UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2014
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 001-35907
QUINTILES TRANSNATIONAL HOLDINGS INC.
(Exact name of registrant as specified in its charter)
North Carolina | 27-1341991 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
4820 Emperor Blvd., Durham, North Carolina 27703
(Address of principal executive offices and Zip Code)
(919) 998-2000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of Common Stock, as of the latest practicable date.
Class |
Number of Shares Outstanding | |
Common Stock $0.01 par value | 130,142,016 shares outstanding as of April 24, 2014 |
QUINTILES TRANSNATIONAL HOLDINGS INC.
FORM 10-Q
2
QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
(in thousands, except per share data) | ||||||||
Service revenues |
$ | 1,005,288 | $ | 927,435 | ||||
Reimbursed expenses |
302,558 | 301,406 | ||||||
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Total revenues |
1,307,846 | 1,228,841 | ||||||
Costs, expenses and other: |
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Costs of revenue, service costs |
643,722 | 611,109 | ||||||
Costs of revenue, reimbursed expenses |
302,558 | 301,406 | ||||||
Selling, general and administrative |
219,242 | 199,302 | ||||||
Restructuring costs |
1,008 | 1,859 | ||||||
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Income from operations |
141,316 | 115,165 | ||||||
Interest income |
(1,255) | (452) | ||||||
Interest expense |
24,703 | 36,042 | ||||||
Other income, net |
(4,844) | (2,382) | ||||||
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Income before income taxes and equity in earnings (losses) of unconsolidated affiliates |
122,712 | 81,957 | ||||||
Income tax expense |
37,389 | 32,118 | ||||||
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Income before equity in earnings (losses) of unconsolidated affiliates |
85,323 | 49,839 | ||||||
Equity in earnings (losses) of unconsolidated affiliates |
4,891 | (1,683) | ||||||
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Net income |
90,214 | 48,156 | ||||||
Net (income) loss attributable to noncontrolling interests |
(31) | 153 | ||||||
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Net income attributable to Quintiles Transnational Holdings Inc. |
$ | 90,183 | $ | 48,309 | ||||
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Earnings per share attributable to common shareholders: |
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Basic |
$ | 0.69 | $ | 0.42 | ||||
Diluted |
$ | 0.68 | $ | 0.41 | ||||
Weighted average common shares outstanding: |
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Basic |
129,898 | 115,769 | ||||||
Diluted |
133,040 | 118,740 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Net income |
$ | 90,214 | $ | 48,156 | ||||
Unrealized gains on marketable securities, net of income taxes of $1,208 and $26 |
1,930 | 42 | ||||||
Unrealized gains (losses) on derivative instruments, net of income taxes of ($125) and ($1,197) |
322 | (3,196) | ||||||
Foreign currency translation, net of income taxes of $0 and ($4,635) |
303 | (15,638) | ||||||
Reclassification adjustments: |
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Gains on marketable securities included in net income, net of income taxes of ($1,927) |
(3,077) | | ||||||
Losses on derivative instruments included in net income, net of income taxes of $794 and $1,368 |
375 | 2,546 | ||||||
Amortization of prior service costs and losses included in net income, net of income taxes of $72 and $101 |
120 | 166 | ||||||
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Comprehensive income |
90,187 | 32,076 | ||||||
Comprehensive (income) loss attributable to noncontrolling interests |
(21) | 151 | ||||||
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Comprehensive income attributable to Quintiles Transnational Holdings Inc. |
$ | 90,166 | $ | 32,227 | ||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2014 |
December 31, 2013 |
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(unaudited) | (Note 1) | |||||||
(in thousands, except per share data) | ||||||||
ASSETS | ||||||||
Current assets: |
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Cash and cash equivalents |
$ | 741,381 | $ | 778,143 | ||||
Restricted cash |
3,373 | 2,712 | ||||||
Trade accounts receivable and unbilled services, net |
948,453 | 924,205 | ||||||
Prepaid expenses |
52,893 | 42,801 | ||||||
Deferred income taxes |
92,856 | 92,115 | ||||||
Income taxes receivable |
16,444 | 16,171 | ||||||
Other current assets and receivables |
92,420 | 89,541 | ||||||
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Total current assets |
1,947,820 | 1,945,688 | ||||||
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Property and equipment, net |
195,852 | 199,578 | ||||||
Investments in debt, equity and other securities |
37,628 | 40,349 | ||||||
Investments in and advances to unconsolidated affiliates |
29,072 | 22,927 | ||||||
Goodwill |
409,519 | 409,626 | ||||||
Other identifiable intangibles, net |
289,094 | 298,054 | ||||||
Deferred income taxes |
33,430 | 32,864 | ||||||
Deposits and other assets |
119,477 | 117,711 | ||||||
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Total assets |
$ | 3,061,892 | $ | 3,066,797 | ||||
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LIABILITIES AND SHAREHOLDERS DEFICIT | ||||||||
Current liabilities: |
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Accounts payable and accrued expenses |
$ | 768,868 | $ | 861,805 | ||||
Unearned income |
511,441 | 538,585 | ||||||
Income taxes payable |
46,697 | 35,778 | ||||||
Current portion of long-term debt and obligations held under capital leases |
15,572 | 10,433 | ||||||
Other current liabilities |
33,898 | 35,646 | ||||||
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Total current liabilities |
1,376,476 | 1,482,247 | ||||||
Long-term debt and obligations held under capital leases, less current portion |
2,031,247 | 2,035,586 | ||||||
Deferred income taxes |
35,565 | 37,541 | ||||||
Other liabilities |
178,129 | 178,908 | ||||||
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Total liabilities |
3,621,417 | 3,734,282 | ||||||
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Commitments and contingencies |
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Shareholders deficit: |
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Common stock and additional paid-in capital, 300,000 shares authorized, $0.01 par value, 130,049 and 129,652 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively |
495,917 | 478,144 | ||||||
Accumulated deficit |
(1,054,998) | (1,145,181) | ||||||
Accumulated other comprehensive loss |
(393) | (376) | ||||||
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Deficit attributable to Quintiles Transnational Holdings Inc.s shareholders |
(559,474) | (667,413) | ||||||
Deficit attributable to noncontrolling interests |
(51) | (72) | ||||||
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Total shareholders deficit |
(559,525) | (667,485) | ||||||
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Total liabilities and shareholders deficit |
$ | 3,061,892 | $ | 3,066,797 | ||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Operating activities: |
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Net income |
$ | 90,214 | $ | 48,156 | ||||
Adjustments to reconcile net income to cash used in operating activities: |
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Depreciation and amortization |
29,088 | 24,640 | ||||||
Amortization of debt issuance costs and discount |
1,595 | 2,875 | ||||||
Share-based compensation |
7,221 | 4,473 | ||||||
Gain on disposals of property and equipment, net |
(181) | (296) | ||||||
(Earnings) loss from unconsolidated affiliates |
(4,891) | 1,683 | ||||||
Gain on investments, net |
(5,268) | (12) | ||||||
(Benefit from) provision for deferred income taxes |
(1,587) | 11,164 | ||||||
Excess income tax benefits on stock option exercises |
(5,840) | (196) | ||||||
Changes in operating assets and liabilities: |
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Change in accounts receivable, unbilled services and unearned income |
(51,018) | (39,654) | ||||||
Change in other operating assets and liabilities |
(87,770) | (74,291) | ||||||
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Net cash used in operating activities |
(28,437) | (21,458) | ||||||
Investing activities: |
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Acquisition of property, equipment and software |
(17,706) | (31,459) | ||||||
Acquisition of business, net of cash acquired |
(667) | | ||||||
Proceeds from disposition of property and equipment |
418 | 659 | ||||||
Proceeds from sale of equity securities |
5,861 | 60 | ||||||
Investments in and advances to unconsolidated affiliates, net of payments received |
(1,224) | (4,377) | ||||||
Change in restricted cash, net |
(661) | (1,077) | ||||||
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Net cash used in investing activities |
(13,979) | (36,194) | ||||||
Financing activities: |
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Repayment of debt and principal payments on capital lease obligations |
(334) | (34,304) | ||||||
Exercise of stock options |
5,916 | 149 | ||||||
Payroll taxes remitted on repurchase of stock options |
(8,415) | | ||||||
Excess income tax benefits on stock option exercises |
5,840 | 196 | ||||||
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Net cash provided by (used in) financing activities |
3,007 | (33,959) | ||||||
Effect of foreign currency exchange rate changes on cash |
2,647 | (21,824) | ||||||
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Decrease in cash and cash equivalents |
(36,762) | (113,435) | ||||||
Cash and cash equivalents at beginning of period |
778,143 | 567,728 | ||||||
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Cash and cash equivalents at end of period |
$ | 741,381 | $ | 454,293 | ||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
6
QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Quintiles Transnational Holdings Inc. and its subsidiaries (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 Companys 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, 2014. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the Companys audited consolidated financial statements included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2013. The balance sheet at December 31, 2013 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 current period presentation. These changes had no effect on previously reported total revenues, net income, comprehensive income, shareholders deficit or cash flows.
