The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Summary of Significant Accounting Policies
The Company
Conducting business in more than 100 countries with over 50,000 employees, Quintiles IMS Holdings, Inc. (together with its subsidiaries, the “Company” or “QuintilesIMS”) is a leading worldwide integrated information and technology-enabled healthcare service provider, dedicated to helping its clients improve their clinical, scientific and commercial results.
Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the Company’s financial condition and results of operations have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. As such, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. The balance sheet at December 31, 2016 has been derived from the audited consolidated financial statements of the Company but does not include all the disclosures required by GAAP.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current presentation, including the reclassification of depreciation and amortization from costs of revenue and selling, general and administrative expenses to a separate caption on the accompanying condensed consolidated statements of income. These changes had no effect on previously reported total revenues, net income, comprehensive income, stockholders’ equity or cash flows.
Income Taxes
Income tax expense includes United States federal, state and international income taxes. Certain items of income and expense are not reported in income tax returns and financial statements in the same year. The income tax effects of these differences are reported as deferred income taxes. Valuation allowances are provided to reduce the related deferred income tax assets to an amount which will, more likely than not, be realized. In addition, the Company does not consider the historical undistributed foreign earnings of most of its foreign subsidiaries to be indefinitely reinvested. The Company does consider the majority of its current year undistributed foreign earnings to be indefinitely reinvested. To the extent undistributed foreign earnings are not indefinitely reinvested, the Company records deferred income taxes on these earnings. Interest and penalties related to unrecognized income tax benefits are recognized as a component of income tax expense.
Recently Issued Accounting Standards
Accounting pronouncement adopted
In March 2016, the United States Financial Accounting Standards Board (“FASB”) issued new accounting guidance which simplifies several aspects of the accounting for employee stock-based compensation transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, and the classification of excess income tax benefits on the statement of cash flows. The Company adopted this new accounting guidance prospectively on January 1, 2017. Under the new accounting guidance, excess income tax benefits related to stock-based awards are reflected as a reduction of income tax expense on the statements of income and as cash provided from operating activities on the statements of cash flows. In the prior periods, these tax benefits were reflected directly in additional paid in capital and as cash provided from financing activities. The adoption of this new accounting guidance did not impact the Company’s recognition of its stock-based compensation expense or its presentation of cash flows related to employee taxes paid for withheld shares.
7
Accounting pronouncements being evaluated
In March 2017, the FASB issued new accounting guidance which requires the service cost component of net periodic benefit cost be presented in the same income statement line item as other employee compensation costs, and requires that the other components of net periodic benefit expense be recognized in the non-operating section of the income statement. In addition, only the service cost component of net periodic benefit expense is eligible for capitalization when applicable. The new accounting guidance will be effective for the Company on January 1, 2018.
In January 2017, the FASB issued new accounting guidance that changes the definition of a business to clarify when a set of assets does not constitute a business. Under the new definition, when substantially all of the fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of assets is generally not a business. The new accounting guidance will be effective for the Company on January 1, 2018.
In August 2016, the FASB issued new accounting guidance which eliminates the diversity in practice related to the cash flow classification of certain cash receipts and payments including debt prepayment or extinguishment payments, payments upon maturity of a zero coupon bond, payment of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions received from certain equity method investees, and cash flows related to beneficial interests obtained in a financial asset securitization. The new guidance designates the appropriate cash flow statement classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. In the absence of specific guidance, each separately identifiable cash source and use will be classified on the basis of the nature of the underlying cash flows. This new accounting guidance will be effective for the Company on January 1, 2018. Early adoption is permitted.
In February 2016, the FASB issued new accounting guidance which requires lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. The income statement will reflect lease expense for operating leases, and amortization and interest expense for financing leases. The new accounting guidance will be effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of this new accounting guidance on its consolidated financial statements.
In January 2016, the FASB issued new accounting guidance which modifies how entities measure equity investments and present changes in the fair value of financial liabilities. The new accounting guidance will be effective for annual reporting periods beginning after December 15, 2017. Early adoption of the presentation guidance is permitted; however, early adoption of the recognition and measurement guidance is not permitted. The adoption of this new accounting guidance is not expected to have a material effect on the Company’s consolidated financial statements.
In May 2014,
the FASB and the International Accounting Standards Board issued a converged standard on the recognition of revenue from contracts with clients. The objective of the new standard is to establish a single comprehensive revenue recognition model that is designed to create greater comparability of financial statements across industries and jurisdictions. Under the new standard, companies will recognize revenue to depict the transfer of goods or services to clients in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The Company has concluded that the majority of the clinical trial arrangements in its Research & Development Solutions segment will represent a single performance obligation. The Company expects to account for revenue for this single performance obligation over time using project cost as an input method to measure progress. Our arrangements in the Commercial Solutions and Integrated Engagement Services segments are generally multiple element arrangements under which current rules require the deferral of revenue when payment on a delivered unit of accounting is contingent on performing on a future unit of accounting. We currently anticipate that under the new standard these arrangements will consist of multiple performance obligations and that such deferral of revenue will in some cases be lower (or zero) when management determines that it is probable that performance on the future performance obligation will occur. The new standard will require expanded disclosures on revenue recognition, including information about changes in assets and liabilities that result from contracts with clients. The new standard allows for either a retrospective or prospective approach to transition upon adoption. The new standard will be effective for annual reporting periods beginning after December 15, 2017. The Company will adopt the new standard on January 1, 2018. The Company is still evaluating the impact of this new standard as well as the transition approach that will be used upon adoption
.
