IQVIA Holdings Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited results; dollar amounts are in millions except per-share data. IQVIA provides analytics, technology and contract research services to the life sciences industry. Comparative 2017 figures were recast for adoption of new revenue-recognition and pension-cost presentation standards.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $2,563 | $2,360 | +8.6% |
| Income from operations | $183 | $202 | -9.4% |
| Operating margin | 7.1% | 8.6% | -1.5 percentage points |
| Net income attributable to IQVIA | $69 | $100 | -31% |
| Diluted EPS | $0.32 | $0.43 | -26% |
| Operating cash flow | $182 | $56 | +$126 |
Revenue rose $203, including approximately $123 of constant-currency growth (5.2%) and an $80 favorable foreign-exchange effect. Costs of revenue were 64.5% of revenue, versus 64.7%; SG&A rose to 16.4% from 16.1%. Depreciation and amortization increased to $282 from $232, and restructuring costs to $26 from $19. Higher interest expense ($96 versus $75) also weighed on earnings. The effective tax rate was 22.4%, compared with 18.9%.
Segments and operating indicators
- Commercial Solutions: Revenue $985, up 14.1%; segment profit $253, up 9.1%. Growth reflected technology, information and real-world analytics services, acquisitions and currency.
- Research & Development Solutions: Revenue $1,365, up 8.1%; segment profit $286, up 8.3%. Contracted backlog was $15.16 billion; management expected about $4.6 billion to convert to revenue in the next 12 months.
- Integrated Engagement Services: Revenue $213, down 9.0%; segment profit $13, down 31.6%. Management attributed the revenue decline largely to cancellations in the Americas.
- Remaining performance obligations were approximately $17.6 billion; about 40% was expected to be recognized over the next 12 months. This measure excludes wholly unperformed contracts customers can cancel unilaterally.
Cash, debt and liquidity
- Cash and equivalents were $960 at March 31, 2018, essentially unchanged from year-end; $255 was held in the United States.
- Operating cash flow was $182; investing cash outflow was $120, including $88 for property, equipment and software; financing cash outflow was $41. Operating cash flow less that capital expenditure was approximately $94.
- Total debt principal was $10.488 billion, compared with $10.269 billion at December 31, 2017; reported long-term debt was $10.342 billion, plus a $104 current portion. Cash less total debt principal implies net debt of about $9.5 billion.
- The company reported approximately $366 of available revolving capacity at quarter-end and amended its credit agreement on April 6, 2018, increasing revolving commitments to $1.5 billion. It reported material compliance with debt covenants.
- Current assets were $3.724 billion and current liabilities $3.199 billion. The company said cash, operating cash flows and available facilities should fund operations, capital expenditures and debt obligations for at least 12 months.
Outlook, commentary and risks
- The filing provides no specific full-year revenue or earnings guidance. Management cited backlog and remaining performance obligations as future revenue indicators, not as guarantees of results.
- Restructuring actions to reduce overcapacity and integrate acquisitions were expected to continue into 2019; most of the $88 restructuring accrual was expected to be paid in 2018 and 2019.
- Key stated risks include short customer termination notice, contract pricing and cost-estimate errors, delays or failure to obtain change-order approval, project cost-to-complete estimation, foreign-exchange exposure, international regulatory and operating risks, clinical-trial and patient liability, acquisition integration, and substantial indebtedness. Management said cash collections can fluctuate with billing and payment timing.
- The Tax Act accounting remained provisional in certain respects; the company was still evaluating GILTI and BEAT accounting. Legal proceedings were described as incidental, with no expected material adverse effect; no material change to previously disclosed risk factors was reported.
Most important facts for investors to verify
- Whether revenue growth converts into improved operating profit: operating income and attributable net income declined despite higher revenue.
- Whether R&D Solutions backlog converts as expected, and whether Integrated Engagement Services cancellations persist.
- Cash conversion and working-capital trends, especially the increase in unbilled services and the timing of customer collections.
- Debt levels, variable-rate exposure, refinancing needs and the terms and availability of the expanded revolver.
- Potential changes to provisional Tax Act accounting and the costs and realized savings from ongoing restructuring.