2. Employee Stock Compensation
The Company granted the following share-based awards:
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Stock options |
1,024,500 | 75,000 | ||||||
Stock appreciation rights |
176,800 | |
The Company had the following share-based awards outstanding:
March 31, 2014 |
December 31, 2013 |
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Stock options |
10,578,160 | 10,100,160 | ||||||
Stock appreciation rights |
430,450 | 258,025 | ||||||
Restricted stock units |
57,167 | 57,167 |
The Company used the following assumptions when estimating the value of the share-based compensation for stock options and stock appreciation rights issued as follows:
Three Months Ended March 31, | ||||
2014 | 2013 | |||
Expected volatility |
32 43% | 34 47% | ||
Weighted average expected volatility |
38% | 42% | ||
Expected dividends |
0.0% | 5.45% | ||
Expected term (in years) |
3.7 6.7 | 3.4 6.4 | ||
Risk-free interest rate |
0.99 2.21% | 0.48 1.19% |
In November 2013, the Companys Board of Directors (the Board) approved an Employee Stock Purchase Plan (ESPP) which, subject to shareholder approval at the 2014 annual meeting, allows eligible employees to authorize payroll deductions of up to 10% of their base salary to be applied toward the purchase of full shares of the Companys common stock on the last day of the offering period. Offering periods under the ESPP are six months in duration and will begin on each March 1 and September 1. The first offering period for the ESPP began March 1, 2014. Under the ESPP, shares will be purchased on the last day of each offering period at a discount of 15% of the closing price of the common stock on such date as reported on the New York Stock Exchange. As of March 31, 2014, there have been aggregate payroll contributions of approximately $407,000 related to the ESPP.
The Company recognized share-based compensation expense of $7.2 million and $4.5 million during the three months ended March 31, 2014 and 2013, respectively.
7
3. Concentration of Credit Risk
No customer accounted for 10% or more of consolidated service revenues for the three months ended March 31, 2014 or 2013.
4. Accounts Receivable and Unbilled Services
Accounts receivable and unbilled services consist of the following (in thousands):
March 31, 2014 |
December 31, 2013 |
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Trade: |
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Billed |
$ | 435,068 | $ | 408,959 | ||||
Unbilled services |
515,131 | 516,942 | ||||||
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950,199 | 925,901 | |||||||
Allowance for doubtful accounts |
(1,746) | (1,696) | ||||||
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$ | 948,453 | $ | 924,205 | |||||
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5. Goodwill
The following is a summary of goodwill by segment for the three months ended March 31, 2014 (in thousands):
Product Development |
Integrated Healthcare Services |
Consolidated | ||||||||||
Balance as of December 31, 2013 |
$ | 351,144 | $ | 58,482 | $ | 409,626 | ||||||
Impact of foreign currency fluctuations and other |
(652) | 545 | (107) | |||||||||
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Balance as of March 31, 2014 |
$ | 350,492 | $ | 59,027 | $ | 409,519 | ||||||
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6. Derivatives
As of March 31, 2014, the Company held the following derivative positions: (i) freestanding warrants to purchase shares of common stock of third parties, (ii) forward exchange contracts to protect against foreign exchange movements for certain forecasted foreign currency cash flows related to service contracts and (iii) interest rate swaps to hedge the exposure to variability in interest payments on variable interest rate debt. The Company does not use derivative financial instruments for speculative or trading purposes.
As of March 31, 2014, the Company had freestanding warrants to purchase shares of third parties common stock. No quoted price is available for the warrants. Accordingly, the Company uses various valuation techniques to value the warrants, including the present value of estimated expected future cash flows, option-pricing models and fundamental analysis. Factors affecting the valuation include the current price of the underlying common stock, the exercise price of the warrants, the expected time to exercise the warrants, the estimated price volatility of the underlying common stock over the life of the warrants and the restrictions on the transferability of or ability to exercise the warrants. The Company did not sell any warrants during the three months ended March 31, 2014 or 2013.
As of March 31, 2014, the Company had 14 open foreign exchange forward contracts to hedge certain forecasted foreign currency cash flow transactions occurring in 2014 with notional amounts totaling $70.6 million. As these contracts were executed to hedge the risk of the potential volatility in the cash flows resulting from fluctuations in currency exchange rates during the last nine months of 2014, these transactions are accounted for as cash flow hedges. As such, the effective portion of the gain or loss on the contracts is recorded as unrealized gains (losses) on derivatives included in the accumulated other comprehensive loss component of shareholders deficit. These hedges are highly effective. Upon expiration of the hedge instruments in 2014, the Company will reclassify the unrealized holding gains and losses on the derivative instruments included in accumulated other comprehensive loss into earnings.
8
On June 9, 2011, the Company entered into six interest rate swaps effective September 28, 2012 and expiring 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. The critical terms of the interest rate swaps were substantially the same as those of the Companys senior secured credit facilities, including quarterly interest settlements. These interest rate swaps are being accounted for as cash flow hedges as these transactions were executed to hedge the Companys interest payments, and these hedges are deemed to be highly effective. As such, changes in the fair value of these derivative instruments are recorded as unrealized gains (losses) on derivatives included in the accumulated other comprehensive loss component of shareholders deficit. The fair value of these interest rate swaps represents 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 condensed consolidated statements of income. These payments, together with the variable rate of interest incurred on the underlying debt, result in a fixed rate of interest of 2.55% plus the applicable margin on the affected borrowings ($945.0 million or 45.9% of the Companys variable rate debt at March 31, 2014). The Company expects that $12.4 million of unrealized losses will be reclassified out of accumulated other comprehensive loss and will form the interest rate swap component of the 2.55% fixed rate of interest incurred over the next 12 months as the underlying net payments are settled.
The fair values of the Companys derivative instruments designated as hedging instruments and the line items on the accompanying condensed consolidated balance sheets to which they were recorded are summarized in the following table (in thousands):
Balance Sheet Classification |
March 31, 2014 |
December 31, 2013 |
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Foreign exchange forward contracts |
Other current assets | $ | 3,141 | $ | 3,950 | |||||
Interest rate swaps |
Other current liabilities | $ | 22,630 | $ | 24,805 |
The fair values of the Companys derivative instruments not designated as hedging instruments and the line items on the accompanying condensed consolidated balance sheets to which they were recorded are summarized in the following table (in thousands):
Balance Sheet Classification |
March 31, 2014 |
December 31, 2013 | ||||
Warrants |
Deposits and other assets | $ 474 | $ 211 |
The effect of the Companys cash flow hedging instruments on other comprehensive income (loss) is summarized in the following table (in thousands):
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Foreign exchange forward contracts |
$ | (809 | ) | $ | (2,391 | ) | ||
Interest rate swaps |
2,175 | 1,912 | ||||||
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Total |
$ | 1,366 | $ | (479 | ) | |||
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Gains from derivative instruments not designated as hedges impacting the Companys condensed consolidated statements of income are summarized below (in thousands):
Three Months Ended March 31, | ||||||||||
Income Statement Classification | 2014 | 2013 | ||||||||
Warrants |
Other income, net | $ | 263 | $ | 11 |
7. 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:
| 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. |
9
Recurring Fair Value Measurements
The following table summarizes the fair value of the Companys financial assets and liabilities that are measured on a recurring basis as of March 31, 2014 (in thousands):
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: |
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Marketable equity securities |
$ | 4,946 | $ | | $ | | $ | 4,946 | ||||||||
Foreign exchange forward contracts |
| 3,141 | | 3,141 | ||||||||||||
Warrants |
| | 474 | 474 | ||||||||||||
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Total |
$ | 4,946 | $ | 3,141 | $ | 474 | $ | 8,561 | ||||||||
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Liabilities: |
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Interest rate swaps |
$ | | $ | 22,630 | $ | | $ | 22,630 | ||||||||
Contingent consideration |
| | 12,932 | 12,932 | ||||||||||||
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Total |
$ | | $ | 22,630 | $ | 12,932 | $ | 35,562 | ||||||||
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Below is a summary of the valuation techniques used in determining fair value:
Marketable equity securities The Company values marketable equity securities utilizing quoted market prices.
Warrants The Company values warrants utilizing the Black-Scholes-Merton model.
Foreign exchange forward contracts The Company values foreign exchange forward contracts using quoted market prices for identical instruments in less active markets or using other observable inputs.
Interest rate swaps The Company values interest rate swaps 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 revenue, net new business and 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 March 31 (in thousands):
Warrants Deposits and Other Assets |
Contingent Consideration Accounts Payable and Accrued Expenses and Other Liabilities |
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2014 | 2013 | 2014 | 2013 | |||||||||||||
Balance as of January 1 |
$ | 211 | $ | 29 | $ | 13,014 | $ | 3,521 | ||||||||
Purchases and issuances |
| | | | ||||||||||||
Revaluations included in earnings |
263 | 11 | (82) | (181) | ||||||||||||
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Balance as of March 31 |
$ | 474 | $ | 40 | $ | 12,932 | $ | 3,340 | ||||||||
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The revaluations for the warrants and the contingent consideration are recognized in other income, net on the accompanying condensed consolidated statements of income.
Non-recurring Fair Value Measurements
Certain assets are carried on the accompanying condensed consolidated balance sheets at cost and are not remeasured to fair value on a recurring basis. These assets include cost and equity method investments and loans that are written down to fair value for declines which are deemed to be other-than-temporary, definite-lived intangible assets which are tested for impairment annually and when a triggering event occurs, and goodwill and identifiable indefinite-lived intangible assets which are tested for impairment annually and when a triggering event occurs.
10
As of March 31, 2014, assets carried on the balance sheet and not remeasured to fair value on a recurring basis totaling approximately $760.4 million were identified as Level 3. These assets are comprised of cost and equity method investments of $61.8 million, goodwill of $409.5 million and other identifiable intangibles, net of $289.1 million.
The Company has unfunded cash commitments totaling approximately $33.0 million related to its cost and equity method investments as of March 31, 2014.