8
2. Employee Stock Compensation
Stock Incentive Plans
The Company granted the following number of stock-based awards:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Stock options
|
|
|
—
|
|
|
|
39,400
|
|
|
|
—
|
|
|
|
783,700
|
|
Stock appreciation rights - stock settled
|
|
|
31,490
|
|
|
—
|
|
|
|
1,895,681
|
|
|
|
—
|
|
Stock appreciation rights - cash settled
|
|
|
—
|
|
|
|
—
|
|
|
|
15,227
|
|
|
|
25,200
|
|
Restricted stock awards
|
|
|
—
|
|
|
|
—
|
|
|
|
254,582
|
|
|
|
—
|
|
Restricted stock units - stock settled
|
|
|
11,930
|
|
|
|
84,065
|
|
|
|
11,930
|
|
|
|
373,836
|
|
Restricted stock units - cash settled
|
|
|
—
|
|
|
|
—
|
|
|
|
3,715
|
|
|
|
—
|
|
Performance awards
|
|
|
—
|
|
|
|
—
|
|
|
|
76,374
|
|
|
|
—
|
|
Performance units
|
|
|
7,545
|
|
|
|
—
|
|
|
|
424,804
|
|
|
|
119,839
|
|
The Company had the following number of stock-based awards outstanding:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Stock options
|
|
|
5,147,296
|
|
|
|
7,251,339
|
|
Stock appreciation rights - stock settled
|
|
|
3,013,901
|
|
|
|
1,313,322
|
|
Stock appreciation rights - cash settled
|
|
|
381,678
|
|
|
|
479,176
|
|
Restricted stock awards
|
|
|
621,635
|
|
|
|
367,053
|
|
Restricted stock units - stock settled
|
|
|
1,483,489
|
|
|
|
1,720,817
|
|
Restricted stock units - cash settled
|
|
|
3,715
|
|
|
|
—
|
|
Performance awards
|
|
|
76,374
|
|
|
|
—
|
|
Performance units
|
|
|
410,442
|
|
|
—
|
|
The Company used the following assumptions when estimating the value of the stock-based compensation for stock options and stock appreciation rights issued as follows:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Expected volatility
|
|
22 – 25%
|
|
|
26 – 29%
|
|
|
22 – 25%
|
|
|
26 – 30%
|
|
Weighted average expected volatility
|
|
|
23%
|
|
|
|
26%
|
|
|
|
24%
|
|
|
|
28%
|
|
Expected dividends
|
|
|
0.0%
|
|
|
|
0.0%
|
|
|
|
0.0%
|
|
|
|
0.0%
|
|
Expected term (in years)
|
|
1.0 – 6.9
|
|
|
3.6 – 6.6
|
|
|
1.0 – 6.9
|
|
|
3.6 – 6.6
|
|
Risk-free interest rate
|
|
1.16 – 2.13%
|
|
|
0.80 – 1.23%
|
|
|
1.16 – 2.21%
|
|
|
0.80 – 1.57%
|
|
The Company’s employee stock purchase plan was discontinued effective December 31, 2016. The Company recognized stock-based compensation expense of $27 million and $10 million during the three months ended June 30, 2017 and 2016, respectively, and $53 million and $19 million during the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, there was approximately $156 million of total unrecognized stock-based compensation expense related to outstanding non-vested stock-based compensation arrangements which the Company expects to recognize over a weighted average period of 1.5 years.
3. Concentration of Credit Risk
No client accounted for 10% or more of consolidated revenues for the three and six months ended June 30, 2017 or 2016.
9
4. Accounts
Receivable and Unbilled Services
Accounts receivable and unbilled services consist of the following:
(in millions)
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Trade:
|
|
|
|
|
|
|
|
|
Billed
|
|
$
|
1,087
|
|
|
$
|
998
|
|
Unbilled services
|
|
|
771
|
|
|
|
723
|
|
|
|
|
1,858
|
|
|
|
1,721
|
|
Allowance for doubtful accounts
|
|
|
(13
|
)
|
|
|
(14
|
)
|
|
|
$
|
1,845
|
|
|
$
|
1,707
|
|
5. Investments – Debt, Equity and Other Securities
The Company’s short-term investments in debt, equity and other securities consist primarily of trading investments in mutual funds and are measured at fair value with realized and unrealized gains and losses recorded in other expense (income), net on the accompanying condensed consolidated statements of income.
6. Variable Interest Entities
As of June 30, 2017, the Company’s investments in unconsolidated variable interest entities (“VIEs”) and its estimated maximum exposure to loss were as follows:
(in millions)
|
|
Investments in Unconsolidated VIEs
|
|
|
Maximum Exposure to Loss
|
|
NovaQuest Pharma Opportunities Fund III, L.P. (“NovaQuest Fund III”)
|
|
$
|
28
|
|
|
$
|
35
|
|
NovaQuest Pharma Opportunities Fund IV, L.P. (“NovaQuest Fund IV”)
|
|
|
6
|
|
|
|
16
|
|
Pappas Life Science Ventures V, L.P. (“Pappas Fund V”)
|
|
|
1
|
|
|
|
5
|
|
|
|
$
|
35
|
|
|
$
|
56
|
|
In June 2017, the Company committed to invest up to $5 million as a limited partner in a private equity fund, Pappas Fund V. As of June 30, 2017, the Company has funded approximately $1 million and has approximately $4 million of remaining funding commitments.
The Company’s maximum exposure to loss on NovaQuest Fund III, NovaQuest Fund IV and Pappas Fund V (collectively, the “Funds”) is limited to its investments and any future payments made under its remaining funding commitments.
The
Company
has determined that the Funds are VIEs but that the Company is not the primary beneficiary as it does not have a controlling financial interest in the Funds. However, because the Company has the ability to exercise significant influence, it accounts for its investments in the Funds under the equity method of accounting and records its pro rata share of the Funds’ earnings and losses in equity in (losses) earnings of unconsolidated affiliates on the accompanying condensed consolidated statements of income. The investment assets of unconsolidated VIEs are included in
investments in and advances to unconsolidated affiliates
on the accompanying condensed consolidated balance sheets.
