IQVIA Holdings Inc. — Q2 2018 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2018. IQVIA provides analytics, technology and contract research services to the life sciences industry. It reports three segments: Technology & Analytics Solutions (TAS), Research & Development Solutions (R&D), and Contract Sales & Medical Solutions (CS&M). Segment name changes during the period did not change segment composition.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $2,567m | $2,355m | $5,130m | $4,715m |
| Income from operations | $170m | $126m | $353m | $328m |
| Net income attributable to IQVIA | $61m | $62m | $130m | $162m |
| Diluted EPS | $0.29 | $0.28 | $0.62 | $0.71 |
| Operating cash flow | — | $493m | $301m |
- Q2 revenue rose 9.0%; management attributed approximately $182m, or 7.7%, to constant-currency growth and $30m to currency effects. First-half revenue rose 8.8%, including approximately 6.5% constant-currency growth and $110m of currency benefit.
- Q2 operating margin was approximately 6.6%, versus 5.4% a year earlier. First-half operating margin was approximately 6.9%, versus 7.0%. Revenue costs were 65.2% of Q2 revenue (66.1% in 2017); SG&A was 16.5% (16.1%).
- Q2 interest expense increased to $107m from $81m; first-half expense increased to $203m from $156m, reflecting higher average debt. First-half net income attributable to IQVIA declined despite higher operating income.
- Operating cash flow was $493m for the first half, up $192m year over year. Investing used $450m, including $198m for property, equipment and software and $227m for acquisitions. Financing used $93m, including $668m for share repurchases.
Segments
- TAS: Q2 revenue increased 14.2% to $1,011m; segment profit increased 1.7% to $239m. Growth reflected technology, information and real-world analytics services, plus acquisitions; costs rose faster than revenue.
- R&D: Q2 revenue increased 9.6% to $1,350m; segment profit increased 25.5% to $276m. Management cited clinical services volume, lab testing and acquisitions.
- CS&M: Q2 revenue decreased 13.4% to $206m; segment profit decreased 18.2% to $18m. Management cited prior-year cancellations in the Americas and lower Asia-Pacific volume.
Financial position and liquidity
- At June 30, cash and cash equivalents were $879m, compared with $959m at December 31, 2017; $235m was held in the U.S. Current assets were $3,587m and current liabilities $3,166m.
- Total debt was approximately $10.8bn, including $10.627bn of long-term debt and $101m current debt. Long-term debt rose from $10.122bn at year-end. Interest rates on borrowings are largely floating, with hedges; management described the debt mix as approximately 52% fixed and 48% variable before interest-rate caps.
- The revolving facility was increased to $1.5bn; approximately $1.29bn remained available at June 30. The company reported covenant compliance and said cash, operating cash flow and available facilities should meet operating, capital expenditure and debt needs for at least 12 months.
- IQVIA repurchased 6.47m shares for approximately $659m in the first half, including 4m shares for $412m acquired in connection with a secondary offering by existing holders. The company received no proceeds from that offering and had approximately $1.0bn of repurchase authorization remaining.
Material changes, outlook and risks
- Remaining performance obligations were approximately $17.3bn at June 30; IQVIA expected to recognize about 40% over the next 12 months. R&D contracted backlog was $15.73bn, including reimbursed expenses, with approximately $4.6bn expected to convert to revenue in the next 12 months. These measures have different definitions and should not be treated as equivalent.
- No specific full-year revenue or earnings guidance is provided in the filing. Restructuring actions are expected to continue into 2019; $43m of restructuring costs were recorded in the first half, and most of the $81m accrued balance was expected to be paid in 2018 and 2019.
- Q2 2017 included a $40m impairment charge related to Encore, which was sold in Q3 2017; there was no comparable impairment in 2018. Q2 2018 included a $2m debt-extinguishment loss. Other income improved, largely from foreign-exchange gains and pension-asset returns.
- Foreign-currency translation reduced Q2 comprehensive income by $365m; the first-half translation loss was $158m. Approximately 38% of first-half revenue was denominated in currencies other than the U.S. dollar.
- Revenue recognition under the new customer-contract standard was adopted retrospectively from January 1, 2018, and prior-period figures were recast. The Tax Act accounting remained provisional in some respects; management was evaluating GILTI and BEAT impacts. First-half effective tax rate was 24.9%, versus 5.7% in 2017, with the year-over-year comparison affected by tax-law changes and merger-related purchase-accounting benefits.
- Key disclosed risks include short-notice contract termination, customer concentration, project cost and change-order estimation, international and foreign-exchange exposure, regulatory and clinical-trial risks, acquisition integration, restructuring execution and substantial indebtedness. Management said pending legal matters were not expected to have a material adverse effect; no material changes to previously disclosed risk factors were reported.
Investor verification priorities
- Assess whether revenue growth and segment profitability persist, particularly the R&D improvement and continued CS&M decline.
- Track conversion of the $17.3bn remaining performance obligations and $15.73bn R&D backlog into revenue and cash, including the impact of cancellations and reimbursed expenses.
- Review debt levels, floating-rate exposure, refinancing terms, covenant headroom and the company’s capacity to sustain share repurchases alongside acquisitions and investment.
- Monitor unbilled services, which increased $226m from year-end, and the related timing of invoicing and customer payments.
- Confirm final Tax Act accounting and assess the effects of foreign-exchange movements, restructuring costs and acquisition-related amortization on reported earnings.