Other
The estimated fair value of the Companys long-term debt, which is primarily based on rates in which the debt is traded among banks, was approximately $2.1 billion at both March 31, 2014 and December 31, 2013.
8. Noncontrolling Interests
Below is a summary of noncontrolling interests for the three months ended March 31 (in thousands):
2014 | 2013 | |||||||
Balance as of January 1 |
$ | (72) | $ | 479 | ||||
Comprehensive income (loss): |
||||||||
Net income (loss) |
31 | (153) | ||||||
Foreign currency adjustments, net of income tax |
(10) | 2 | ||||||
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Balance as of March 31 |
$ | (51) | $ | 328 | ||||
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9. Restructuring
In February 2014, the Board approved a restructuring plan of up to $13.0 million to better align resources with the Companys strategic direction. These actions are expected to occur throughout 2014 and are expected to result in severance for approximately 400 positions, primarily in the Product Development segment. Since February 2014, the Company has recognized approximately $1.5 million of restructuring costs related to this plan, all of which were for activities in the Product Development segment. All of the restructuring costs are related to severance costs. Restructuring costs are not allocated to the Companys reportable segments as they are not part of the segment performance measures regularly reviewed by management.
The following amounts were recorded for the February 2014 restructuring plan and the restructuring plans initiated in prior years (in thousands):
Severance and Related Costs |
Exit Costs | Total | ||||||||||
Balance at December 31, 2013 |
$ | 5,276 | $ | 198 | $ | 5,474 | ||||||
Expense, net of reversals |
1,008 | | 1,008 | |||||||||
Payments |
(2,658) | (42) | (2,700) | |||||||||
Foreign currency translation |
(14) | | (14) | |||||||||
|
|
|
|
|
|
|||||||
Balance at March 31, 2014 |
$ | 3,612 | $ | 156 | $ | 3,768 | ||||||
|
|
|
|
|
|
The Company expects the majority of the remaining restructuring accruals to be paid in 2014.
10. Employee Benefit Plans
Defined Benefit Plans
The following table summarizes the components of pension expense related to the Companys defined benefit plans (in thousands):
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Service cost |
$ | 3,287 | $ | 3,153 | ||||
Interest cost |
987 | 938 | ||||||
Expected return on plan assets |
(928) | (692) | ||||||
Amortization of prior service costs |
20 | 89 | ||||||
Amortization of actuarial losses |
172 | 178 | ||||||
|
|
|
|
|||||
$ | 3,538 | $ | 3,666 | |||||
|
|
|
|
11
Other
As of March 31, 2014 and December 31, 2013, the Company has a severance accrual included in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheets of $10.9 million and $14.1 million, respectively. The Company recognizes obligations associated with severance related to contractual termination benefits at fair value on the date that it is probable that the affected employees will be entitled to the benefit and the amount can reasonably be estimated. The severance accrual is related to cost reduction programs that will result in severance for approximately 270 positions, which are expected to lower operating costs and improve profitability by reducing excess capacity. These actions are expected to occur and be paid during 2014 and 2015. During the first quarter of 2014, the Company has recognized approximately $2.2 million of net reversals related to these cost reduction programs, primarily as a result of affected individuals transferring into other positions within the Company. Of the $2.2 million decrease from net reversals recognized for these cost reduction programs, approximately ($2.2) million, $131,000 and ($55,000) were related to activities in the Product Development segment, Integrated Healthcare Services segment and corporate activities, respectively.
The following amounts were recorded for the severance associated with cost reduction programs (in thousands):
Balance at December 31, 2013 |
$ | 14,056 | ||
Expense, net of reversals |
(2,160) | |||
Payments |
(966) | |||
Foreign currency translation |
(1) | |||
|
|
|||
Balance at March 31, 2014 |
$ | 10,929 | ||
|
|
11. Income Taxes
The Companys effective income tax rate was 30.5% and 39.2% for the first quarter of 2014 and 2013 respectively. The effective income tax rate for the first quarter of 2014 was positively impacted by the Companys change in the assertion regarding the undistributed earnings of most of its foreign subsidiaries that are considered to be indefinitely reinvested outside of the United States. Prior to June 2013, the Company had not considered the majority of the undistributed earnings of its foreign subsidiaries to be indefinitely reinvested. Accordingly, the first quarter of 2013 was negatively impacted by income taxes imposed on most of the earnings of the foreign subsidiaries, as a deferred income tax liability was recorded for the anticipated income tax costs of repatriating those earnings in the future. The Company reevaluated this assertion following its initial public offering (IPO) in May 2013 as a portion of the IPO proceeds were used to pay down debt held in the United States as well as the fact the Company does not anticipate paying dividends in the foreseeable future, which had been significant in the past. With this reduction of debt and related interest expense and the change in approach relating to payment of dividends, the Company expects to be able to support the cash needs of its domestic subsidiaries without repatriating cash from the affected foreign subsidiaries. The Company expects to utilize the cash generated outside of the United States to fund growth outside of the United States.
12. Comprehensive Income
Below is a summary of the components of accumulated other comprehensive (loss) income for the three months ended March 31, 2014 and 2013 (in thousands):
Foreign Currency Translation |
Marketable Securities |
Derivative Instruments |
Defined Benefit Plans |
Income Taxes |
Accumulated Other Comprehensive (Loss) Income |
|||||||||||||||||||
Balance at December 31, 2013 |
$ | (5,829) | $ | 5,708 | $ | (20,855) | $ | (5,044) | $ | 25,644 | $ | (376) | ||||||||||||
Other comprehensive (loss) income before reclassifications |
313 | 3,138 | 197 | | (1,083) | 2,565 | ||||||||||||||||||
Reclassification adjustments |
| (5,004) | 1,169 | 192 | 1,061 | (2,582) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at March 31, 2014 |
$ | (5,516) | $ | 3,842 | $ | (19,489) | $ | (4,852) | $ | 25,622 | $ | (393) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Foreign Currency Translation |
Marketable Securities |
Derivative Instruments |
Defined Benefit Plans |
Income Taxes |
Accumulated Other Comprehensive (Loss) Income |
|||||||||||||||||||
Balance at December 31, 2012 |
$ | 19,312 | $ | 467 | $ | (33,542) | $ | (8,235) | $ | 29,693 | $ | 7,695 | ||||||||||||
Other comprehensive income (loss) before reclassifications |
(20,275) | 68 | (4,393) | | 5,806 | (18,794) | ||||||||||||||||||
Reclassification adjustments |
| | 3,914 | 267 | (1,469) | 2,712 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at March 31, 2013 |
$ | (963) | $ | 535 | $ | (34,021) | $ | (7,968) | $ | 34,030 | $ | (8,387) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
12
Below is a summary of the reclassification adjustments from accumulated other comprehensive (loss) income into net income for the three months ended March 31, 2014 and 2013 (in thousands):
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Marketable securities: |
||||||||
Marketable securities gain included in other income, net |
$ | (5,004) | $ | | ||||
|
|
|
|
|||||
Total before income taxes |
(5,004) | | ||||||
Income taxes |
(1,927) | | ||||||
|
|
|
|
|||||
Total net of income taxes |
$ | (3,077) | $ | | ||||
|
|
|
|
|||||
Derivative instruments: |
||||||||
Interest rate swaps increase to interest expense |
$ | 3,080 | $ | 3,006 | ||||
Foreign exchange forward contracts (increase) reduction to service revenues |
(1,911) | 908 | ||||||
|
|
|
|
|||||
Total before income taxes |
1,169 | 3,914 | ||||||
Income taxes |
794 | 1,368 | ||||||
|
|
|
|
|||||
Total net of income taxes |
$ | 375 | $ | 2,546 | ||||
|
|
|
|
|||||
Defined benefit plans: |
||||||||
Amortization of prior service costs |
$ | 20 | $ | 89 | ||||
Amortization of actuarial losses |
172 | 178 | ||||||
|
|
|
|
|||||
Total before income taxes |
192 | 267 | ||||||
Income taxes |
72 | 101 | ||||||
|
|
|
|
|||||
Total net of income taxes |
$ | 120 | $ | 166 | ||||
|
|
|
|
Amortization of prior service costs and actuarial losses are included in the computation of pension expense for the Companys defined benefit plans. See Note 10 for additional information.
13. Segments
The following table presents the Companys operations by reportable segment. The Company is managed through two reportable segments, Product Development and Integrated Healthcare Services. Product Development, which primarily serves biopharmaceutical customers engaged in research and development, provides clinical research and clinical trial services. Integrated Healthcare Services provides commercialization services to biopharmaceutical customers and research, analytics, real-world and late phase research, and other services to both biopharmaceutical customers and the broader healthcare market.
