Business context and reporting period
This is Quintiles Transnational Holdings Inc.’s unaudited Form 10-Q for the three months ended March 31, 2014—not a filing under the name IQVIA Holdings Inc. Quintiles provided biopharmaceutical development and commercial outsourcing services through Product Development and Integrated Healthcare Services.
Financial performance and liquidity
Amounts are in U.S. dollars; financial statement figures are in millions except per-share data.
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Service revenue | $1,005.3 | $927.4; up 8.4% |
| Total revenue, including reimbursed expenses | $1,307.8 | $1,228.8; up 6.4% |
| Operating income | $141.3 | $115.2; up 22.7% |
| Operating income as a share of service revenue | 14.1% | 12.4% |
| Net income attributable to Quintiles | $90.2 | $48.3 |
| Diluted earnings per share | $0.68 | $0.41 |
| Cash from operating activities | $(28.4) | $(21.5) |
| Cash and cash equivalents at March 31 | $741.4 | $778.1 at December 31, 2013 |
| Total indebtedness | $2.05 billion | Company-reported |
At March 31, current assets were $1,947.8 million and current liabilities were $1,376.5 million. The $300 million revolving credit facility was undrawn. Total shareholders’ deficit was $559.5 million. Cash and cash equivalents declined by $36.8 million during the quarter.
Material changes versus the prior comparable period
- Service revenue growth was reported in both segments: Product Development revenue increased 9.1% to $770.8 million; Integrated Healthcare Services increased 6.0% to $234.5 million. Product Development operating margin improved to 20.8% from 18.8%; Integrated Healthcare Services improved to 3.8% from 2.8%.
- Net new business increased 2% to $1.274 billion. Integrated Healthcare Services grew 58% to $269 million, while Product Development declined 6% to $1.005 billion. Backlog rose to $10.066 billion from $9.855 billion at year-end; $6.607 billion was not expected to convert to revenue within 12 months.
- Interest expense decreased to $24.7 million from $36.0 million, reflecting lower average debt and borrowing rates. The effective tax rate fell to 30.5% from 39.2%, primarily due to the changed assertion that most foreign subsidiary earnings would remain indefinitely reinvested abroad.
- Net income included a $5.0 million gain on the sale of marketable equity securities and $4.9 million of equity earnings from unconsolidated affiliates, compared with a $1.7 million affiliate loss in Q1 2013. The company attributed the affiliate improvement primarily to gains in its NovaQuest Pharma Opportunities Fund investment.
Outlook, risks, contingencies and unusual items
- Management said available cash, expected operating cash flows and access to the revolving facility should fund operating needs, capital expenditures and debt obligations for at least 12 months. No specific revenue or earnings guidance was provided.
- A February 2014 restructuring plan authorizes up to $13 million of costs, covering approximately 400 positions, primarily in Product Development. Management estimated annual savings of $20–$25 million; actions were expected throughout 2014. The company recorded $1.0 million of restructuring costs in Q1 and expected most remaining restructuring accruals to be paid in 2014.
- Operating cash use worsened year over year. Management cited higher days sales outstanding, longer contract payment terms, higher income tax and incentive compensation payments; the quarter included a five-day increase in DSO.
- Foreign cash is intended to fund growth outside the United States; repatriation could create additional tax liability. The company reported $289.9 million of cash in the United States.
- Risks highlighted include contract termination on short notice, pricing and cost overruns, backlog conversion, customer or therapeutic concentration, international and foreign-exchange exposure, regulatory and patient-liability risks, acquisitions and substantial indebtedness. Management reported no significant changes to previously disclosed risk factors. It did not expect pending legal proceedings to have a material adverse effect, while noting outcomes could differ from expectations.
- Other exposures included $12.9 million of Level 3 contingent consideration and approximately $33 million of unfunded commitments related to cost and equity-method investments. Interest-rate swaps covered $945 million of variable-rate borrowings and fixed the affected rate at 2.55% plus the applicable margin.
Most important facts for investors to verify
- Confirm the registrant and historical corporate lineage: the filing is for Quintiles Transnational Holdings Inc. in 2014, not an IQVIA-named issuer.
- Assess whether backlog and net new business convert into recognized revenue, especially given the amount of backlog not expected within 12 months and Product Development’s lower net new business.
- Track collections, DSO and operating cash flow; reported earnings were positive while operating activities used $28.4 million of cash.
- Check debt maturities, interest-rate exposure, covenant compliance and the availability of the undrawn revolving facility; the filing states the company believed it was in compliance with covenants.
- Evaluate whether restructuring achieves the projected savings and whether reported earnings remain supported after the securities gain, affiliate earnings and lower tax rate.