10-Q 1 d783344d10q.htm 10-Q 10-Q
Table of Contents

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 September 30, 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

(Registrant’s 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 issuer’s classes of Common Stock, as of the latest practicable date.

 

Class

 

Number of Shares Outstanding

Common Stock $0.01 par value   127,799,825 shares outstanding as of October 23, 2014

 

 


Table of Contents

QUINTILES TRANSNATIONAL HOLDINGS INC.

FORM 10-Q

TABLE OF CONTENTS

 

              Page  
PART I—FINANCIAL INFORMATION         3   

Item 1.

  Financial Statements (unaudited)         3   
  Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013         3   
  Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013         4   
  Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013         5   
  Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013         6   
 

Notes to Condensed Consolidated Financial Statements

        7   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations         16   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk         27   

Item 4.

  Controls and Procedures         27   
PART II—OTHER INFORMATION         27   

Item 1.

  Legal Proceedings         27   

Item 1A.

  Risk Factors         27   

Item 2.

  Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities         27   

Item 6.

  Exhibits         28   

SIGNATURES

        29   

EXHIBIT INDEX

        30   

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2014     2013     2014     2013  
    (in thousands, except per share data)  

Service revenues

    $ 1,061,013          $ 932,727          $ 3,101,777          $ 2,804,400     

Reimbursed expenses

    339,021          263,112          947,133          915,960     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

      1,400,034            1,195,839            4,048,910            3,720,360     

  Costs of revenue, service costs

    691,051          600,694          2,009,287          1,829,469     

  Costs of revenue, reimbursed expenses

    339,021          263,112          947,133          915,960     

  Selling, general and administrative

    219,027          199,573          657,283          627,713     

  Restructuring costs

    1,793          7,201          3,749          11,897     
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    149,142          125,259          431,458          335,321     

  Interest income

    (602)         (1,119)         (2,851)         (2,356)    

  Interest expense

    25,050          28,756          74,552          96,682     

  Loss on extinguishment of debt

    —          —          —          16,543     

  Other (income) expense, net

    (7,776)         3,224          (9,564)         1,378     
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes and equity in earnings (losses) of unconsolidated affiliates

    132,470          94,398          369,321          223,074     

Income tax expense

    41,260          27,459          111,049          68,407     
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before equity in earnings (losses) of unconsolidated affiliates

    91,210          66,939          258,272          154,667     

Equity in earnings (losses) of unconsolidated affiliates

    1,523          (355)         9,785          (1,574)    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    92,733          66,584          268,057          153,093     

Net (income) loss attributable to noncontrolling interests

    (79)         185          (100)         502     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Quintiles Transnational Holdings Inc.

    $ 92,654          $ 66,769        $ 267,957        $ 153,595     
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to common shareholders:

       

Basic

    $ 0.73          $ 0.52          $ 2.08          $ 1.25     

Diluted

    $ 0.71          $ 0.50          $ 2.03          $ 1.22     

Weighted average common shares outstanding:

       

Basic

    127,462          128,923          128,780          122,467     

Diluted

    130,626          133,267          131,903          126,195     

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3


Table of Contents

QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
             2014                      2013                      2014                      2013          
     (in thousands)  

Net income

     $ 92,733           $ 66,584           $ 268,057           $ 153,093     

Unrealized (losses) gains on marketable securities, net of income taxes of ($4), $821, ($294) and $847

     (6)          1,315           (469)          1,357    

Unrealized (losses) gains on derivative instruments, net of income taxes of ($882), $159, ($990) and ($815)

     (3,561)          2,126           (2,311)          (574)    

Foreign currency translation, net of income taxes of ($1,408), ($2,048), ($1,408) and ($2,378)

     (27,280)          8,622           (23,116)          (19,732)    

Reclassification adjustments:

           

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 $1,086, $1,285, $2,616 and $3,973

     1,449           2,084           1,945           6,902     

Amortization of prior service costs and losses included in net income, net of income taxes of $70, $95, $214 and $290

     117           157           358           478     
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

       63,452             80,888             241,387             141,524     
Comprehensive (income) loss attributable to noncontrolling interests      (87)          175           (99)          484     
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income attributable to Quintiles Transnational Holdings Inc.

     $ 63,365           $ 81,063           $ 241,288           $ 142,008     
  

 

 

    

 

 

    

 

 

    

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4


Table of Contents

QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

       September 30,  
2014
       December 31,  
2013
 
     (unaudited)      (Note 1)  
     (in thousands, except per share data)  
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 645,034         $ 778,143     

Restricted cash

     3,519           2,712     

Trade accounts receivable and unbilled services, net

     1,032,553           924,205     

Prepaid expenses

     51,534           42,801     

Deferred income taxes

     94,175           92,115     

Income taxes receivable

     17,394           16,171     

Other current assets and receivables

     94,394           89,541     
  

 

 

    

 

 

 

Total current assets

     1,938,603           1,945,688     
  

 

 

    

 

 

 

Property and equipment, net

     190,863           199,578     

Investments in debt, equity and other securities

     33,723           40,349     

Investments in and advances to unconsolidated affiliates

     34,737           22,927     

Goodwill

     468,620           409,626     

Other identifiable intangibles, net

     288,266           298,054     

Deferred income taxes

     31,278           32,864     

Deposits and other assets

     120,625           117,711     
  

 

 

    

 

 

 

Total assets

   $ 3,106,715         $ 3,066,797     
  

 

 

    

 

 

 
LIABILITIES AND SHAREHOLDERS’ DEFICIT      

Current liabilities:

     