13
Certain costs are not allocated to the Companys segments and are reported as general corporate and unallocated expenses. These costs primarily consist of share-based compensation and expenses for corporate overhead functions such as finance, human resources, information technology, facilities and legal. The Company does not allocate restructuring or impairment charges to its segments. Information presented below is in thousands:
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Service revenues |
||||||||
Product Development |
$ | 770,828 | $ | 706,307 | ||||
Integrated Healthcare Services |
234,460 | 221,128 | ||||||
|
|
|
|
|||||
Total service revenues |
1,005,288 | 927,435 | ||||||
Costs of revenue, service costs |
||||||||
Product Development |
450,483 | 429,007 | ||||||
Integrated Healthcare Services |
193,239 | 182,102 | ||||||
|
|
|
|
|||||
Total costs of revenue, service costs |
643,722 | 611,109 | ||||||
Selling, general and administrative |
||||||||
Product Development |
159,685 | 144,625 | ||||||
Integrated Healthcare Services |
32,276 | 32,781 | ||||||
General corporate and unallocated |
27,281 | 21,896 | ||||||
|
|
|
|
|||||
Total selling, general and administrative |
219,242 | 199,302 | ||||||
Income from operations |
||||||||
Product Development |
160,660 | 132,675 | ||||||
Integrated Healthcare Services |
8,945 | 6,245 | ||||||
General corporate and unallocated |
(27,281) | (21,896) | ||||||
Restructuring costs |
(1,008) | (1,859) | ||||||
|
|
|
|
|||||
Total income from operations |
$ | 141,316 | $ | 115,165 | ||||
|
|
|
|
|||||
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Depreciation and amortization expense |
||||||||
Product Development |
$ | 22,970 | $ | 18,447 | ||||
Integrated Healthcare Services |
4,891 | 5,353 | ||||||
General corporate and unallocated |
1,227 | 840 | ||||||
|
|
|
|
|||||
Total depreciation and amortization expense |
$ | 29,088 | $ | 24,640 | ||||
|
|
|
|
14. Earnings Per Share
The following table shows the weighted average number of outstanding share-based awards not included in the computation of diluted earnings per share as the effect of including such share-based awards in the computation would be anti-dilutive (in thousands):
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Weighted average shares subject to anti-dilutive share-based awards |
766 | 1,631 |
Share-based awards will have a dilutive effect under the treasury method only when the respective periods average market value of the Companys common stock exceeds the exercise proceeds.
14
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement for Forward-Looking Information
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect, among other things, our current expectations and anticipated results of operations, all of which are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, market trends, or industry results to differ materially from those expressed or implied by such forward-looking statements. Therefore, any statements contained herein that are not statements of historical fact may be forward-looking statements and should be evaluated as such. Without limiting the foregoing, the words anticipates, believes, estimates, expects, intends, may, plans, projects, should, targets, will and the negative thereof and similar words and expressions are intended to identify forward-looking statements. Unless legally required, we assume no obligation to update any such forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information.
We caution you that any such forward-looking statements are further qualified by important factors that could cause our actual operating results to differ materially from those in the forward-looking statements, including without limitation, that most of our contracts may be terminated on short notice, and we may be unable to maintain large customer contracts or to enter into new contracts; our financial results may be adversely affected if we underprice our contracts, overrun our cost estimates or fail to receive approval for or experience delays in documenting change orders; the historical indications of the relationship of our backlog to revenues may not be indicative of their future relationship; we may be unable to maintain our information systems or effectively update them; customer or therapeutic concentration could harm our business; our business is subject to risks associated with international operations, including economic, political and other risks, such as compliance with a myriad of laws and regulations, complications from conducting clinical trials in multiple countries simultaneously and changes in exchange rates; the market for our services may not grow as we expect; government regulators or our customers may limit the scope of prescription or withdraw products from the market, and government regulators may impose new regulatory requirements or may adopt new regulations affecting the biopharmaceutical industry; we may be unable to successfully develop and market new services or enter new markets; our failure to perform services in accordance with contractual requirements, regulatory standards and ethical considerations may subject us to significant costs or liability, which could also damage our reputation and cause us to lose existing business or not receive new business; our services are related to treatment of human patients, and we could face liability if a patient is harmed; we may be unable to successfully identify, acquire and integrate businesses, services and technologies; and we have substantial indebtedness and may incur additional indebtedness in the future, which could adversely affect our financial condition. For a further discussion of the risks relating to our business, see Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
Overview
We are the worlds largest provider of biopharmaceutical development services and commercial outsourcing services. We are positioned at the intersection of business services and healthcare and generated $1.0 billion of service revenues in the first quarter of 2014, conduct business in approximately 100 countries and have approximately 29,000 employees. We use the breadth and depth of our service offerings, our global footprint and our therapeutic, scientific and analytics expertise to help our biopharmaceutical customers, as well as other healthcare customers, to be more successful in an increasingly complex healthcare environment. Our business is currently organized in two reportable segments, Product Development and Integrated Healthcare Services.
Product Development
Product Development provides services and expertise that allow biopharmaceutical companies to outsource the clinical development process from first-in-man trials to post-launch monitoring. Our comprehensive service offerings provide the support and functional expertise necessary at each stage of development, as well as the systems and analytical capabilities to help our customers improve product development efficiency and effectiveness. Product Development is comprised of clinical solutions and services and consulting. Clinical solutions and services provides services necessary to develop biopharmaceutical products. These services include project management and clinical monitoring functions for conducting multi-site trials (generally Phase II-IV) (collectively core clinical). These also include clinical trial support services that improve clinical trial decision-making, such as global laboratories, data management, biostatistical, safety and pharmacovigilance, early clinical development trials (generally Phase I), and strategic planning and design services, which help improve decisions and performance. Consulting provides strategy and management consulting services based on life science expertise and advanced analytics, as well as regulatory and compliance consulting services.
15
Integrated Healthcare Services
Integrated Healthcare Services provides the healthcare industry with both broad geographic presence and commercial capabilities. Our customized commercialization services are designed to accelerate the commercial success of biopharmaceutical and other health-related products. Integrated Healthcare Services provides a broad array of services including commercial services, such as providing contract pharmaceutical sales forces in key geographic markets, as well as a growing number of healthcare business services for the broader healthcare sector. Service offerings include commercial services (sales representatives, strategy, marketing communications and other areas related to commercialization), real-world and late phase research (drug therapy analysis, real-world research and evidence-based medicine, including research studies to prove a drugs value) and other healthcare services (comparative and cost-effectiveness research capabilities, clinical management analytics, decision support services, medication adherence and health outcome optimization services, and web-based systems for measuring quality improvement).
Reimbursed Expenses
Reimbursed expenses may fluctuate from period-to-period due, in part, to where we are in the lifecycle of the many contracts that are in progress at a particular point in time. For instance, these pass-through costs tend to be higher during the early phases of clinical trials as a result of patient recruitment efforts. As reimbursed expenses are pass-through costs to our customers with little to no profit to us, we believe that the fluctuations in reimbursed expenses from period to period are not meaningful to our underlying performance, we do not provide analysis of the fluctuations in these items or their impact on our financial results.
Foreign Currency Fluctuations
The impact from foreign currency fluctuations and constant currency information assumes constant foreign currency exchange rates based on the rates in effect for the comparable prior-year period were used in translation. We believe that providing the impact of fluctuations in foreign currency rates on certain financial results can facilitate analysis of period-to-period comparisons of business performance.
Results of Operations
Backlog and Net New Business
We began 2014 with backlog (as defined under Net New Business Reporting and Backlog below) of $9,855 million, which was 13% higher than at the beginning of 2013. Backlog at March 31, 2014 was $10,066 million.
Net new business grew 2% in the first quarter of 2014 to $1,274 million from $1,245 million in first quarter of 2013, driven by growth in Integrated Healthcare Services, partially offset by a decline in Product Development. Integrated Healthcare Services net new business increased 58% to $269 million in the first quarter of 2014 as compared to $170 million for the same period in 2013, related to growth in commercial services in North America as well as an increase in new business from real-world and late phase research services. Product Developments net new business decreased 6% to $1,005 million in the first quarter of 2014 as compared to $1,075 million for the same period in 2013, which was as a result of lower net new business from core clinical services, partially offset by net new business from a business combination completed in the third quarter of 2013. We experienced higher growth in net new business for functional resourcing business in core clinical services in the 2014 quarter.
Service Revenues
Three Months Ended March 31, | Change | |||||||||||||||
2014 | 2013 | $ | % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Service revenues |
$ | 1,005,288 | $ | 927,435 | $ | 77,853 | 8.4 | % |
For the three months ended March 31, 2014, our service revenues increased $77.9 million, or 8.4%, as compared to the same period in 2013. This increase is comprised of constant currency service revenue growth of approximately $78.4 million, or 8.4%, partially offset by a negative impact of approximately $466,000 from the effects of foreign currency fluctuations. The constant currency service revenue growth, which includes the impact from a business combination completed in the third quarter of 2013, is comprised of a $60.8 million increase in Product Development and a $17.6 million increase in Integrated Healthcare Services.
16
Costs of Revenue, Service Costs
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
(dollars in thousands) | ||||||||
Costs of revenue, service costs |
$ | 643,722 | $ | 611,109 | ||||
% of service revenues |
64.0% | 65.9% |
When compared to the same period in 2013, service costs in the first quarter of 2014 increased $32.6 million. The increase included a constant currency increase in expenses of approximately $41.4 million, or 6.8%, partially offset by a positive impact of approximately $8.8 million from the effects of foreign currency fluctuations. The constant currency service costs growth was due to incremental costs resulting from the business combination completed in the third quarter of 2013 and increases in compensation and related expenses due to (1) annual merit increases, (2) an increase in billable headcount needed to support our higher volume of revenue, and (3) a reduction of an accrual for statutory profit sharing of approximately $5.4 million in 2013 as a result of guidance handed down by an administrative court in France. These increases in compensation and related expenses were partially offset by efficiencies gained from restructuring activities taken in prior years.
Selling, General and Administrative
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
(dollars in thousands) | ||||||||
Selling, general and administrative |
$ | 219,242 | $ | 199,302 | ||||
% of service revenues |
21.8% | 21.5% |
The $19.9 million increase in selling, general and administrative expenses in the first quarter of 2014 was caused by a constant currency increase of $21.8 million, or 11.0%, partially offset by a decrease of $1.9 million from a positive foreign currency impact. The constant currency increase was primarily due to (1) incremental costs from the business combination completed in the third quarter of 2013, (2) an increase in share-based compensation, (3) increases in compensation and related expenses resulting primarily from annual merit increases and an increase in headcount, and (4) an increase in marketing and information technology, or IT, costs.