7. Goodwill and Identifiable Intangible Assets
The following is a summary of goodwill by reportable segment for the six months ended June 30, 2017:
|
|
|
|
|
|
Research &
|
|
|
Integrated
|
|
|
|
|
|
|
|
Commercial
|
|
|
Development
|
|
|
Engagement
|
|
|
|
|
|
(in millions)
|
|
Solutions
|
|
|
Solutions
|
|
|
Services
|
|
|
Consolidated
|
|
Balance as of December 31, 2016
|
|
$
|
9,415
|
|
|
$
|
1,196
|
|
|
$
|
116
|
|
|
$
|
10,727
|
|
Business combinations
|
|
|
196
|
|
|
|
18
|
|
|
|
—
|
|
|
|
214
|
|
Impairment
|
|
|
(40
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(40
|
)
|
Impact of foreign currency fluctuations and other
|
|
|
349
|
|
|
|
7
|
|
|
|
1
|
|
|
|
357
|
|
Balance as of June 30, 2017
|
|
$
|
9,920
|
|
|
$
|
1,221
|
|
|
$
|
117
|
|
|
$
|
11,258
|
|
10
During the second quarter of 2017, we determined there was sufficient indication that the carrying value of our investment in Encore Health Resources LLC (“Encore”
) should be reviewed for further impairment due to its continued decline in performance. The Company proceeded to perform an impairment assessment which resulted in the recognition of a goodwill impairment of $39.6 million, which represents the remaining
amount of goodwill associated with Encore, and an intangible asset impairment of $0.4 million for other-than-temporary declines in fair value.
As of June 30, 2017, accumulated goodwill impairment losses were $63 million.
On July 12, 2017, the Company completed the sale of Encore to an unrelated third party. Encore was acquired in July 2014 to enhance the Company’s electronic health records expertise and is currently reported in the Commercial Solutions segment.
8. Derivatives
Foreign Exchange Risk Management
As of June 30, 2017, the Company held foreign currency forward contracts to (i) hedge certain forecasted foreign exchange cash flows arising from service contracts (“Service Contract Hedging”) and (ii) hedge non-United States Dollar anticipated intercompany royalties (“Royalty Hedging”). It is the Company’s policy to enter into foreign currency transactions only to the extent necessary to reduce earnings and cash flow volatility associated with foreign exchange rate movements. The Company does not enter into foreign currency transactions for investment or speculative purposes.
As of June 30, 2017, the Company had 61 open Service Contract Hedging and Royalty Hedging contracts to hedge certain forecasted foreign currency cash flow transactions occurring in 2017 and 2018 with notional amounts totaling $299 million. For accounting purposes these hedges are highly effective. As of June 30, 2017 and December 31, 2016, the Company had recorded gross unrealized gains (losses) of $6 million and ($5) million and $11 million and ($9) million, respectively, related to these contracts. Upon expiration of the hedge instruments during 2017 and 2018, the Company will reclassify the unrealized holding gains and losses on the derivative instruments included in accumulated other comprehensive income (loss) (“AOCI”) into earnings. The unrealized gains (losses) are included in other current assets and liabilities on the accompanying condensed consolidated balance sheets as of June 30, 2017 and December 31, 2016.
Interest Rate Risk Management
The Company purchases interest rate caps and has entered into interest rate swap agreements for purposes of managing its exposure to interest rate fluctuations.
On June 9, 2011, the Company entered into six interest rate swaps which expired between September 30, 2013 and March 31, 2016, in an effort to limit its exposure to changes in the variable interest rate on its senior secured credit facilities. During May 2015, the Company terminated the remaining open interest rate swaps for a cash payment to the counterparty of $12 million, which included $1 million of accrued interest. Since the hedged forecasted cash transactions continued to be probable of occurring, the accumulated loss ($3 million at December 31, 2015) related to the terminated interest rate swaps in AOCI was reclassified to earnings as a component of interest expense in the same periods as the hedged forecasted transactions occurred over the first three months of 2016.
The Company, through the merger with IMS Health described in Note 12 below, has United States Dollar denominated interest rate caps (the “2014 Caps”) with a total notional value of $700 million at strike prices between 2% and 3% in an effort to limit its exposure to changes in the variable interest rate on its senior secured credit facilities. The 2014 Caps commenced at various times between April 2014 and April 2016 and expire in April 2019. The 2014 Caps are accounted for as cash flow hedges.
The Company, through the merger with IMS Health, has United States Dollar and Euro denominated interest rate swap agreements (the “2014 USD Swap” and “2014 EUR Swap”) to limit its exposure to changes in the variable interest rate on its senior secured credit facilities. The 2014 USD Swap and 2014 EUR Swap began accruing interest in April and June 2014, respectively, and expire in March 2019 and March 2021, respectively. On these agreements, the Company pays fixed rates of 2.1% to 1.65%, respectively, and receives variable rates of interest equal to the greater of three-month United States Dollar London Interbank Offered Rate (“LIBOR”) or three-month Euro Interbank Offered Rate (“EURIBOR”), and 1%.
On June 3, 2015, the Company entered into seven forward starting interest rate swaps (the “2015 Swaps”) in an effort to limit its exposure to changes in the variable interest rate on its senior secured credit facilities. Interest on the swaps began accruing on June 30, 2016, and the interest rate swaps expire at various times from March 2017 through March 2020. The Company pays a fixed rate ranging from 1.3% to 2.1% and receives a variable rate of interest equal to the three-month LIBOR on these agreements.
11
The critical terms of the 2014 USD Swaps and 2015 Swaps are substantially the same as the un
derlying borrowings. These interest rate swaps are being accounted for as cash flow hedges as these transactions were executed to hedge the Company’s interest payments and for accounting purposes these hedges are highly effective. As such, the effective po
rtion of the hedges is recorded
as unrealized gains (losses) on derivatives included in AOCI and the ineffective portion of the hedges is recognized in earnings. The 2014 EUR Swap (notional value $331 million) ceased to be a highly effective hedge when the
underlying debt was refinanced on March 7, 2017. As such, the Company discontinued hedge accounting on that date and prospective changes in the fair value of the 2014 EUR Swap are recognized in earnings. The fair value of these interest rate swaps represe
nts the present value of the anticipated net payments the Company will make to the counterparty, which, when they occur, are reflected as interest expense on the consolidated statements of income. These interest rate swaps will result in a total debt mix o
f approximately 60% fixed rate debt and 40% variable rate debt, before the additional protection arising from the interest rate caps.
Net Investment Risk Management
Subsequent to the merger with IMS Health, the Company designated its foreign currency denominated debt as a hedge of its net investment in certain foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in the Euro exchange rate with respect to the United States Dollar. As of June 30, 2017, these borrowings (net of original issue discount) were €3,907 million ($4,463 million). The effective portion of foreign exchange gains or losses on the remeasurement of the debt is recognized in the cumulative translation adjustment component of AOCI with the related offset in long-term debt. Those amounts will be reclassified from AOCI to earnings upon the sale or substantial liquidation of these net investments. The amount of foreign exchange losses related to the net investment hedge included in the cumulative translation adjustment component of AOCI for the six months ended June 30, 2017 was $338 million.