Accounts payable and accrued expenses

     $ 830,388           $ 861,805     

Unearned income

     526,000           538,585     

Income taxes payable

     19,219           35,778     

Current portion of long-term debt and obligations held under capital leases

     20,681           10,433     

Other current liabilities

     30,492           35,646     
  

 

 

    

 

 

 

Total current liabilities

     1,426,780           1,482,247     

  Long-term debt and obligations held under capital leases, less current portion

     2,022,595           2,035,586     

  Deferred income taxes

     25,578           37,541     

  Other liabilities

     167,994           178,908     
  

 

 

    

 

 

 

Total liabilities

     3,642,947           3,734,282     
  

 

 

    

 

 

 

Commitments and contingencies

     

Shareholders’ deficit:

     

Common stock and additional paid-in capital, 300,000 shares authorized, $0.01 par value, 127,696 and 129,652 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively

     368,010           478,144     

Accumulated deficit

     (877,224)          (1,145,181)    

Accumulated other comprehensive loss

     (27,045)          (376)    
  

 

 

    

 

 

 

Deficit attributable to Quintiles Transnational Holdings Inc.’s shareholders

     (536,259)          (667,413)    

Deficit attributable to noncontrolling interests

     27           (72)    
  

 

 

    

 

 

 

Total shareholders’ deficit

     (536,232)          (667,485)    
  

 

 

    

 

 

 

Total liabilities and shareholders’ deficit

   $ 3,106,715         $ 3,066,797     
  

 

 

    

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5


Table of Contents

QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

     Nine Months Ended September 30,  
     2014      2013  
     (in thousands)  

Operating activities:

     

  Net income

   $ 268,057         $ 153,093     

  Adjustments to reconcile net income to cash provided by operating activities:

     

Depreciation and amortization

     89,113           76,950     

Amortization of debt issuance costs and discount

     4,787           16,944     

Share-based compensation

     22,388           16,960     

(Earnings) loss from unconsolidated affiliates

     (9,763)          1,454     

Gain on investments, net

     (4,806)          (62)    

Benefit from deferred income taxes

     (11,529)          (15,883)    

Excess income tax benefits from share-based award activities

     (12,802)          (145)    

Changes in operating assets and liabilities:

     

Change in accounts receivable, unbilled services and unearned income

     (118,721)          (74,533)    

Change in other operating assets and liabilities

     (50,927)          3,133     
  

 

 

    

 

 

 

Net cash provided by operating activities

     175,797           177,911    

Investing activities:

     

Acquisition of property, equipment and software

     (57,782)          (73,940)    

Acquisition of businesses, net of cash acquired

     (92,201)          (144,970)    

Proceeds from sale of equity securities

     5,861           60     

Investments in and advances to unconsolidated affiliates, net of payments received

     (2,137)          (5,944)    

Other

     332           802     
  

 

 

    

 

 

 

Net cash used in investing activities

     (145,927)          (223,992)    

Financing activities:

     

Repayment of debt and principal payments on capital lease obligations

     (6,729)          (385,807)    

Issuance of common stock, net of costs

     (105)          489,560     

Stock issued under employee stock purchase and option plans

     23,201           364     

Repurchase of common stock

     (165,131)          —     

Payroll taxes remitted on repurchase of stock options

     (8,415)          —     

Excess income tax benefits from share-based award activities

     12,802           145     
  

 

 

    

 

 

 

Net cash (used in) provided by financing activities

     (144,377)          104,262     

Effect of foreign currency exchange rate changes on cash

     (18,602)          (16,199)    
  

 

 

    

 

 

 

(Decrease) increase in cash and cash equivalents

     (133,109)          41,982     

Cash and cash equivalents at beginning of period

     778,143           567,728     
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 645,034         $ 609,710     
  

 

 

    

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6


Table of Contents

QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Basis of Presentation

Unaudited Interim Financial Information

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 Company’s financial condition and results of operations have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 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 immaterial 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 or shareholders’ deficit.

Recently Issued Accounting Standards

In May 2014, the United States Financial Accounting Standards Board and the International Accounting Standards Board issued a converged standard on the recognition of revenue from contracts with customers. The objective of the new standard is to establish a single comprehensive revenue recognition model that is designed to create greater comparability of financial statements across industries and jurisdictions. Under the new standard, companies will recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also will require expanded disclosures on revenue recognition and changes in assets and liabilities that result from contracts with customers. The Company will adopt the new standard on January 1, 2017, as required. Early adoption is not permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

2. Employee Stock Compensation

The Company granted the following share-based awards:

 

     Three Months
Ended
September 30,
     Nine Months Ended September 30,  
     2013      2014      2013  

Stock options

     100,000         1,359,600         2,200,500   

Stock appreciation rights

     10,000         176,800         162,600   

Restricted stock units

     —           36,500         —     

No share-based awards were granted during the three months ended September 30, 2014.

The Company had the following share-based awards outstanding:

 

     September 30,
2014
     December 31,
2013
 

Stock options

     9,811,235         10,100,160   

Stock appreciation rights

     411,363         258,025   

Restricted stock units

     93,667         57,167   

 

7


Table of Contents

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
September 30,
  Nine Months Ended September 30,
     2013   2014   2013

Expected volatility

   22 –  44%   31 –  43%   18 –  47%

Weighted average expected volatility

   33%   37%   40%

Expected dividends

   0.0%   0.0%   0.0  –  5.45%

Expected term (in years)

   0.25 –  6.4   3.7 – 6.7   0.25  –  6.4

Risk-free interest rate

   0.04 – 2.08%   0.99 – 2.21%   0.04 –  2.08%

In November 2013, the Company’s Board of Directors (the “Board”) approved an Employee Stock Purchase Plan (“ESPP”) which was approved by the Company’s shareholders in May 2014. The ESPP 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 Company’s common stock on the last day of the offering period. Offering periods under the ESPP are six months in duration and begin on each March 1 and September 1. The first offering period for the ESPP began March 1, 2014. Participating employees will purchase shares 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 (“NYSE”). During the three and nine months ended September 30, 2014, the Company issued 46,032 shares of common stock for purchases under the ESPP.

