IQVIA Holdings Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. IQVIA provides analytics, technology solutions and contract research services to the life sciences industry through Technology & Analytics Solutions, Research & Development Solutions, and Contract Sales & Medical Solutions.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $2.594B | $2.466B | $7.724B | $7.181B |
| Operating income | $181M | $195M | $534M | $523M |
| Net income attributable to IQVIA | $60M | $88M | $190M | $250M |
| Diluted EPS | $0.29 | $0.40 | $0.91 | $1.11 |
| Operating cash flow | Not stated for quarter | $837M | $737M |
- Q3 revenue rose 5.2% reported and 6.3% in constant currency; nine-month revenue rose 7.6% reported and 6.4% in constant currency.
- Q3 operating margin was approximately 7.0%, down from 7.9%; nine-month operating margin was approximately 6.9%, down from 7.3%. Costs of revenue were 64.7% of revenue in Q3 versus 65.3%; SG&A rose to 16.5% from 16.0%.
- Q3 revenue growth was led by Technology & Analytics Solutions (+12.9%) and Research & Development Solutions (+3.1%); Contract Sales & Medical Solutions declined 12.8%. Segment profit increased in Research & Development Solutions but fell in the other two segments.
- Cash provided by operations increased to $837M from $737M for nine months. Investing used $632M, including $321M for property, equipment and software and $255M for acquisitions; financing used $294M, including $801M of share repurchases. Cash declined $132M to $827M.
- At September 30, cash was $827M and total debt principal was $10.671B (about $10.7B); reported current and long-term debt totaled $10.619B after discounts and current classification. The revolving facility had $1.34B available. Management said liquidity, operating cash flows and facility access should fund operations, capital spending and debt obligations for at least 12 months.
Changes, outlook and notable items
- Revenue growth was partially offset by foreign exchange in Q3; nine-month results benefited from currency. Contract Sales & Medical Solutions continued to contract, attributed mainly to prior customer cancellations in the Americas and lower Asia-Pacific volume.
- Interest expense increased to $105M in Q3 and $308M for nine months, versus $93M and $249M, respectively, primarily reflecting higher average debt. The company extended Term A and revolving facility maturities to 2023, reduced applicable margins, and issued additional Term B loans due 2025. It reported compliance with debt covenants.
- A $27M provisional Tax Act transition-tax benefit reduced Q3 tax expense; the reported effective tax rate was (27.5%) in Q3 and 12.9% for nine months. Tax Act accounting remained provisional, with completion expected in Q4 2018.
- Restructuring costs were $23M in Q3 and $66M for nine months; restructuring actions are expected to continue into 2019. The remaining $85M restructuring accrual was expected to be paid mainly in 2018 and 2019.
- Remaining performance obligations were approximately $18.3B, with about 35% expected to be recognized over the next 12 months. Research & Development Solutions contracted backlog was $16.40B, including reimbursed expenses, with approximately $4.6B expected to convert to revenue in the next 12 months. These are not full-year revenue or earnings guidance.
- Other notable changes: depreciation and amortization increased to $283M in Q3 and $847M for nine months; Q3 other expense included acquisition-related contingent-consideration remeasurement. Foreign-currency translation contributed a $280M loss to nine-month comprehensive income, leaving comprehensive loss attributable to IQVIA of $79M.
- The filing cites risks including short-notice contract termination, project cost-estimate and change-order uncertainty, international and foreign-exchange exposure, regulatory and patient-liability risks, acquisition integration, restructuring execution, and substantial indebtedness. No material change to previously disclosed risk factors was reported; routine legal proceedings were not expected to have a material adverse effect. Management concluded disclosure controls were effective.
Investor verification points
- Assess whether growth in Technology & Analytics and Research & Development can offset continued weakness in Contract Sales & Medical Solutions.
- Review operating-margin pressure, elevated interest expense, and the effect of debt levels and variable-rate exposure.
- Track unbilled services, which rose $338M to $1.221B, and project-cost estimates and billing timing in clinical research contracts.
- Verify conversion and cancellation assumptions behind the $18.3B remaining performance obligations and $16.40B clinical backlog.
- Monitor final Tax Act accounting, restructuring costs and savings, acquisition-related contingent consideration, and the planned lease-accounting adoption, which the company expected to materially affect its balance sheet.