The fair values of the Company’s derivative instruments and the line items on the accompanying condensed consolidated balance sheets to which they were recorded are summarized in the following table:
|
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
(in millions)
|
|
Balance Sheet Classification
|
|
Assets
|
|
|
Liabilities
|
|
|
Notional
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Notional
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current assets and liabilities
|
|
$
|
6
|
|
|
$
|
5
|
|
|
$
|
299
|
|
|
$
|
11
|
|
|
$
|
9
|
|
|
$
|
300
|
|
Interest rate swaps
|
|
Other liabilities
|
|
|
—
|
|
|
|
6
|
|
|
|
520
|
|
|
|
—
|
|
|
|
15
|
|
|
|
945
|
|
Interest rate caps
|
|
Deposits and other assets
|
|
|
—
|
|
|
|
—
|
|
|
|
700
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1,000
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
189
|
|
Interest rate swaps
|
|
Other liabilities
|
|
|
—
|
|
|
|
8
|
|
|
|
331
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total derivatives
|
|
|
|
$
|
6
|
|
|
$
|
19
|
|
|
|
|
|
|
$
|
12
|
|
|
$
|
25
|
|
|
|
|
|
The effect of the Company’s cash flow hedging instruments on other comprehensive (loss) income is summarized in the following table:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Foreign exchange forward contracts
|
|
$
|
(4
|
)
|
|
$
|
(6
|
)
|
|
$
|
(5
|
)
|
|
$
|
(7
|
)
|
Interest rate swaps
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
2
|
|
|
|
(10
|
)
|
Total
|
|
$
|
(5
|
)
|
|
$
|
(10
|
)
|
|
$
|
(3
|
)
|
|
$
|
(17
|
)
|
9. Fair Value Measurements
The Company records certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy that prioritizes the inputs used to measure fair value is described below. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
12
|
•
|
Level 1 — Quoted prices
in active markets for identical assets or liabilities.
|
|
•
|
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
|
|
•
|
Level 3 — Unobservable inputs that are supported by little or no market activity. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
|
The carrying values of cash, cash equivalents, accounts receivable and accounts payable approximated their fair values at June 30, 2017 and December 31, 2016 due to their short-term nature. At June 30, 2017 and December 31, 2016, the fair value of total debt approximated $9,086 million and $7,298 million, respectively, as determined under Level 2 measurements based on quoted prices for these financial instruments.
Recurring Fair Value Measurements
The following table summarizes the fair value of the Company’s financial assets and liabilities that are measured on a recurring basis as of June 30, 2017:
(in millions)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
43
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
43
|
|
Derivatives
|
|
|
—
|
|
|
|
6
|
|
|
—
|
|
|
|
6
|
|
Total
|
|
$
|
43
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
49
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
—
|
|
|
$
|
19
|
|
|
$
|
—
|
|
|
$
|
19
|
|
Contingent consideration
|
|
—
|
|
|
|
—
|
|
|
|
53
|
|
|
|
53
|
|
Total
|
|
$
|
—
|
|
|
$
|
19
|
|
|
$
|
53
|
|
|
$
|
72
|
|
Below is a summary of the valuation techniques used in determining fair value:
Trading securities
— The Company values trading securities using the quoted market value of the securities held.
Derivatives
— Derivatives consist of foreign exchange contracts and interest rate caps and swaps. The fair value of foreign exchange contracts is based on observable market inputs of spot and forward rates or using other observable inputs. The fair value of the interest rate caps and swaps is the estimated amount that the Company would receive or pay to terminate such agreements, taking into account market interest rates and the remaining time to maturities or using market inputs with mid-market pricing as a practical expedient for bid-ask spread.
Contingent consideration
— The Company values contingent consideration related to business combinations using a weighted probability calculation of potential payment scenarios discounted at rates reflective of the risks associated with the expected future cash flows. Key assumptions used to estimate the fair value of contingent consideration include various financial metrics (revenue performance targets, operating forecasts) and the probability of achieving the specific targets.
The following table summarizes the changes in Level 3 financial assets and liabilities measured on a recurring basis for the three months ended June 30:
|
|
Contingent Consideration –
Accounts Payable and Accrued
Expenses
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
Balance as of January 1
|
|
$
|
18
|
|
|
$
|
4
|
|
Business combinations
|
|
|
38
|
|
|
|
—
|
|
Contingent consideration paid
|
|
|
(3
|
)
|
|
|
—
|
|
Revaluations included in earnings and foreign currency translation adjustments
|
|
|
—
|
|
|
|
—
|
|
Balance as of June 30
|
|
$
|
53
|
|
|
$
|
4
|
|
Revaluations of the contingent consideration are recognized in other expense (income), net on the accompanying condensed consolidated statements of income.