The Company recognized share-based compensation expense of $6.8 million and $5.9 million during the three months ended September 30, 2014 and 2013, respectively, and $22.4 million and $17.0 million during the nine months ended September 30, 2014 and 2013, respectively.

3. Concentration of Credit Risk

No customer accounted for 10% or more of consolidated service revenues for the three and nine months ended September 30, 2014 or 2013.

4. Accounts Receivable and Unbilled Services

Accounts receivable and unbilled services consist of the following (in thousands):

 

     September 30,
2014
    December 31,
2013
 

Trade:

  

Billed

   $ 474,717      $ 408,959   

Unbilled services

     559,848        516,942   
  

 

 

   

 

 

 
     1,034,565        925,901   

Allowance for doubtful accounts

     (2,012     (1,696
  

 

 

   

 

 

 
   $ 1,032,553      $ 924,205   
  

 

 

   

 

 

 

5. Goodwill

The following is a summary of goodwill by segment for the nine months ended September 30, 2014 (in thousands):

 

     Product
Development
     Integrated
Healthcare
Services
     Consolidated  

Balance as of December 31, 2013

   $ 351,144        $ 58,482        $ 409,626    

Acquisition

     —           62,778          62,778    

Impact of foreign currency fluctuations and other

     (2,623)         (1,161)         (3,784)   
  

 

 

    

 

 

    

 

 

 

Balance as of September 30, 2014

   $ 348,521        $ 120,099        $ 468,620    
  

 

 

    

 

 

    

 

 

 

6. Derivatives

As of September 30, 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.

 

8


Table of Contents

As of September 30, 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 and nine months ended September 30, 2014 or 2013.

As of September 30, 2014, the Company had 12 open foreign exchange forward contracts to hedge certain forecasted foreign currency cash flow transactions occurring in 2014 and the first six months of 2015 with notional amounts totaling $75.6 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 remainder of 2014 and the first six months of 2015, 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 income (loss) (“AOCI”) component of shareholders’ deficit. These hedges are highly effective. Upon expiration of the hedge instruments in 2014 and the first six months of 2015, the Company will reclassify the unrealized holding gains and losses on the derivative instruments included in AOCI into earnings.

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 Company’s 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 Company’s interest payments, and these hedges are highly effective. As such, changes in the fair value of these derivative instruments are recorded as unrealized gains (losses) on derivatives included in the AOCI 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 2.57% plus the applicable margin on the affected borrowings ($910.0 million or 44.3% of the Company’s variable rate debt at September 30, 2014). The Company expects that $12.2 million of unrealized losses will be reclassified out of AOCI and will form the interest rate swap component of the 2.57% fixed rate of interest to be incurred over the next 12 months as the underlying net payments are settled.

The fair values of the Company’s 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    September 30,
2014
     December 31,
2013
 

Foreign exchange forward contracts

   Other current assets        $ —               $ 3,950       

Foreign exchange forward contracts

   Other current liabilities        $ 2,410               $ —       

Interest rate swaps

   Other current liabilities        $     17,185               $       24,805       

The fair values of the Company’s 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    September 30,
2014
   December 31,
2013

Warrants

   Deposits and other assets        $              13            $              211    

The effect of the Company’s cash flow hedging instruments on other comprehensive income (loss) is summarized in the following table (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2014     2013      2014     2013  

Foreign exchange forward contracts

       $ (5,216       $ 4,273           $ (6,360       $ 2,648   

Interest rate swaps

     3,308        1,381         7,620        6,838   
  

 

 

   

 

 

    

 

 

   

 

 

 

   Total

       $ (1,908       $ 5,654           $ 1,260          $ 9,486   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

9


Table of Contents

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.

Recurring Fair Value Measurements

The following table summarizes the fair value of the Company’s financial assets and liabilities that are measured on a recurring basis as of September 30, 2014 (in thousands):

 

     Level 1      Level 2      Level 3      Total  

Assets:

           

Marketable equity securities

   $ 1,045         $ —         $ —         $ 1,045     

Warrants

     —           —           13           13     
  

 

 

    

 

 

    

 

 

    

 

 

 

  Total

   $ 1,045         $ —         $ 13         $ 1,058     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Foreign exchange forward contracts

   $ —         $ 2,410         $ —         $ 2,410     

Interest rate swaps

     —           17,185           —           17,185     

Contingent consideration

     —           —           4,443           4,443     
  

 

 

    

 

 

    

 

 

    

 

 

 

  Total

   $ —         $ 19,595         $ 4,443         $ 24,038     
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

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.

Warrants — The Company values warrants utilizing the Black-Scholes-Merton model.

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 nine months ended September 30 (in thousands):

 

     Warrants–Deposits
and Other Assets
     Contingent Consideration –
Accounts Payable and Accrued
Expenses and Other Liabilities
 
     2014      2013      2014      2013  

Balance as of January 1

   $     211         $ 29         $ 13,014         $ 3,521     

Initial estimate of contingent consideration

     —           —           —           14,300     

Revaluations included in earnings

     (198)          62           (8,571)          (1,352)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of September 30

   $ 13         $     91         $ 4,443         $ 16,469     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

10


Table of Contents

The revaluations for the warrants and the contingent consideration are recognized in other (income) expense, 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, and goodwill and identifiable intangible assets which are tested for impairment annually and when a triggering event occurs.