Restructuring Costs
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Restructuring costs |
$ | 1,008 | $ | 1,859 |
In February 2014, our Board of Directors, or our Board, approved a restructuring plan of up to $13.0 million to better align our resources with our strategic direction. We recognized $1.0 million of restructuring charges, net of reversals for changes in estimates, in the first quarter of 2014, which was primarily related to the February 2014 restructuring plan. These actions are expected to occur throughout 2014 and are expected to result in severance for approximately 400 positions, primarily in the Product Development segment. We believe that this plan will result in annual cost savings of approximately $20.0 to $25.0 million.
Interest Income and Interest Expense
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Interest income |
$ | (1,255 | ) | $ | (452 | ) | ||
Interest expense |
$ | 24,703 | $ | 36,042 |
Interest income includes interest received from bank balances and investments.
Interest expense for the first quarter of 2014 was lower than the same period in 2013 primarily due to a decrease in the average debt outstanding as a result of (1) the repayment of the $300.0 million term loan, which Quintiles Transnational Holdings Inc. obtained in February 2012 and paid in full in May 2013, (2) the pay down of $50.0 million of outstanding indebtedness under our senior secured credit facilities in May 2013, and (3) the mandatory prepayment of $33.8 million of outstanding indebtedness under our senior secured credit facilities in the first quarter of 2013. In addition, the average rate of interest on the term loan under our senior secured credit facility in the first quarter of 2014 was 75 basis points lower than it was in the first quarter of 2013 due to the reduction in the interest rate pursuant to the terms and conditions in the credit agreement as well as from the refinancing transaction we completed in the fourth quarter of 2013.
17
Other Income, Net
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Other income, net |
$ | (4,844) | $ | (2,382) |
Included in other income, net for the first quarter of 2014 were approximately $529,000 of foreign currency net losses as compared to $1.8 million of foreign currency net gains during the same period in 2013. In addition, the first quarter of 2014 included a gain from the sale of marketable equity securities of approximately $5.0 million.
Income Tax Expense
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
(dollars in thousands) | ||||||||
Income tax expense |
$ | 37,389 | $ | 32,118 | ||||
Effective income tax rate |
30.5% | 39.2% |
The effective income tax rate for the first quarter of 2014 was positively impacted by our change in the assertion regarding the undistributed earnings of most of our foreign subsidiaries that are considered to be indefinitely reinvested outside of the United States. Prior to June 2013, we had not considered the majority of the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested. Accordingly, the first quarter of 2013 was negatively impacted by income taxes imposed on most of the earnings of the foreign subsidiaries, as a deferred income tax liability was recorded each quarter for the anticipated income tax costs of repatriating those earnings in the future. We reevaluated this assertion following our initial public offering, or IPO, in May 2013 as a portion of the IPO proceeds were used to pay down debt held in the United States as well as the fact we do not anticipate paying dividends in the foreseeable future, which had been significant in the past. With this reduction of debt and related interest expense and the change in approach relating to payment of dividends, we expect to be able to support the cash needs of our domestic subsidiaries without repatriating cash from the affected foreign subsidiaries. We expect to utilize the cash generated outside of the United States to fund growth outside of the United States.
Equity in Earnings (Losses) of Unconsolidated Affiliates
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Equity in earnings (losses) of unconsolidated affiliates |
$ | 4,891 | $ | (1,683) |
Equity in earnings (losses) of unconsolidated affiliates reflected earnings of $4.9 million during the first quarter of 2014 as compared to a loss of $1.7 million for the same period last year. The increase was primarily due to gains in our NovaQuest Pharma Opportunities Fund investment.
Segments
Service revenues and income from operations by segment are as follows (dollars in millions):
Three Months Ended March 31, 2014 and 2013 | ||||||||||||||||||||
Service Revenues | Income from Operations | Operating Profit Margin | ||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||
Product Development |
$ | 770.8 | $ | 706.3 | $ | 160.6 | $ | 132.7 | 20.8% | 18.8% | ||||||||||
Integrated Healthcare Services |
234.5 | 221.1 | 9.0 | 6.2 | 3.8 | 2.8 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total segment |
1,005.3 | 927.4 | 169.6 | 138.9 | 16.9% | 15.0% | ||||||||||||||
General corporate and unallocated expenses |
(27.3) | (21.8) | ||||||||||||||||||
Restructuring costs |
(1.0) | (1.9) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Consolidated |
$ | 1,005.3 | $ | 927.4 | $ | 141.3 | $ | 115.2 | ||||||||||||
|
|
|
|
|
|
|
|
Certain costs are not allocated to our segments and are reported as general corporate and unallocated expenses. These costs primarily consist of share-based compensation and expenses for corporate office functions such as senior leadership, finance, human resources, IT, facilities and legal.
18
Product Development
Three Months Ended March 31, | Change | |||||||||||||||
2014 | 2013 | $ | % | |||||||||||||
(dollars in millions) | ||||||||||||||||
Service revenues |
$ | 770.8 | $ | 706.3 | $ | 64.5 | 9.1% | |||||||||
Costs of revenue, service costs |
450.5 | 429.0 | 21.5 | 5.0 | ||||||||||||
as a percentage of service revenues |
58.4% | 60.7% | ||||||||||||||
Selling, general and administrative |
159.7 | 144.6 | 15.1 | 10.4 | ||||||||||||
as a percentage of service revenues |
20.8% | 20.5% | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Segment income from operations |
$ | 160.6 | $ | 132.7 | $ | 27.9 | 21.1% | |||||||||
|
|
|
|
|
|
|
|
|||||||||
as a percentage of service revenues |
20.8% | 18.8% |
Service Revenues
Product Developments service revenues were $770.8 million in the first quarter of 2014, an increase of $64.5 million, or 9.1%, over the same period in 2013. This increase was comprised of constant currency service revenue growth of $60.8 million, or 8.6%, and approximately $3.7 million due to the effect of foreign currency fluctuations. The constant currency service revenue growth was primarily a result of a volume-related increase of $29.5 million in clinical solutions and services and $32.7 million from a business acquired in the third quarter of 2013, which were partially offset by a decrease of $1.4 million from consulting services.
Our clinical solutions and services growth for the first quarter of 2014 was primarily related to core clinical in North America, an increase in global laboratories services as well as growth in clinical trial support services. This growth was due largely to execution on the higher backlog in place as we entered the quarter as a result of a consistent history of year-over-year growth in net new business. This growth was tempered by a decrease in service revenues from a large clinical solutions project which wound down in 2013.
Costs of Revenue, Service Costs
Product Developments service costs increased approximately $21.5 million in the first quarter of 2014 over the same period in 2013. This increase was comprised of a $27.1 million constant currency increase, or 6.3%, partially offset by a reduction of $5.6 million from the positive effect of foreign currency fluctuations. The constant currency service costs growth was due to incremental costs resulting from the business combination completed in the third quarter of 2013 and increases in compensation and related expenses due to (1) annual merit increases, (2) an increase in billable headcount needed to support our higher volume of revenue, and (3) a reduction of an accrual for statutory profit sharing of approximately $5.4 million in 2013 as a result of guidance handed down by an administrative court in France. These increases in compensation and related expenses were partially offset by efficiencies gained from restructuring activities taken in prior years. As a percent of service revenues, Product Developments service costs were 58.4% and 60.7% in the first quarter of 2014 and 2013, respectively. The decrease in service costs as a percentage of service revenues was primarily a result of a closer alignment of resources with project requirements.
Selling, General and Administrative
As a percent of service revenues, Product Developments selling, general and administrative expenses were 20.8% and 20.5% in the first quarter of 2014 and 2013, respectively. Product Developments selling, general and administrative expenses increased approximately $15.1 million in the first quarter of 2014 as compared to the same period in 2013. This increase was primarily caused by the impact from the business combination completed in the third quarter of 2013, increases in compensation and related expenses resulting from annual merit increases and an increase in headcount, and a growth related increase in IT costs. These increases were partially offset by a positive foreign currency impact of approximately $1.7 million.
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Integrated Healthcare Services
Three Months Ended March 31, | Change | |||||||||||||||
2014 | 2013 | $ | % | |||||||||||||
(dollars in millions) | ||||||||||||||||
Service revenues |
$ | 234.5 | $ | 221.1 | $ | 13.4 | 6.0% | |||||||||
Costs of revenue, service costs |
193.2 | 182.1 | 11.1 | 6.1 | ||||||||||||
as a percentage of service revenues |
82.4% | 82.4% | ||||||||||||||
Selling, general and administrative |
32.3 | 32.8 | (0.5) | (1.5) | ||||||||||||
as a percentage of service revenues |
13.8% | 14.8% | ||||||||||||||
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|
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Segment income from operations |
$ | 9.0 | $ | 6.2 | $ | 2.8 | 43.2% | |||||||||
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as a percentage of service revenues |
3.8% | 2.8% |
Service Revenues
Integrated Healthcare Services service revenues were $234.5 million in the first quarter of 2014, an increase of $13.4 million, or 6.0%, over the same period in 2013. This increase is comprised of constant currency service revenue growth of $17.6 million, or 7.9%, partially offset by a negative impact of approximately $4.2 million due to the effect of foreign currency fluctuations. The increase in constant currency service revenues was driven by an increase in commercial services in Japan and North America as well as growth in real-world and late phase research services.