13
10. Credit Arrangements
The following is a summary of the Company’s revolving credit facilities at June 30, 2017:
Facility
|
|
Interest Rates
|
$1,000 million (revolving credit facility)
|
|
LIBOR in the relevant currency borrowed plus a margin of 2.00% at June 30, 2017
|
$25 million (receivables financing facility)
|
|
United States LIBOR plus a margin of 0.85% at June 30, 2017 depending upon the Company’s debt rating
|
£10 million (approximately $13 million) general banking facility with a European headquartered bank
|
|
Bank’s base rate of 0.25% at June 30, 2017 plus 1%
|
The following table summarizes the Company’s debt at the dates indicated:
(in millions)
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Senior Secured Credit Facilities:
|
|
|
|
|
|
|
|
|
Senior Secured Term A Loan due 2021—U.S. Dollar LIBOR at average floating rates of 3.30%
|
|
$
|
866
|
|
|
$
|
888
|
|
Senior Secured Term A Loan due 2021—Euro LIBOR at average floating rates of 2.00%
|
|
|
443
|
|
|
|
419
|
|
Senior Secured Term B Loan due 2024—U.S. Dollar LIBOR at average floating rates of 3.23%
|
|
|
1,194
|
|
|
|
—
|
|
Senior Secured Term B Loan due 2024—Euro LIBOR at average floating rates of 2.75%
|
|
|
1,364
|
|
|
|
—
|
|
Senior Secured Term B Loan due 2021—U.S. Dollar LIBOR at average floating rates of 3.50%
|
|
|
—
|
|
|
|
1,700
|
|
Senior Secured Term B Loan due 2021—Euro LIBOR at average floating rates of 3.75%
|
|
|
—
|
|
|
|
765
|
|
Revolving Credit Facility due 2021:
|
|
|
|
|
|
|
|
|
U.S. Dollar denominated borrowings
—
U.S. Dollar LIBOR at average floating rates of 3.38%
|
|
|
338
|
|
|
|
375
|
|
5.0% Senior Notes due 2026
—
U.S. Dollar denominated
|
|
|
1,050
|
|
|
|
1,050
|
|
3.25% Senior Notes due 2025
—
Euro denominated
|
|
|
1,628
|
|
|
|
—
|
|
3.5% Senior Notes due 2024
—
Euro denominated
|
|
|
714
|
|
|
|
658
|
|
4.125% Senior Notes due 2023
—
Euro denominated
|
|
|
314
|
|
|
|
289
|
|
4.875% Senior Notes due 2023—U.S. Dollar denominated
|
|
|
800
|
|
|
|
800
|
|
Receivables financing facility due 2018—U.S. Dollar LIBOR at average floating rate of 2.07%
|
|
|
275
|
|
|
|
275
|
|
Principal amount of debt
|
|
|
8,986
|
|
|
|
7,219
|
|
Less: unamortized discount
|
|
|
(28
|
)
|
|
|
(12
|
)
|
Less: unamortized debt issuance costs
|
|
|
(6
|
)
|
|
|
(7
|
)
|
Less: current portion
|
|
|
(94
|
)
|
|
|
(92
|
)
|
Long-term debt
|
|
$
|
8,858
|
|
|
$
|
7,108
|
|
Contractual maturities of long-term debt are as follows at June 30, 2017:
(in millions)
|
|
|
|
|
|
|
Remainder of 2017
|
|
|
|
$
|
47
|
|
2018
|
|
|
|
|
369
|
|
2019
|
|
|
|
|
94
|
|
2020
|
|
|
|
|
94
|
|
2021
|
|
|
|
|
1,436
|
|
Thereafter
|
|
|
|
|
6,946
|
|
|
|
|
|
$
|
8,986
|
|
14
At June 30, 2017, there were bank guarantees totaling approximately £4 million (approximately $6 million) issued against the availability of the general banking facility.
During the first half of 2017, the Company borrowed and repaid $853 million and $890 million, respectively, under its revolving credit facilities.
Senior Secured Facilities
At June 30, 2017, the Company’s senior credit facility provided financing of up to approximately $4,868 million, which consisted of $4,206 million principal amount of debt outstanding (as detailed in the table above) and $662 million of available borrowing capacity on the $1,000 million revolving credit facility that expires in 2021.
On March 7, 2017, the Company refinanced all of its term B loans due 2021—U.S. dollar denominated (approximately $1,700 million) and its term B loans due 2021—Euro denominated (approximately $765 million) with an extended and repriced term B loan facility due in 2024 for an aggregate principal amount of approximately $2,465 million comprised of $1,200 million U.S. dollar denominated term B loans and €1,200 million ($1,279 million) Euro denominated term B loans. The U.S. dollar denominated term B loans bear interest based on the U.S. Dollar LIBOR with a floor of 0.75%, plus a margin of 2.00% for an all-in interest rate of 3.23% as of June 30, 2017. The Euro denominated term B loans bear interest based on the Euro LIBOR with a floor of 0.75%, plus a margin of 2.00% for an all-in interest rate of 2.75% as of June 30, 2017. In connection with this refinancing, the Company recognized a $3 million loss on extinguishment of debt, which included fees and related expenses.
Senior Notes
On February 28, 2017, the Company issued €1,425 million ($1,522 million) aggregate principal amount of 3.25% senior notes due 2025 (the “2017 Notes”). The 2017 Notes, which are unsecured obligations of the Company, will mature on March 15, 2025 and bear interest at the rate of 3.25% per year. Interest on the 2017 Notes is payable semi-annually on March 15 and September 15 of each year, beginning on September 15, 2017. The 2017 Notes may be redeemed prior to their final stated maturity, subject to a customary make-whole premium at any time prior to March 15, 2020 (subject to a certain customary “equity claw” redemption right) and thereafter subject to annually declining redemption premiums at any time prior to March 15, 2022. During March 2017, the proceeds of the 2017 Notes were used to pay fees and expenses related to the notes offering and the refinancing referenced above and other general corporate purposes, including the repurchase of the Company’s common stock.
Restrictive Covenants
The Company’s debt agreements provide for certain covenants and events of default customary for similar instruments, including a covenant not to exceed a specified ratio of consolidated senior secured net indebtedness to consolidated EBITDA, as defined in the credit agreement and a covenant to maintain a specified minimum interest coverage ratio. If an event of default occurs under any of the Company’s or the Company’s subsidiaries’ financing arrangements, the creditors under such financing arrangements will be entitled to take various actions, including the acceleration of amounts due under such arrangements, and in the case of the lenders under the revolving credit facility and term loans, other actions permitted to be taken by a secured creditor. The Company’s long-term debt arrangements contain other usual and customary restrictive covenants that, among other things, place limitations on our ability to declare dividends. At June 30, 2017, the Company was in compliance with the financial covenants under its financing arrangements.
11. Stockholders’ Equity
Preferred Stock
The Company is authorized to issue 1.0 million shares of preferred stock, $0.01 per share par value. No shares of preferred stock were issued or outstanding as of June 30, 2017 or December 31, 2016.
Equity Repurchase Program
On February 14, 2017, the Board increased the stock repurchase authorization under a previously approved equity repurchase program (the “Repurchase Program”) by $1 billion. On May 24, 2017, the Board further increased the stock repurchase authorization under the Repurchase Program by $1 billion, which increased the total amount that has been authorized under the Repurchase Program to $4.225 billion since the plan’s inception in October 2013. The Repurchase Program does not obligate the Company to repurchase any particular amount of common stock or vested in-the-money employee stock options, and it could be modified, extended, suspended or discontinued at any time.