As of September 30, 2014, assets carried on the balance sheet and not remeasured to fair value on a recurring basis totaling approximately $824.3 million were identified as Level 3. These assets are comprised of cost and equity method investments of $67.4 million, goodwill of $468.6 million and other identifiable intangibles, net of $288.3 million.

The Company has unfunded cash commitments totaling approximately $27.4 million related to its cost and equity method investments as of September 30, 2014.

Goodwill — Goodwill represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets resulting from business combinations. The Company performs a qualitative analysis to determine whether it is more likely than not that the estimated fair value of a reporting unit is less than its book value. This includes a qualitative analysis of macroeconomic conditions, industry and market considerations, internal cost factors, financial performance, fair value history and other company specific events. If this qualitative analysis indicates that it is more likely than not that the estimated fair value is less than the book value for the respective reporting unit, the Company applies a two-step impairment test in which the Company determines whether the estimated fair value of the reporting unit is in excess of its carrying value. If the carrying value of the net assets assigned to the reporting unit exceeds the estimated fair value of the reporting unit, the Company performs the second step of the impairment test to determine the implied estimated fair value of the reporting unit’s goodwill. The Company determines the implied estimated fair value of goodwill by determining the present value of the estimated future cash flows for each reporting unit and comparing the reporting unit’s risk profile and growth prospects to selected, reasonably similar publicly traded companies. No indication of impairment was identified during the Company’s annual review.

Indefinite-lived Intangible Asset — The Company performs a qualitative analysis to determine whether it is more likely than not that the estimated fair value of the indefinite-lived intangible asset is less than its carrying value. If this qualitative analysis indicates that it is more likely than not that the estimated fair value is less than the carrying value of the indefinite-lived intangible asset, the Company determines the estimated fair value of the indefinite-lived intangible asset (trade name) by determining the present value of the estimated royalty payments on an after-tax basis that it would be required to pay the owner for the right to use such trade name. If the carrying amount exceeds the estimated fair value, an impairment loss is recognized in an amount equal to the excess. No indication of impairment was identified during the Company’s annual review.

Other

The estimated fair value of the Company’s long-term debt, which is primarily based on rates in which the debt is traded among banks, was approximately $2.0 billion and $2.1 billion at September 30, 2014 and December 31, 2013, respectively.

8. Shareholders’ Deficit

Equity Repurchase Program

On October 30, 2013, the Board approved an equity repurchase program (the “Repurchase Program”) authorizing the repurchase of up to $125.0 million of either the Company’s common stock or vested in-the-money employee stock options, or a combination thereof. The Company repurchased 300 shares of its common stock for $47.51 per share for an aggregate purchase price of approximately $14,000 during the nine months ended September 30, 2014 under the Repurchase Program. As of September 30, 2014, the Company has remaining authorization under the Repurchase Program to repurchase up to $59.5 million of its common stock. The Repurchase Program for vested in-the-money employee stock options expired in November 2013. The Repurchase Program for common stock does not have an end date.

 

11


Table of Contents

Private Share Repurchase

On May 28, 2014, the Company completed the repurchase of 3,287,209 shares of its common stock for $50.23 per share from TPG Quintiles Holdco, L.P., one of its existing shareholders, in a private transaction for an aggregate purchase price of approximately $165.1 million. The repurchase price per share of common stock was equal to 98% of the closing market price of the Company’s common stock on the NYSE on May 27, 2014 (which was $51.26). The repurchase of shares from its existing shareholder was authorized in compliance with the Company’s related party transactions approval policy. The Company funded this private repurchase transaction with cash on hand. This private repurchase transaction was separate from and in addition to the Repurchase Program.

9. Business Combinations

On July 1, 2014, the Company completed the acquisition of Encore Health Resources, LLC (“Encore”) effected through a merger for approximately $91.5 million in cash (net of approximately $2.2 million of acquired cash). Encore has operations in the United States and its business is primarily focused on providing electronic health records (“EHR”) implementation and advisory services to healthcare providers. As part of its Integrated Healthcare Services segment, the Company expects that Encore will enhance its EHR expertise.

This acquisition was a business combination and, accordingly, the assets acquired and the liabilities assumed have been recorded at their respective estimated fair values as of the acquisition date. In connection with the Encore acquisition, the Company recorded goodwill, primarily attributable to the assembled workforce of Encore and expected synergies, which was assigned to the Integrated Healthcare Services segment and is deductible for income tax purposes. The pro forma results of Encore and the acquisition-related expenses are immaterial for separate disclosure. The Company is continuing to evaluate the initial fair value measurement of assets acquired and liabilities assumed as of the acquisition date. Further adjustments may be necessary as additional information related to the fair values of assets acquired and liabilities assumed is assessed during the measurement period (up to one year from the acquisition date). The following table summarizes the preliminary fair value of the net assets acquired of Encore at the date of the acquisition (in thousands):

Assets acquired:

Cash and cash equivalents

   $ 2,223   

Accounts receivable and unbilled services

     17,714   

Other current assets

     443   

Property and equipment

     289   

Goodwill

     62,778   

Other identifiable intangibles

     14,150   

Deferred income tax asset – long-term

     396   

Liabilities assumed:

  

Accounts payable and accrued expenses

     (4,206

Other

     (31
  

 

 

 

Net assets acquired

   $ 93,756   
  

 

 

 

The identifiable definite-lived intangible assets consisted of the following:

 

Other identifiable intangibles (in thousands)       

Customer relationships

   $ 8,800   

Acquired backlog

     800   

Trade names

     1,100   

Non-compete agreements

     450   

Software

     3,000   
  

 

 

 

Total other identifiable intangibles

   $ 14,150   
  

 

 

 

Amortized over a weighted average useful life (in years)

     8   

10. Restructuring

In 2014, the Board approved restructuring plans of approximately $13 million to better align resources with the Company’s strategic direction. These actions are expected to occur throughout 2014 and are expected to result in severance for approximately 350 positions. Through September 30, 2014, the Company has recognized approximately $3.9 million and $700,000 of restructuring costs related to these plans for activities in the Product Development and Integrated Healthcare Services segments, respectively. All of the restructuring costs are related to severance costs. Restructuring costs are not allocated to the Company’s reportable segments as they are not part of the segment performance measures regularly reviewed by management.