Costs of Revenue, Service Costs
Integrated Healthcare Services service costs increased approximately $11.1 million in the first quarter of 2014. This increase was comprised of a $14.3 million constant currency increase, or 7.9%, partially offset by a reduction of $3.2 million from the positive effect of foreign currency fluctuations. The constant currency increase was primarily due to increases in compensation and related expenses resulting from an increase in billable headcount needed to support the higher volume of revenue as well as annual merit increases in compensation.
Selling, General and Administrative
Integrated Healthcare Services selling, general and administrative expenses in the first quarter of 2014 were slightly lower as compared to the same period in 2013 due to lower compensation and related expenses primarily as a result of lower headcount.
Liquidity and Capital Resources
Overview
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our principal source of liquidity is operating cash flows. In addition to operating cash flows, other significant factors that affect our overall management of liquidity include: capital expenditures, acquisitions, debt service requirements, dividends, equity repurchases, adequacy of our revolving credit facility, and access to the capital markets.
We manage our worldwide cash requirements by monitoring the funds available among our subsidiaries and determining the extent to which those funds can be accessed on a cost effective basis. The repatriation of cash balances from certain of our subsidiaries could have adverse income tax consequences. During the second quarter of 2013, we changed our assertion regarding the earnings of most of our foreign subsidiaries and now consider them indefinitely reinvested outside of the United States. Making this assertion limits our ability to repatriate cash from our foreign subsidiaries for the foreseeable future. In making this assertion, we determined that the cash flows expected to be generated in the United States should be sufficient to fund our operating requirements and debt service obligations in the United States and that we intend to use the cash generated by the affected foreign subsidiaries to fund growth outside of the United States. A future distribution or change in this assertion could result in additional tax liability.
We had a cash balance of $741.4 million at March 31, 2014 ($289.9 million of which was in the United States), a decrease from $778.1 million at December 31, 2013.
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On October 30, 2013, our Board approved an equity repurchase program authorizing the repurchase of up to $125.0 million of either our common stock or vested in-the-money employee stock options, or a combination thereof. We used $65.5 million in the fourth quarter of 2013 to purchase $59.1 million of stock options and $6.4 million of common stock. We have used and intend to continue to use cash on hand to fund the equity repurchase program. The equity repurchase program does not obligate us to repurchase any particular amount of common stock or vested in-the-money employee stock options, and it could be modified, suspended or discontinued at any time. Repurchases of vested in-the-money employee stock options were made through transactions between us and our employees (other than our executive officers, who were not eligible to participate in the program), and this aspect of the equity repurchase program expired in November 2013. The equity repurchase program for common stock does not have an end date. Additional information regarding our equity repurchase program is presented in Part II, Item 2 Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities of this Quarterly Report on Form 10-Q.
Based on our current operating plan, we believe that our available cash and cash equivalents, future cash flows from operations and our ability to access funds under our revolving credit facility, will enable us to fund our operating requirements and capital expenditures and meet debt obligations for at least the next 12 months. We regularly evaluate our debt arrangements, as well as market conditions, and from time to time we may explore opportunities to modify our existing debt arrangements or pursue additional financing arrangements that could result in the issuance of new debt securities by us or our affiliates. We may use our existing cash, cash generated from operations or dispositions of assets or businesses and/or proceeds from any new financing arrangements or issuances of debt or equity securities to repay or reduce some of our outstanding obligations, to repurchase shares from our shareholders or for other purposes. While our Board will review our dividend policy from time to time, we currently do not intend to pay dividends in the foreseeable future. As part of our ongoing business strategy, we also are continually evaluating new acquisition, expansion and investment possibilities or other strategic growth opportunities, as well as potential dispositions of assets or businesses, as appropriate, including dispositions that may cause us to recognize a loss on certain assets. Should we elect to pursue any such transaction, we may seek to obtain debt or equity financing to facilitate those activities. Our ability to enter into any such potential transactions and our use of cash or proceeds is limited to varying degrees by the terms and restrictions contained in our senior secured credit facilities. We cannot provide assurances that we will be able to complete any such alternative financing arrangements or other transactions on favorable terms or at all.
Long-Term Debt
As of March 31, 2014, we had $2.05 billion of total indebtedness. Additionally, our senior secured credit agreement provides for a $300 million revolving credit facility. There were no amounts drawn on this revolving credit facility in the first quarter of 2014. Our long-term debt arrangements contain usual and customary restrictive covenants, and as of March 31, 2014, we believe we were in compliance with these covenants.
See Managements Discussion and Analysis Liquidity and Capital Resources and Note 10 to our audited consolidated financial statements, each included in our Annual Report on Form 10-K for fiscal year ended December 31, 2013, for additional details regarding our credit arrangements.
Three months ended March 31, 2014 and 2013
Cash Flow from Operating Activities
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Net cash used in operating activities |
$ | (28,437) | $ | (21,458) |
Cash used in operating activities increased by $7.0 million during the first three months of 2014 as compared to the same period in 2013. This increase in cash used in operations was primarily as a result of higher cash used in days sales outstanding, or DSO ($11.4 million), higher payments for income taxes ($12.3 million), and higher cash used for incentive compensation. This higher cash used reflects a five-day increase in DSO in the first three months of 2014 compared to a three-day increase in the first three months of 2013. The net impact on cash from the increase in DSO resulted from a trend we continue to experience toward longer payment terms on our contracts. DSO can shift significantly at each reporting period depending on the timing of cash receipts under contractual payment terms relative to the recognition of revenue over a project lifecycle. These higher uses in cash from operations were partially offset by the increase in net income and lower payments for interest ($9.0 million) in the first three months of 2014 as compared to the same period in 2013.
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Cash Flow from Investing Activities
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Net cash used in investing activities |
$ | (13,979) | $ | (36,194) |
Cash used in investing activities decreased by $22.2 million during the first three months of 2014 as compared to the same period in 2013. This decline in the use of cash in the first three months of 2014 was primarily related to lower cash used for the acquisition of property, equipment and software and an increase in proceeds from the sale of third-party securities.
Cash Flow from Financing Activities
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Net cash provided by (used in) financing activities |
$ | 3,007 | $ | (33,959) |
Net cash provided by financing activities increased by $37.0 million to $3.0 million during the first three months of 2014, as compared to cash used of $34.0 million during the same period in 2013. The cash provided by financing activities in the first three months of 2014 was primarily related to the exercise of stock options and the excess income tax benefits on stock option exercises, partially offset by the remittance of payroll tax withheld on stock options repurchased in the fourth quarter of 2013. The cash used in financing activities in the first three months of 2013 was primarily a result of a mandatory prepayment of $33.8 million on our senior secured credit facilities as a result of excess cash flow (as defined in the credit agreement).
Net New Business Reporting and Backlog
Net new business is the value of services awarded during the period from projects under signed contracts, letters of intent and, in some cases, pre-contract commitments, which are supported by written communications and adjusted for contracts that were modified or canceled during the period. Net new business under sole provider arrangements is recorded over the life of the arrangement as projects are awarded. Under sole provider arrangements, we are considered the exclusive provider for the contracted service or services.
Consistent with our methodology for calculating net new business during a particular period, backlog represents, at a particular point in time, future service revenues from work not yet completed or performed under signed contracts, letters of intent and, in some cases, pre-contract commitments that are supported by written communications. Once work begins on a project, service revenues are recognized over the duration of the project. Included within backlog at March 31, 2014 is approximately $6,607 million of backlog that we do not expect to generate revenue in the next 12 months.
Backlog was as follows:
March 31, 2014 |
December 31, 2013 |
|||||||
(in millions) | ||||||||
Backlog |
$ | 10,066 | $ | 9,855 |
Net new business was as follows:
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
(in millions) | ||||||||
Net new business |
$ | 1,274 | $ | 1,245 |
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Contractual Obligations and Commitments
We have various contractual obligations, which are recorded as liabilities in our consolidated financial statements. Other items, such as operating lease obligations, are not recognized as liabilities in our consolidated financial statements but are required to be disclosed.
There have been no material changes, outside of the ordinary course of business, to our contractual obligations as previously disclosed in our Annual Report on Form 10-K for fiscal year ended December 31, 2013.
Application of Critical Accounting Policies
There have been no material changes to our critical accounting policies as previously disclosed in our Annual Report on Form 10-K for fiscal year ended December 31, 2013.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our quantitative and qualitative disclosures about market risk as compared to the quantitative and qualitative disclosures about market risk described in our Annual Report on Form 10-K for fiscal year ended December 31, 2013.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of such date, our disclosure controls and procedures were effective.
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in managements evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are party to legal proceedings incidental to our business. While the outcome of these matters could differ from managements expectations, we do not believe that the resolution of these matters is reasonably likely to have a material adverse effect to our financial statements.
For a discussion of our potential risks and uncertainties, see the information under the heading Risk Factors in our Annual Report on Form 10-K for fiscal year ended December 31, 2013. There have been no significant changes from the risk factors previously disclosed in our Annual Report.
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Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Recent Sales of Unregistered Securities
Not applicable.
Use of Proceeds from Registered Securities
Not applicable.
