired and including contingent and deferred payments.
- Management highlights risks including contracts terminable on short notice, contract pricing and cost overruns, foreign currency exposure (about 40% of nine-month revenue was in non-U.S. currencies), international and regulatory risks, clinical-trial execution, information-system security, acquisition integration, restructuring outcomes and substantial indebtedness. Management did not expect pending legal proceedings to have a material adverse effect. No material changes to previously reported risk factors were identified.
- Foreign currency translation contributed materially to comprehensive loss: comprehensive loss attributable to IQVIA was $105m in Q3, despite $57m of parent-attributable net income. The company adopted lease accounting in 2019, adding $490m of operating lease right-of-use assets and $546m of lease liabilities at September 30; management said adoption materially affected the balance sheet but not results or cash flows.
Important facts for investors to verify
- Whether revenue growth continues to convert into segment profit and operating cash flow, particularly in R&D.
- Backlog and remaining-performance-obligation conversion, including the timing of clinical research milestones, invoicing and collections; unbilled services rose $221m from year-end.
- Debt refinancing costs, interest burden, covenant headroom and the company’s capacity to service $11.605bn of debt principal.
- Acquisition returns and integration progress, and whether ongoing restructuring achieves the intended cost savings.
- The effects of foreign exchange, repurchases and share-count changes on reported earnings and per-share results.