 

12


Table of Contents

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

     3,749               3,749   

Payments

     (5,476     (119     (5,595

Foreign currency translation

     (142            (142
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ 3,407      $ 79      $ 3,486   
  

 

 

   

 

 

   

 

 

 

The Company expects the majority of the restructuring accruals at September 30, 2014 will be paid in 2014.

11. Employee Benefit Plans

Defined Benefit Plans

The following table summarizes the components of pension expense related to the Company’s defined benefit plans (in thousands):

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2014     2013     2014     2013  

Service cost

   $ 3,275      $ 2,916      $ 9,953      $ 9,050   

Interest cost

     991        912        2,981        2,770   

Expected return on plan assets

     (935     (705     (2,805     (2,083

Amortization of prior service costs

     20        83        60        255   

Amortization of actuarial losses

     167        169        512        513   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 3,518      $ 3,375      $ 10,701      $ 10,505   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other

As of September 30, 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 $7.5 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 nine months of 2014, the Company has recognized approximately $2.1 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 $2.1 million decrease from net reversals recognized for these cost reduction programs, approximately ($2.2) million, $105,000 and ($47,000) 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

     (2,111

Payments

     (4,418

Foreign currency translation

     (33
  

 

 

 

Balance at September 30, 2014

   $ 7,494   
  

 

 

 

12. Income Taxes

Due to the potential for expiration of various federal, state, and foreign statutes of limitation, the Company’s unrecognized income tax benefits may change within the next 12 months by a range of zero to $16.6 million.

 

13


Table of Contents

13. Comprehensive Income

Below is a summary of the components of AOCI (in thousands):

 

     Foreign
Currency
Translation
     Marketable
Securities
     Derivative
Instruments
     Defined
Benefit
Plans
     Income
Taxes
     AOCI  

Balance at December 31, 2013

     $ (5,829)          $ 5,708           $ (20,855)          $ (5,044)          $ 25,644           $ (376)    

Other comprehensive (loss) income before reclassifications

     (24,523)          (763)          (3,301)          —           2,692           (25,895)    

Reclassification adjustments

     —           (5,004)          4,561           572           (903)          (774)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at September 30, 2014

     $   (30,352)          $ (59)          $ (19,595)          $ (4,472)          $ 27,433           $ (27,045)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Below is a summary of the (gains) losses reclassified from AOCI into the condensed consolidated statements of income and the affected financial statement line item (in thousands):

 

Reclassification Adjustments

 

Affected Financial Statement

Line Item

   Three Months Ended September 30,      Nine Months Ended September 30,  
         2014      2013      2014      2013  

Marketable securities:

             

Marketable securities

  Other (income) expense, net      $ —           $ —           $ (5,004)          $ —     
    

 

 

    

 

 

    

 

 

    

 

 

 

Total before income taxes

       —           —           (5,004)          —     

Income tax expense

       —           —           (1,927)          —     
    

 

 

    

 

 

    

 

 

    

 

 

 

Total net of income taxes

       $ —           $ —           $ (3,077)          $ —     
    

 

 

    

 

 

    

 

 

    

 

 

 

Derivative instruments:

             

Interest rate swaps

  Interest expense      $ 3,149           $ 3,248           $ 9,344           $ 9,433     

Foreign exchange forward contracts

  Service revenues      (614)          121           (4,783)          1,442     
    

 

 

    

 

 

    

 

 

    

 

 

 

Total before income taxes

       2,535           3,369           4,561           10,875     

Income tax benefit

       1,086           1,285           2,616           3,973     
    

 

 

    

 

 

    

 

 

    

 

 

 

Total net of income taxes

       $ 1,449           $ 2,084           $ 1,945           $ 6,902     
    

 

 

    

 

 

    

 

 

    

 

 

 

Defined benefit plans:

             

Amortization of prior service costs

  See Note 11      $ 20           $ 83           $ 60           $ 255     

Amortization of actuarial losses

  See Note 11      167           169           512           513     
    

 

 

    

 

 

    

 

 

    

 

 

 

Total before income taxes

       187           252           572           768     

Income tax benefit

       70           95           214           290     
    

 

 

    

 

 

    

 

 

    

 

 

 

Total net of income taxes

       $ 117           $ 157           $ 358           $ 478     
    

 

 

    

 

 

    

 

 

    

 

 

 

14. Segments

The following table presents the Company’s 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.