Purchases of Equity Securities by the Issuer
The following table summarizes the equity repurchase program activity for the three months ended March 31, 2014 and the approximate dollar value of shares that may yet be purchased pursuant to our equity repurchase program:
Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs |
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(in thousands, except per share data) | ||||||||||||||||
January 1, 2014 January 31, 2014 |
0 | $ | 00.00 | 0 | $ | 59,500 | ||||||||||
February 1, 2014 February 28, 2014 |
0 | $ | 00.00 | 0 | $ | 59,500 | ||||||||||
March 1, 2014 March 31, 2014 |
0 | $ | 00.00 | 0 | $ | 59,500 | ||||||||||
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0 | 0 | |||||||||||||||
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On October 31, 2013, we announced that on October 30, 2013 our Board approved an equity repurchase program authorizing the repurchase of up to $125.0 million of either our common stock or vested in-the-money employee stock options, or a combination thereof. We have used and intend to continue to use cash on hand to fund the equity repurchase program. The equity repurchase program does not obligate us to repurchase any particular amount of common stock or vested in-the-money employee stock options, and it could be modified, suspended or discontinued at any time. The timing and amount of repurchases are determined by our management based on a variety of factors such as the market price of our common stock, our corporate requirements, and overall market conditions. Purchases of our common stock may be made in open market transactions effected through a broker-dealer at prevailing market prices, in block trades, or in privately negotiated transactions. We may also repurchase shares of our common stock pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Exchange Act, which would permit shares of our common stock to be repurchased when we might otherwise be precluded from doing so by law. Repurchases of vested in-the-money employee stock options were made through transactions between us and our employees (other than our executive officers, who were not eligible to participate in the program), and this aspect of the equity repurchase program expired in November 2013. The equity repurchase program for common stock does not have an end date.
The exhibits in the accompanying Exhibit Index following the signature page are filed or furnished as a part of this report and are incorporated herein by reference.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Durham, State of North Carolina, on May 1, 2014.
QUINTILES TRANSNATIONAL HOLDINGS INC. |
/s/ Kevin K. Gordon |
Kevin K. Gordon Executive Vice President and Chief Financial Officer (On behalf of the Registrant and as Principal Financial Officer) |
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Incorporated by Reference | ||||||||||||
Exhibit |
Exhibit Description |
Filed Herewith |
Form |
File No. |
Exhibit |
Filing Date | ||||||
10.1 | General Release and Severance Agreement, dated January 29, 2014, between John D. Ratliff and Quintiles Transnational Corp. | 10-K/A |
001-35907 | 10.64 | February 21, 2014 | |||||||
10.2 | Form of Award Agreement Awarding Incentive Stock Options to Employees under the Quintiles Transnational Holdings Inc. 2013 Stock Incentive Plan. | X | ||||||||||
31.1 | Certification of Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||
31.2 | Certification of Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||
32.1 | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||
32.2 | Certification of Executive Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||
101* | Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Consolidated Statements of Income, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements | X |
| Indicates management contract or compensatory plan or arrangement. |
* | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
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Exhibit 10.2
QUINTILES TRANSNATIONAL HOLDINGS INC.
2013 STOCK INCENTIVE PLAN
AWARD AGREEMENT
(Awarding Incentive Stock Option)
THIS AWARD AGREEMENT (this Agreement) is made by and between Quintiles Transnational Holdings Inc., a North Carolina corporation (the Company), and [Insert Name of Grantee] (the Optionee) pursuant to the provisions of the Quintiles Transnational Holdings Inc. 2013 Stock Incentive Plan (the Plan), which is incorporated herein by reference. Capitalized terms not defined in this Agreement shall have the meanings given to them in the Plan.
WITNESSETH:
WHEREAS, the Optionee is providing, or has agreed to provide, services to the Company, or Affiliate or a Subsidiary of the Company, as an Employee; and
WHEREAS, the Company considers it desirable and in its best interests that the Optionee be given a personal stake in the Companys growth, development and financial success through the grant of an option to purchase shares of the $.01 par value common stock of the Company (the Shares).
NOW, THEREFORE, in consideration of the premises and the mutual agreements set forth herein, the parties agree as follows:
1. Grant of Option. Effective as of [Insert Grant Date] (the Date of Grant), the Company hereby grants to the Optionee, an option (the Option) to purchase [Insert Number of Shares] Shares at the Option Price per Share of [Insert Option Price] (the Option Price), subject to the terms and conditions of the Plan and this Agreement. The future value of such Shares is unknown and cannot be predicted with certainty. If such Shares do not increase in value, the Option will have no value. The Option is intended to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code. To the extent that the aggregate Fair Market Value (determined as of the Grant Date) of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year exceeds $100,000, the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonqualified Stock Options.
2. Term of Option. Subject to earlier termination under Section 4 hereof, the term of the Option shall be ten (10) years (the Term).
3. Vesting Schedule. The Option shall vest and become exercisable as to [Insert Vesting Schedule].
In no event will any portion of the Option that is not vested and exercisable at the time of the termination of the Optionees service relationship become vested and exercisable following such termination. Further, notwithstanding any provision of the Plan or this Agreement to the contrary, in no event will any portion of the Option that is not vested and exercisable immediately prior to the time of a Sale of the Company become vested and exercisable because of such event.
4. Termination of Option. Except as otherwise provided herein, the Option shall terminate on the earliest to occur of the following:
(a) | The expiration of the Term of the Option. |
(b) | Three months after termination of the Optionees service relationship for any reason other than one specified in (c) or (d) below. |
(c) | The 366th day after termination of the Optionees service relationship as a result of the Optionees death or disability (within the meaning of Section 22(e)(3) of the Code). |
(d) | Termination of the Optionees employment relationship by the Company for Cause, or of the Optionees service relationship by the Company for reasons that would constitute Cause if the Optionee were an employee. |
5. Exercise of Option. The vested portion of the Option may be exercised in whole or in part by delivery of an exercise notice in the form attached as Exhibit A (the Exercise Notice) which shall state the election to exercise the Option and set forth the number of Shares with respect to which the Option is being exercised. The Exercise Notice shall be accompanied by payment of an amount equal to the aggregate Option Price as to all exercised Shares. Payment of such amount shall be by any of the following methods, or combination thereof, at the election of the Optionee: (a) in cash or its equivalent; (b) by tendering (either by actual delivery or attestation) previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the Option Price; (c) by a cashless (broker-assisted) exercise; or (d) any other method approved or accepted by the Committee in its sole discretion. The Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by the aggregate Option Price.
In connection with such exercise, the Company shall have the right to require that the Optionee make such provision, or furnish the Company such authorization, as may be necessary or desirable so that the Company may satisfy any obligation it has under applicable income tax laws to withhold for income or other taxes due upon or incident to such exercise. The Committee may, in its discretion, permit such withholding obligation to be satisfied through the withholding of Shares that would otherwise be delivered upon exercise of the Option.
6. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or the laws of descent and distribution and, during the Optionees lifetime, may only be exercised by the Optionee.
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7. Restrictions on Shares. This Agreement shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or stock exchange as may be required. The Optionee agrees to take all steps the Committee determines are necessary to comply with all applicable provisions of federal and state securities law in exercising his or her rights under this Agreement. The Committee may impose such restrictions on any Shares acquired pursuant to the exercise of this Option as it deems advisable, including, without limitation, minimum holding period requirements, restrictions under applicable federal securities laws, under the requirements of any stock exchange or market upon which such Shares are then listed and/or traded, or under any blue sky or state securities laws as may be applicable to such Shares.
8. Forfeiture. Where an Optionee engages in certain competitive activity or is terminated by the Company for Cause, his or her Option and Shares are subject to forfeiture conditions under Section 11.3 of the Plan. Upon the occurrence of any of the events set forth in Section 11.3 of the Plan, in addition to the remedies provided in Section 11.3, the Company shall be entitled to issue a stop transfer order and other documents implementing the forfeiture to its transfer agent, the depository or any of its nominees, and any other person with respect to this Option and the Shares.
9. Successors and Assigns. The Company may assign any of its rights under this Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, the terms and conditions of the Plan and this Agreement shall be binding upon the Optionee and his or her heirs, executors, administrators, successors and assigns.
10. Interpretation. Any dispute regarding the interpretation of this Agreement shall be submitted by the Optionee or by the Company forthwith to the Committee, which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Committee shall be final and binding on all parties.
11. Tax Consequences. The exercise of this Option and the subsequent disposition of the Shares may cause the Optionee to be subject to federal, state and/or foreign taxation. The Optionee should consult a tax advisor before exercising this Option or disposing of the Shares purchased hereunder.
12. Qualification as an Incentive Stock Option and Notification of Disqualifying Dispositions. In order for the Option to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code, the Optionee must hold the Shares issued pursuant to the exercise of the Option for the longer of two years after the Date of Grant and one year after such exercise (the Holding Period). If the Optionee disposes of any of the Shares issued pursuant to the exercise of the Option before the end of the Holding Period, the Optionee shall notify the Company in writing within ten (10) calendar days thereof of the date of such disposition, the number of Shares disposed of, and the consideration received.
13. Acknowledgement. The Optionee acknowledges and agrees: (i) that the Plan is discretionary in nature and may be suspended or terminated by the Company at any time; (ii) that the grant of the
3
Option does not create any contractual or other right to receive future grants of options or any right to continue an employment or other relationship with the Company (for the vesting period or otherwise); (iii) that the Optionee remains subject to discharge from such relationship to the same extent as if the Option had not been granted; (iv) that all determinations with respect to any such future grants, including, but not limited to, when and on what terms they shall be made, will be at the sole discretion of the Committee; (v) that participation in the Plan is voluntary; (vi) that the value of the Option is an extraordinary item of compensation that is outside the scope of the Optionees employment contract if any; and (vii) that the Option is not part of normal or expected compensation for purposes of calculating any severance, resignation, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar benefits.