15
During the six months ended June 30, 2017, the Company repurchased 21,337,443 shares of its common stock under the Repurchase Program a
t an average market price per share of $79.40 for an aggregate purchase price of approximately $1.7 billion. Those repurchases include shares repurchased pursuant to a share repurchase agreement dated February 23, 2017 with certain of the Company’s princip
al shareholders under the Repurchase Program. Pursuant to that agreement, the Company purchased an aggregate of 9,677,420 shares of the Company’s common stock in a private transaction for an aggregate purchase price of approximately $750 million. This tran
saction was consummated on February 28, 2017. In addition, the repurchases during the first six months of 2017 also include shares repurchased under the Repurchase Program pursuant to a secondary public offering of shares of the Company’s common stock desc
ribed below.
From the plan’s inception in October 2013 through June 30, 2017, the Company has repurchased a total of $3,372 million of its securities under the Repurchase Program, consisting of $59 million of stock options and $3,313 million of common stock. As of June 30, 2017, the Company has remaining authorization to repurchase up to $853 million of its common stock under the Repurchase Program. In addition, from time to time, the Company has repurchased and may continue to repurchase common stock through private or other transactions outside of the Repurchase Program.
Secondary Public Offering
In May 2017, the Company completed an underwritten secondary public offering of 10,571,003 shares of its common stock held by certain of the Company’s principal shareholders (the “Selling Stockholders”), of which, the Company repurchased 3,571,003 shares for an aggregate purchase price of approximately $300 million. The Company did not offer any stock in this transaction and did not receive any proceeds from the sale of the shares by the Selling Stockholders in the offering. Pursuant to an agreement with the underwriter, the Company’s per-share purchase price for repurchased shares was the same as the per-share purchase price payable by the underwriter to the Selling Stockholders.
An automatic shelf registration statement (including a prospectus) relating to the offering an unspecified amount of common stock was filed by the Company or selling stockholders to be named in the future with the Securities and Exchange Commission on May 24, 2017 and became effective upon filing. The registration statement will expire three years after the date of filing.
Non-controlling Interests
In July 2015, the Company contributed businesses to a joint venture with Quest Diagnostics Incorporated (“Quest”) that was recorded at book value (carryover basis) because the Company owns 60% of the joint venture and maintains control of these businesses. Quest’s 40% non-controlling interest in the joint venture, referred to as Q
2
Solutions, was $235 million at June 30, 2017.
|
|
2017
|
|
|
2016
|
|
Balance as of January 1
|
|
$
|
227
|
|
|
$
|
228
|
|
Investment by non-controlling interest
|
|
|
—
|
|
|
|
1
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
6
|
|
|
|
7
|
|
Foreign currency adjustments, net of income tax
|
|
|
2
|
|
|
|
(7
|
)
|
Balance as of June 30
|
|
$
|
235
|
|
|
$
|
229
|
|
16
12. Business Combinations
IMS Health
On October 3, 2016, Quintiles Transnational Holdings Inc. (“Quintiles”) completed a merger of equals transaction with IMS Health Holdings, Inc. (“IMS Health”) (the “Merger”). Pursuant to the terms of the merger agreement dated as of May 3, 2016 between Quintiles and IMS Health, IMS Health was merged with and into Quintiles, and the separate corporate existence of IMS Health ceased, with Quintiles continuing as the surviving corporation. The Merger was accounted for as a business combination with Quintiles considered the accounting and the legal acquirer. Immediately prior to the completion of the Merger, Quintiles reincorporated as a Delaware corporation. The surviving corporation changed its name to Quintiles IMS Holdings, Inc. At the effective time of the Merger, IMS Health common stock was automatically converted into 0.3840 of a share of the Company’s common stock. The merger consideration was approximately $10.4 billion (based on the closing price of the Company’s common stock on October 3, 2016), and consisted of the fair value of the Company’s common stock issued (approximately 126.6 million shares) in exchange for the IMS Health common stock as well as the fair value of the vested portion of the converted IMS Health equity awards. In connection with the IMS Health acquisition, the Company recorded goodwill, primarily attributable to the assembled workforce of IMS Health and expected synergies, which was assigned to the Commercial Solutions segment ($9,688 million), the Research & Development Solutions segment ($533 million) and the Integrated Engagement Services segment ($67 million). The goodwill is not deductible for income tax purposes. The Company’s assessment of fair value and the purchase price allocation are preliminary and subject to change upon completion. Further adjustments may be necessary as additional information related to the fair values of assets acquired and liabilities assumed is assessed during the measurement period (up to one year from the acquisition date).
Unaudited Pro Forma Information
The following unaudited pro forma information presents the financial results as if the acquisition of IMS Health had occurred on January 1, 2015, with pro forma adjustments to give effect to (i) an increase in depreciation and amortization expense for fair value adjustments of property, plant and equipment and intangible assets, (ii) an increase in stock-based compensation expense resulting from the exchange of the vested IMS Health equity awards for the Company’s equity awards, and (iii) the related income tax effects. The pro forma results do not include any cost synergies, costs or other effects pertaining to the integration of IMS Health. Accordingly, such pro forma amounts are not necessarily indicative of the results that actually would have occurred for the periods presented below had the IMS Health acquisition been completed on January 1, 2015, nor are they indicative of the future operating results of the Company.
The following table summarizes the pro forma results:
|
|
2016
|
|
(in millions, except earnings per share)
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
Revenues
|
|
$
|
1,968
|
|
|
$
|
3,849
|
|
Reimbursed expenses
|
|
|
386
|
|
|
|
768
|
|
Total revenues
|
|
$
|
2,354
|
|
|
$
|
4,617
|
|
Net income attributable to Quintiles IMS Holdings, Inc.
|
|
$
|
41
|
|
|
$
|
113
|
|
Earnings per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
|
$
|
0.46
|
|
Diluted
|
|
$
|
0.16
|
|
|
$
|
0.45
|
|
Pro forma information is not presented for any other acquisition as the aggregate operations of the acquired businesses were not significant to the overall operations of the Company.