 

14


Table of Contents

Certain costs are not allocated to the Company’s 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, as well as certain expenses incurred during the second quarter of 2013, including the $25.0 million fee incurred in connection with the termination of the management agreement with affiliates of certain shareholders and the $1.5 million fee paid in connection with the modification of an agreement for the business usage of an airplane owned by GF Management Company, LLC, a company owned by the Company’s Executive Chairman. The Company does not allocate restructuring or impairment charges to its segments. Information presented below is in thousands:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2014      2013      2014      2013  

Service revenues

           

Product Development

     $ 771,361           $ 714,244           $ 2,323,376           $ 2,144,721     

Integrated Healthcare Services

     289,652           218,483           778,401           659,679     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total service revenues

     1,061,013           932,727           3,101,777           2,804,400     

Costs of revenue, service costs

           

Product Development

     458,731           426,094           1,374,492           1,296,996     

Integrated Healthcare Services

     232,320           174,600           634,795           532,473     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total costs of revenue, service costs

     691,051           600,694           2,009,287           1,829,469     

Selling, general and administrative

           

Product Development

     154,460           147,534           471,697           438,341     

Integrated Healthcare Services

     37,447           32,221           103,069           96,792     

General corporate and unallocated

     27,120           19,818           82,517           92,580     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total selling, general and administrative

     219,027           199,573           657,283           627,713     

Income from operations

           

Product Development

     158,170           140,616           477,187           409,384     

Integrated Healthcare Services

     19,885           11,662           40,537           30,414     

General corporate and unallocated

     (27,120)          (19,818)          (82,517)          (92,580)    

Restructuring costs

     (1,793)          (7,201)          (3,749)          (11,897)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total income from operations.

     $     149,142           $     125,259           $     431,458           $     335,321     
  

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months Ended September 30,      Nine Months Ended September 30,  
     2014      2013      2014      2013  

Depreciation and amortization expense

           

Product Development

     $ 23,106           $ 20,853           $ 69,867           $ 57,901     

Integrated Healthcare Services

     5,803           5,077           15,548           15,697     

General corporate and unallocated

     1,271           1,394           3,698           3,352     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total depreciation and amortization expense

     $ 30,180           $ 27,324           $ 89,113           $ 76,950     
  

 

 

    

 

 

    

 

 

    

 

 

 

15. 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 September 30,                  Nine Months Ended September 30,          
     2014      2013      2014      2013  

Weighted average shares subject to anti-dilutive share-based awards

              1,324                    2,057                    1,229                    1,635     

Share-based awards will have a dilutive effect under the treasury method only when the respective period’s average market value of the Company’s common stock exceeds the exercise proceeds.

 

15


Table of Contents

Item 2.    Management’s 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. 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 world’s largest provider of biopharmaceutical development services and commercial outsourcing services. We are positioned at the intersection of business services and healthcare and conduct business in approximately 100 countries with approximately 32,100 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.

For the three months ended September 30, 2014, our service revenues increased $128.3 million, or 13.8%, at actual foreign exchange rates compared to the same period last year. Our growth in service revenues, excluding the impact of foreign currency fluctuations (“constant currency”), was 14.0%, with 7.9% growth in the Product Development segment and 33.9% growth in the Integrated Healthcare Services segment. For the nine months ended September 30, 2014, our service revenues increased $297.4 million, or 10.6%, to $3.1 billion at actual foreign exchange rates compared to the same period last year. The year to date growth in service revenues on a constant currency basis was 10.3%, with 7.7% growth in the Product Development segment and 18.9% growth in the Integrated Healthcare Services segment.

Income from operations was $149.1 million, net income attributable to Quintiles Transnational Holdings Inc. was $92.7 million and diluted earnings per share was $0.71 for the three months ended September 30, 2014. Income from operations was $431.5 million, net income attributable to Quintiles Transnational Holdings Inc. was $268.0 million and diluted earnings per share was $2.03 for the nine months ended September 30, 2014.

 

16


Table of Contents

Net new business was $1,512 million and $4,014 million for the three and nine months ended September 30, 2014, respectively. This net new business contributed to an ending backlog of $10,746 million at September 30, 2014. “Net new business” and “backlog” are defined under “Net New Business Reporting and Backlog” below.

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. We also provide functional services that cover a range of areas. Consulting provides strategy and management consulting services based on life science expertise and advanced analytics, as well as regulatory and compliance consulting services.

Integrated Healthcare Services

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. Our customized commercialization services are designed to accelerate the commercial success of biopharmaceutical and other health-related products. 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 drug’s value), other healthcare services (comparative and cost-effectiveness research capabilities, decision support services, medication adherence and health outcome optimization services, and web-based systems for measuring quality improvement), and electronic health record implementation and advisory services.

On July 1, 2014, we completed the acquisition of Encore Health Resources, LLC, or Encore, for approximately $91.5 million in cash (net of approximately $2.2 million of acquired cash).

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 and we do not provide analysis of the fluctuation 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 of $9,855 million, which was 13% higher than at the beginning of 2013. Backlog at September 30, 2014 was $10,746 million.

 

17


Table of Contents

Net new business grew 13% in the third quarter of 2014 to $1,512 million from $1,341 million in third quarter of 2013, driven by growth in Product Development. Product Development’s net new business increased 47% to $1,268 million in the third quarter of 2014 as compared to $862 million for the same period in 2013, led by higher growth in net new business primarily related to the renewal of a five year contract for clinical and data management functional resourcing services as well as net new business generated from the acquisition of Novella Clinical Inc., or Novella, that was completed in the third quarter of 2013. Integrated Healthcare Services’ net new business decreased 49% to $244 million in the third quarter of 2014 as compared to $479 million for the same period in 2013, primarily related to lower contract signings for commercial services in North America and Japan. This decline in contract signings is an example of the fluctuation in our net new business levels from period to period resulting from the receipt of a small number of relatively large orders in any given reporting period. Because of the timing of these large orders, our net new business in that reporting period may reach levels above our historical average and may not be sustained in subsequent reporting periods.