14. Employee Data Privacy. As a condition of the grant of this Option, the Optionee consents to the collection, use and transfer of personal data as described in this paragraph. The Optionee understands that the Company and its Affiliates hold certain personal information about the Optionee, including but not limited to the Optionees name, home address and telephone number, date of birth, social security number, salary, nationality, job title, shares of common stock or directorships held in the Company, details of all Options or other entitlement to shares of common stock awarded, cancelled, exercised, vested, unvested or outstanding in the Optionees favor for the purpose of managing and administering the Plan (Data). The Optionee further understands that the Company and/or its Affiliates will transfer Data amongst themselves as necessary for the purposes of implementation, administration and management of the Optionees participation in the Plan, and that the Company and/or any of its Affiliates may each further transfer Data to any third parties assisting the Company in the implementation, administration and management of the Plans. The Optionee understands that these recipients may be located in the Optionees country of residence or elsewhere. The Optionee authorizes them to receive, possess, use, retain and transfer Data in electronic or other form, for the purposes of implementing, administering and managing the Optionees participation in the Plan, including any requisite transfer of such Data as may be required for the administration of the Plan and/or the subsequent holding shares of common stock on the Optionees behalf to a broker or other third party with whom the shares acquired on exercise may be deposited. The Optionee understands that the Optionee may, at any time, view the Data, require any necessary amendments to it or withdraw the consent herein in writing by contacting the local human resources representative.
15. Confidentiality. The Optionee agrees not to disclose the terms of this offer to anyone other than the members of the Optionees immediately family or the Optionees counsel or financial advisors and agrees to advise such persons of the confidential nature of this offer.
16. Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan and this Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionees interest except by means of a writing signed by the Company and Optionee. This Agreement is governed by the internal substantive laws but not the choice of law rules of North Carolina.
4
OPTIONEE | QUINTILES TRANSNATIONAL HOLDINGS INC. | |||||
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By: |
| ||||
Signature | Name: |
| ||||
Title: |
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5
Exhibit A
FORM OF
EXERCISE NOTICE FOR 2013 STOCK INCENTIVE PLAN1
Quintiles Transnational Holdings Inc.
4820 Emperor Blvd
Durham, NC 27703
Attention: Stock Plan Administrator
1. Exercise of Option. Effective as of today, , 20 , the undersigned (the Optionee) hereby elects to exercise the Optionees option (the Option) to purchase shares of the Common Stock (the Shares) of Quintiles Transnational Holdings Inc. (the Company) under and pursuant to the Quintiles Transnational Holdings Inc. 2013 Stock Incentive Plan (the Plan) and the Award Agreement with a grant date of , 20 (the Award). The Grant Number of the Option is , and the per share exercise price is $ .
2. Delivery of Payment. The Optionee herewith delivers to the Company the aggregate exercise price of the Option, as set forth in the Award, by means of (check one):
¨ | a check in U.S. dollars made payable to Quintiles Transnational Holdings Inc. or bank transfer; |
or
¨ | (i) a share certificate (or certificates) representing previously acquired shares and (ii) a check in U.S. Dollars made payable to Quintiles Transnational Holdings Inc. or bank transfer that, in combination, have an aggregate value (the Fair Market Value of the shares delivered plus the check or bank transfer amount) equal to the aggregate exercise price of the Option. |
3. Representations of Optionee. The Optionee acknowledges that the Optionee has received, read and understood the Plan and the Award and agrees to abide by and be bound by their terms and conditions. In making the decision to exercise the option(s) the Optionee has relied upon his or her own independent investigations or those made by his or her representatives, if any (including professional, financial, tax, legal and other advisors). The Optionee (and his or her representatives, if any) has had an opportunity to review information with respect to the Company, desires no further additional information concerning the Company or its operations, and deems such information reviewed adequate to evaluate the merits and risks of the Optionees investment in the Company.
1 | The actual form of exercise notice used by Optionee to exercise the Options covered by this Award will vary from this form, depending upon various circumstances relating to the decision to exercise. Optionee should contact the Plan Administrator through Global Incentives if he/she desires to exercise the Option. |
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The Optionee acknowledges that the Company is relying upon each of the above representations in connection with the exercise of the option and the issuance of the underlying Shares.
4. Rights as Shareholder. Until the issuance of the Shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Shares, notwithstanding the exercise of the Option. The Shares shall be issued to the Optionee as soon as practicable after the Option is exercised. No adjustment shall be made for a dividend or other right for which the record date is prior to the date of issuance except as provided in the Plan.
5. Tax Consultation and Withholding. The Optionee understands that the Optionee may suffer adverse tax consequences as a result of the Optionees purchase or disposition of the Shares. The Optionee represents that the Optionee has consulted with any tax consultants the Optionee deems advisable in connection with the purchase or disposition of the Shares and that the Optionee is not relying on the Company for any tax advice. The Optionee further understands that the Optionees purchase of the Shares may give rise to an obligation on the part of the Company to withhold for income or other taxes due and agrees to make a payment to the Company in the amount necessary to allow the Company to satisfy any withholding obligations.
6. Restrictive Legends. The Optionee understands and agrees that the Company shall cause the legends set forth below or legends substantially equivalent thereto, to be placed upon any certificate(s) evidencing ownership of the Shares together with any other legends that may be required by the Company or by state or federal securities laws:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE QUINTILES TRANSNATIONAL HOLDINGS INC. 2013 STOCK INCENTIVE PLAN, AS SUCH PLAN MAY BE ALTERED, AMENDED, RESTATED OR MODIFIED FROM TIME TO TIME, AND ANY TRANSFEREE OF THESE SECURITIES SHALL BE SUBJECT TO THE TERMS OF SUCH PLAN. COPIES OF THE FOREGOING PLAN ARE MAINTAINED WITH THE CORPORATE RECORDS OF THE ISSUER AND ARE AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICES OF THE ISSUER.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO AN AWARD AGREEMENT BETWEEN THE ISSUER AND THE HOLDER, AS SUCH AGREEMENT MAY BE AMENDED, RESTATED OR MODIFIED FROM TIME TO TIME, AND ANY TRANSFEREE OF THESE SECURITIES SHALL BE SUBJECT TO THE TERMS OF SUCH AGREEMENT. COPIES OF THE FOREGOING AGREEMENT ARE MAINTAINED WITH THE CORPORATE RECORDS OF THE ISSUER AND ARE AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICES OF THE ISSUER.
7. Governing Law. This Agreement shall be governed by the internal substantive laws but not the choice of law rules of North Carolina.
8. Entire Agreement. The Plan and Award are incorporated herein by reference. This Agreement, the Plan, and the Award constitute the entire agreement of the parties with respect to
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the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionees interest except by means of a writing signed by the Company and the Optionee.
Submitted by: | Accepted by: | |||||||
OPTIONEE | QUINTILES TRANSNATIONAL HOLDINGS INC. | |||||||
By: |
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Signature |
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Name: |
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Name: |
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Title: |
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Date: |
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Exhibit 31.1
CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Thomas H. Pike, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Quintiles Transnational Holdings Inc. (the registrant);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 1, 2014
/s/ Thomas H. Pike |
Thomas H. Pike |
Chief Executive Officer |
(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Kevin K. Gordon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Quintiles Transnational Holdings Inc. (the registrant);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 1, 2014
/s/ Kevin K. Gordon |
Kevin K. Gordon |
Executive Vice President and Chief Financial Officer |
(Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas H. Pike, Chief Executive Officer of Quintiles Transnational Holdings Inc. (the Company), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) | the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2014 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented therein. |
Date: May 1, 2014
/s/ Thomas H. Pike |
Thomas H. Pike |
Chief Executive Officer |
(Principal Executive Officer) |
This certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Report, irrespective of any general incorporation language contained in such filing.
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
I, Kevin K. Gordon, Executive Vice President and Chief Financial Officer of Quintiles Transnational Holdings Inc. (the Company), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) | the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2014 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented therein. |
Date: May 1, 2014
/s/ Kevin K. Gordon |
Kevin K. Gordon |
Executive Vice President and Chief Financial Officer |
(Principal Financial Officer) |
This certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Report, irrespective of any general incorporation language contained in such filing.
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Goodwill - Summary of Goodwill by Segment (Detail) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended |
---|---|
Mar. 31, 2014
|
|
Goodwill [Line Items] | |
Beginning balance | $ 409,626 |
Impact of foreign currency fluctuations and other | (107) |
Ending balance | 409,519 |
Product Development [Member]
|
|
Goodwill [Line Items] | |
Beginning balance | 351,144 |
Impact of foreign currency fluctuations and other | (652) |
Ending balance | 350,492 |
Integrated Healthcare Services [Member]
|
|
Goodwill [Line Items] | |
Beginning balance | 58,482 |
Impact of foreign currency fluctuations and other | 545 |
Ending balance | $ 59,027 |
Income Taxes - Additional Information (Detail)
|
3 Months Ended | |
---|---|---|
Mar. 31, 2014
|
Mar. 31, 2013
|
|
Income Tax Disclosure [Abstract] | ||
Effective income tax rate | 30.50% | 39.20% |
Noncontrolling Interests - Summary of Noncontrolling Interests (Detail) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | |
---|---|---|
Mar. 31, 2014
|
Mar. 31, 2013
|
|
Noncontrolling Interest [Abstract] | ||
Noncontrolling interest, Beginning Balance | $ (72) | $ 479 |
Comprehensive income (loss): | ||
Net income (loss) | 31 | (153) |
Foreign currency adjustments, net of income tax | (10) | 2 |
Noncontrolling interest, Ending Balance | $ (51) | $ 328 |
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