The Company’s condensed consolidated statements of income for the three and six months ended June 30, 2017 included $813 million and $1,601 million, respectively, of revenues related to the IMS Health acquisition. Following the closing of the IMS Health acquisition, the Company began integrating IMS Health’s operations. As a result, deriving a separate measure of IMS Health’s stand-alone profitability for periods after the acquisition date is impracticable.
17
Other Acquisitions
The Company also completed several individually immaterial acquisitions within the Commercial Solutions segment and the Research & Development Solutions segment during the six months ended June 30, 2017. The Company’s assessment of fair value and the purchase price allocation related to these acquisitions is preliminary and subject to change upon completion. Further adjustments may be necessary as additional information related to the fair values of assets acquired and liabilities assumed is assessed during the measurement period (up to one year from the acquisition date). The condensed consolidated financial statements include the results of the acquisitions subsequent to their respective closing dates.
The following table provides certain financial information for these acquisitions, including the preliminary allocation of the purchase price to certain tangible and intangible assets acquired and goodwill:
|
|
|
|
Amortization
|
|
|
|
|
(in millions)
|
|
|
|
Period
|
|
2017
|
|
Total cost of acquisition, net of cash acquired
|
|
|
|
|
|
$
|
314
|
|
Amounts recorded in the Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
214
|
|
Portion of goodwill deductible for income tax purposes
|
|
|
|
|
|
|
117
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Client relationships
|
|
|
|
10-15 years
|
|
|
81
|
|
Non-compete agreements
|
|
|
|
3-5 years
|
|
|
14
|
|
Software
|
|
|
|
2-5 years
|
|
|
15
|
|
Trade names
|
|
|
|
1-17 years
|
|
|
5
|
|
Total intangible assets
|
|
|
|
|
|
$
|
115
|
|
13. Restructuring
The Company has taken restructuring actions in 2017, 2016 and 2015 to align its resources and reduce overcapacity to adapt to changing market conditions and integrate acquisitions. These actions include closing facilities, consolidating functional activities, eliminating redundant positions, and aligning resources with client requirements. In 2016, the Company also assumed certain restructuring liabilities as a result of the Merger. Restructuring expense in the first six months of 2017 consisted of severance and related costs of $24 million, including approximately $6 million related to the Merger. These restructuring actions are expected to continue into 2018.
The following amounts were recorded for the restructuring plans:
(in millions)
|
|
Severance and
Related Costs
|
|
|
Exit Costs
|
|
|
Total
|
|
Balance at December 31, 2016
|
|
$
|
99
|
|
|
$
|
3
|
|
|
$
|
102
|
|
Expense, net of reversals
|
|
|
24
|
|
|
|
4
|
|
|
|
28
|
|
Payments
|
|
|
(39
|
)
|
|
|
(3
|
)
|
|
|
(42
|
)
|
Foreign currency translation and other
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
Balance at June 30, 2017
|
|
$
|
86
|
|
|
$
|
4
|
|
|
$
|
90
|
|
The reversals were due to changes in estimates primarily resulting from the redeployment of staff and higher than expected voluntary terminations. Restructuring costs are not allocated to the Company’s reportable segments as they are not part of the segment performance measures regularly reviewed by management. The Company expects that the majority of the restructuring accruals at June 30, 2017 will be paid in 2017 and 2018.
14. Income Taxes
The effective income tax rate was (10.3)% and 27.5% in the second quarter of 2017 and 2016, respectively, and 3.2% and 28.2% in the first six months of 2017 and 2016, respectively. The effective income tax rate was favorably impacted by a tax benefit of $66 million and $130 million in the three and six months ended June 30, 2017, respectively, related to purchase accounting amortization of approximately $186 million and $368 million, respectively, as a result of the Merger. Additionally, due to the adoption of ASU 2016-09 on January 1, 2017, the effective income tax rate was favorably impacted by discrete tax adjustments related to excess tax benefits on share-based compensation of $10 million and $13 million in the three and six months ended June 30, 2017, respectively.
18
The Company does
not consider the historical undistributed foreign earnings of most of its foreign subsidiaries to be indefinitely reinvested. The Company does consider the majority of its current year undistributed foreign earnings to be indefinitely reinvested. To the
extent undistributed foreign earnings are not indefinitely reinvested, the Company has recorded deferred income taxes on these earnings.
15. Employee Benefit Plans
Pension and Postretirement Benefit Plans
The following table summarizes the components of net periodic benefit cost for the Company’s pension benefits:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(in millions)
|
|
2017
|
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
2016
|
|
Service cost
|
|
$
|
10
|
|
|
|
|
$
|
5
|
|
|
$
|
19
|
|
|
|
|
$
|
9
|
|
Interest cost
|
|
|
5
|
|
|
|
|
|
1
|
|
|
|
10
|
|
|
|
|
|
2
|
|
Expected return on plan assets
|
|
|
(10
|
)
|
|
|
|
|
(1
|
)
|
|
|
(19
|
)
|
|
|
|
|
(2
|
)
|
|
|
$
|
5
|
|
|
|
|
$
|
5
|
|
|
$
|
10
|
|
|
|
|
$
|
9
|
|
The above tables do not include the Company’s expense associated with providing certain executives with supplemental pension benefits as well as postretirement medical, dental and life insurance benefits in accordance with their individual employment arrangements. The Company’s net periodic expense related to these benefits for the three and six months ended June 30, 2017 was de minimis.