Net new business grew 12% in the first nine months of 2014 to $4,014 million from $3,600 million in the first nine months of 2013, driven by growth in both Product Development and Integrated Healthcare Services. Product Development’s net new business increased 12% to $3,140 million for the first nine months in 2014 as compared to $2,808 million for the same period in 2013, led by higher growth in net new business for functional resourcing business including the renewal of a five year contract for core clinical services and data management services as well as net new business generated from the acquisition of Novella that was completed in the third quarter of 2013. Integrated Healthcare Services’ net new business increased 10% to $874 million in the first nine months of 2014 as compared to $792 million for the same period in 2013, related primarily to growth in commercial services in North America as well as an increase in new business from real-world and late phase research services and net new business from the Encore acquisition.

Service Revenues

 

     Three Months Ended September 30,                          Change                       
     2014      2013      $      %  
     (dollars in millions)  

Service revenues

    $ 1,061.0            $ 932.7            $ 128.3             13.8

For the three months ended September 30, 2014, our service revenues increased $128.3 million, or 13.8%, as compared to the same period in 2013. This increase is comprised of constant currency service revenue growth of approximately $130.2 million, or 14.0%, and a negative impact of approximately $1.9 million from the effects of foreign currency fluctuations. The constant currency service revenue growth, which includes the impact from the Novella and Encore acquisitions, is comprised of a $56.3 million increase in Product Development and a $73.9 million increase in Integrated Healthcare Services.

 

     Nine Months Ended September 30,                          Change                       
     2014      2013      $      %  
     (dollars in millions)  

Service revenues

    $ 3,101.8            $ 2,804.4            $ 297.4             10.6

For the nine months ended September 30, 2014, our service revenues increased $297.4 million, or 10.6%, as compared to the same period in 2013. This increase is comprised of constant currency service revenue growth of approximately $289.7 million, or 10.3%, and a positive impact of approximately $7.7 million from the effects of foreign currency fluctuations. The constant currency service revenue growth, which includes the impact from the Novella and Encore acquisitions, is comprised of a $165.2 million increase in Product Development and a $124.5 million increase in Integrated Healthcare Services.

Costs of Revenue, Service Costs

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2014      2013      2014      2013  
     (dollars in millions)  

Costs of revenue, service costs

    $ 691.1            $ 600.7            $ 2,009.3            $ 1,829.5       

% of service revenues

     65.1%             64.4%             64.8%             65.2%       

When compared to the same period in 2013, service costs in the third quarter of 2014 increased $90.4 million. The increase included a constant currency increase in expenses of approximately $93.8 million, or 15.6%, partially offset by a positive impact of approximately $3.4 million from the effects of foreign currency fluctuations. The constant currency service costs growth was due to incremental costs resulting from the Novella and Encore acquisitions and increases in compensation and related expenses due to annual merit increases and an increase in billable headcount needed to support our higher volume of revenue. These increases in compensation and related expenses were partially offset by efficiencies gained from restructuring activities taken in prior years.

 

18


Table of Contents

When compared to the same period in 2013, service costs in the first nine months of 2014 increased $179.8 million. The increase included a constant currency increase in expenses of approximately $188.8 million, or 10.3%, partially offset by a positive impact of approximately $9.0 million from the effects of foreign currency fluctuations. The constant currency service costs growth was due to incremental costs resulting from the Novella and Encore acquisitions 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 September 30,      Nine Months Ended September 30,  
     2014      2013      2014      2013  
     (dollars in millions)  

Selling, general and administrative

    $ 219.0            $ 199.6            $ 657.3            $ 627.7       

% of service revenues

     20.6%             21.4%             21.2%             22.4%       

The $19.4 million increase in selling, general and administrative expenses in the third quarter of 2014 included a constant currency increase of $19.0 million, or 9.5%, and an increase of approximately $400,000 from a negative foreign currency impact. The constant currency increase was primarily due to (1) incremental costs from the Novella and Encore acquisitions, (2) an increase in share-based compensation and (3) increases in compensation and related expenses resulting primarily from annual merit increases and an increase in headcount.

The $29.6 million increase in selling, general and administrative expenses in the first nine months of 2014 was due to a constant currency increase of $30.1 million, or 4.8%, partially offset by a decrease of approximately $500,000 from a positive foreign currency impact. The constant currency increase was primarily due to (1) incremental costs from the Novella and Encore acquisitions, (2) an increase in share-based compensation and (3) increases in compensation and related expenses resulting primarily from annual merit increases and an increase in headcount. These increases were partially offset by expenses incurred in the first nine months of 2013 that did not recur in 2014 related to a $25.0 million fee paid in connection with the termination of our management agreement with affiliates of certain of our shareholders and a $1.5 million fee paid in connection with the modification of an agreement for the business usage of an airplane owned by GF Management Company, LLC, or GFM, a company controlled by our Executive Chairman.

Restructuring Costs

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2014      2013      2014      2013  
     (in millions)  

Restructuring costs

    $ 1.8            $ 7.2            $ 3.7            $ 11.9       

In 2014, our Board of Directors, or our Board, approved restructuring plans of approximately $13 million to better align our resources with our strategic direction. We recognized $1.8 million and $3.7 million of restructuring charges, net of reversals for changes in estimates, during the three and nine months ended September 30, 2014, respectively, which was primarily related to the 2014 restructuring plans. These actions are expected to occur throughout 2014 and are expected to result in severance for approximately 350 positions. We believe that this plan will result in annualized cost savings of approximately $20.0 to $25.0 million.

Interest Income and Interest Expense

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2014     2013     2014     2013  
     (in millions)  

Interest income

       $ (0.6       $ (1.1       $ (2.9       $ (2.4

Interest expense

       $ 25.1          $ 28.8          $ 74.6          $ 96.7   

Interest income includes interest received from bank balances and investments.