16. Comprehensive Income
Below is a summary of the components of AOCI:
(in millions)
|
|
Foreign
Currency
Translation
|
|
|
Marketable
Securities
|
|
|
Derivative
Instruments
|
|
|
Defined
Benefit
Plans
|
|
|
Income
Taxes
|
|
|
Total
|
|
Balance at December 31, 2016
|
|
$
|
(623
|
)
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
21
|
|
|
$
|
22
|
|
|
$
|
(570
|
)
|
Other comprehensive income before reclassifications
|
|
|
257
|
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
—
|
|
|
|
83
|
|
|
|
335
|
|
Reclassification adjustments
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
Balance at June 30, 2017
|
|
$
|
(366
|
)
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
21
|
|
|
$
|
105
|
|
|
$
|
(233
|
)
|
Below is a summary of the adjustments for (gains) losses reclassified from AOCI into the condensed consolidated statements of income and the affected financial statement line item:
|
|
Affected Financial Statement
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(in millions)
|
|
Line Item
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Interest expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
Foreign exchange forward contracts
|
|
Revenues
|
|
|
4
|
|
|
|
3
|
|
|
|
9
|
|
|
|
6
|
|
Foreign exchange forward contracts
|
|
Other expense (income), net
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
—
|
|
Total before income taxes
|
|
|
|
|
—
|
|
|
|
3
|
|
|
|
2
|
|
|
|
9
|
|
Income tax (expense) benefit
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
Total net of income taxes
|
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
7
|
|
19
17. Segments
The following table presents the Company’s operations by reportable segment. The Company is managed through three reportable segments, Commercial Solutions, Research & Development Solutions and Integrated Engagement Services. Commercial Solutions provides mission critical information, technology solutions and real-world insights and services to the Company’s life science clients. Research & Development Solutions, which primarily serves biopharmaceutical clients, provides outsourced clinical research and clinical trial related services. Integrated Engagement Services provides health care provider (including contract sales) and patient engagement services to both biopharmaceutical clients and the broader healthcare market.
Certain costs are not allocated to the Company’s segments and are reported as general corporate and unallocated expenses. These costs primarily consist of stock-based compensation and expenses for corporate overhead functions such as senior leadership, finance, human resources, information technology, facilities and legal. The Company does not allocate depreciation and amortization, impairment charges, restructuring costs or merger related costs to its segments. Revenues and costs for reimbursed expenses are not allocated to the Company’s segments. Asset information by segment is not presented, as this measure is not used by the chief operating decision maker to assess the Company’s performance. The Company’s reportable segment information is presented below:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Solutions
|
|
$
|
869
|
|
|
$
|
71
|
|
|
$
|
1,716
|
|
|
$
|
146
|
|
Research & Development Solutions
|
|
|
896
|
|
|
|
887
|
|
|
|
1,762
|
|
|
|
1,722
|
|
Integrated Engagement Services
|
|
|
204
|
|
|
|
209
|
|
|
|
402
|
|
|
|
407
|
|
Total revenues
|
|
|
1,969
|
|
|
|
1,167
|
|
|
|
3,880
|
|
|
|
2,275
|
|
Costs of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Solutions
|
|
|
474
|
|
|
|
50
|
|
|
|
927
|
|
|
|
107
|
|
Research & Development Solutions
|
|
|
515
|
|
|
|
522
|
|
|
|
1,014
|
|
|
|
996
|
|
Integrated Engagement Services
|
|
|
165
|
|
|
|
163
|
|
|
|
325
|
|
|
|
326
|
|
Total costs of revenue
|
|
|
1,154
|
|
|
|
735
|
|
|
|
2,266
|
|
|
|
1,429
|
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Solutions
|
|
|
156
|
|
|
|
16
|
|
|
|
329
|
|
|
|
31
|
|
Research & Development Solutions
|
|
|
138
|
|
|
|
149
|
|
|
|
274
|
|
|
|
291
|
|
Integrated Engagement Services
|
|
|
17
|
|
|
|
23
|
|
|
|
36
|
|
|
|
43
|
|
General corporate and unallocated
|
|
|
59
|
|
|
|
28
|
|
|
|
111
|
|
|
|
51
|
|
Total selling, general and administrative expenses
|
|
|
370
|
|
|
|
216
|
|
|
|
750
|
|
|
|
416
|
|
Segment profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Solutions
|
|
|
239
|
|
|
|
5
|
|
|
|
460
|
|
|
|
8
|
|
Research & Development Solutions
|
|
|
243
|
|
|
|
216
|
|
|
|
474
|
|
|
|
435
|
|
Integrated Engagement Services
|
|
|
22
|
|
|
|
23
|
|
|
|
41
|
|
|
|
38
|
|
Total segment profit
|
|
|
504
|
|
|
|
244
|
|
|
|
975
|
|
|
|
481
|
|
General corporate and unallocated
|
|
|
(59
|
)
|
|
|
(28
|
)
|
|
|
(111
|
)
|
|
|
(51
|
)
|
Depreciation and amortization
|
|
|
(245
|
)
|
|
|
(32
|
)
|
|
|
(477
|
)
|
|
|
(64
|
)
|
Impairment charges
|
|
|
(40
|
)
|
|
|
—
|
|
|
|
(40
|
)
|
|
|
—
|
|
Restructuring costs
|
|
|
(9
|
)
|
|
|
(25
|
)
|
|
|
(28
|
)
|
|
|
(28
|
)
|
Merger related costs
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
(9
|
)
|
Total income from operations
|
|
$
|
151
|
|
|
$
|
150
|
|
|
$
|
319
|
|
|
$
|
329
|
|
20
18. Earnings Per Share
The following table presents the weighted average number of outstanding stock-based awards not included in the computation of diluted earnings per share because they are subject to performance conditions or the effect of including such stock-based awards in the computation would be anti-dilutive:
|
|
Three Months Ended June 30,
|
|
|
|
|
Six Months Ended June 30,
|
|
(in millions)
|
|
2017
|
|
|
|
|
2016
|
|
|
|
|
2017
|
|
|
|
|
2016
|
|
Shares subject to performance conditions
|
|
|
0.5
|
|
|
|
|
|
0.2
|
|
|
|
|
|
0.4
|
|
|
|
|
|
0.1
|
|
Shares subject to anti-dilutive stock-based awards
|
|
|
1.9
|
|
|
|
|
|
1.6
|
|
|
|
|
|
1.6
|
|
|
|
|
|
1.5
|
|
Total shares excluded from diluted earnings per share
|
|
|
2.4
|
|
|
|
|
|
1.8
|
|
|
|
|
|
2.0
|
|
|
|
|
|
1.6
|
|
The vesting of performance units is contingent upon the achievement of certain performance targets. The performance units are not included in diluted earnings per share until the performance targets have been met. Stock-based awards will have a dilutive effect under the treasury method when the respective period’s average market value of the Company’s common stock exceeds the exercise proceeds.
21