 

19


Table of Contents

Interest expense during the three and nine months ended September 30, 2014 was lower than the same periods in 2013 in part due to a decrease in the average rate of interest. The average rate of interest on the term loan under our senior secured credit facility during the three and nine months ended September 30, 2014 was 75 basis points lower than it was during the same periods in 2013 due to a 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. In addition to the lower average rate of interest, interest expense during the nine months ended September 30, 2014 also benefited from a decrease in the average debt outstanding as a result of 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, the pay down of $50.0 million of outstanding indebtedness under our senior secured credit facilities in May 2013 and the mandatory prepayment of $33.8 million of outstanding indebtedness under our senior secured credit facilities in the first quarter of 2013.

Loss on Extinguishment of Debt

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2014      2013      2014      2013  
     (in millions)  

Loss on extinguishment of debt

    $ —          $ —          $ —          $ 16.5       

In May 2013, we recognized a $16.5 million loss on extinguishment of debt related to payment of all amounts outstanding under the $300.0 million term loan and a $50.0 million pay down of outstanding indebtedness under our senior secured credit facilities. The loss on extinguishment of debt included approximately $5.6 million of unamortized debt issuance costs, $4.8 million of unamortized discount and $6.1 million of fees and expenses.

Other (Income) Expense, Net

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2014      2013      2014      2013  
     (in millions)  

Other (income) expense, net

    $     (7.8)          $ 3.2          $     (9.6)          $ 1.4     

Other (income) expense, net for the third quarter of 2014 includes income of approximately $8.8 million related to the change in fair value of contingent consideration from an acquisition, partially offset by other expenses, primarily consisting of $926,000 of foreign currency net losses. Other (income) expense, net for the nine months of 2014 includes income of approximately $8.6 million related to the change in fair value of contingent consideration from an acquisition as well as a gain from the sale of marketable equity securities of approximately $5.0 million, partially offset by other expenses, primarily consisting of $4.3 million of foreign currency net losses. The three and nine months ended September 30, 2013 included income of approximately $1.2 million and $1.4 million, respectively, due to changes in the estimated fair value of contingent consideration from acquisitions, which was more than offset by other expenses, primarily consisting of $4.3 million and $3.4 million of foreign currency net losses, respectively.

Income Tax Expense

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2014      2013      2014      2013  
     (dollars in millions)  

Income tax expense

    $ 41.3            $ 27.5            $ 111.0            $ 68.4       

Effective income tax rate

     31.1%             29.1%             30.1%             30.7%       

Due to the potential for expiration of various federal, state, and foreign statutes of limitation, our unrecognized income tax benefits may change within the next 12 months by a range of zero to $16.6 million.

Equity in Earnings (Losses) of Unconsolidated Affiliates

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2014      2013      2014      2013  
     (in millions)  

Equity in earnings (losses) of unconsolidated affiliates

    $ 1.5            $     (0.4)            $ 9.8            $     (1.6)       

Equity in earnings (losses) of unconsolidated affiliates for both the three and nine month periods of 2014 increased as compared to the same periods in 2013 primarily due to gains from our investment in the NovaQuest Pharma Opportunities Fund III, L.P.

 

20


Table of Contents

Segments

Service revenues and income from operations by segment are as follows (dollars in millions):

 

Three Months Ended September 30, 2014 and 2013                                      
     Service Revenues      Income from Operations      Operating Profit Margin
     2014      2013      2014      2013      2014    2013

Product Development

    $ 771.4          $ 714.2          $ 158.2          $ 140.6         20.5%    19.7%

Integrated Healthcare Services

     289.6           218.5           19.9           11.7         6.9    5.3
  

 

 

    

 

 

    

 

 

    

 

 

       

Total segment

     1,061.0           932.7           178.1           152.3         16.8%    16.3%

General corporate and unallocated expenses

           (27.2)          (19.8)          

Restructuring costs

           (1.8)          (7.2)          
  

 

 

    

 

 

    

 

 

    

 

 

       

Consolidated

    $ 1,061.0          $ 932.7          $ 149.1          $ 125.3           
  

 

 

    

 

 

    

 

 

    

 

 

       

 

Nine Months Ended September 30, 2014 and 2013                                      
     Service Revenues      Income from Operations      Operating Profit Margin
     2014      2013      2014      2013      2014    2013

Product Development

    $ 2,323.4          $ 2,144.7          $ 477.2          $ 409.4         20.5%    19.1%

Integrated Healthcare Services

     778.4           659.7           40.5           30.4         5.2    4.6
  

 

 

    

 

 

    

 

 

    

 

 

       

Total segment

     3,101.8           2,804.4           517.7           439.8         16.7%    15.7%

General corporate and unallocated expenses

           (82.5)          (92.6)          

Restructuring costs

           (3.7)          (11.9)          
  

 

 

    

 

 

    

 

 

    

 

 

       

Consolidated

    $ 3,101.8          $ 2,804.4          $ 431.5          $ 335.3           
  

 

 

    

 

 

    

 

 

    

 

 

       

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, information technology, or IT, facilities and legal, as well as certain expenses incurred in the second quarter of 2013 including the $25.0 million fee incurred in connection with the termination of the management agreement with affiliates of certain shareholders and the $1.5 million fee paid in connection with the modification of an agreement for the business usage of an airplane owned by GFM. We do not allocate restructuring or impairment charges to our segments.

Product Development

 

     Three Months Ended September 30,                          Change                       
     2014      2013      $      %  
     (dollars in millions)  

Service revenues

    $ 771.4            $ 714.2            $ 57.2             8.0%   

Costs of revenue, service costs

     458.7             426.1             32.6             7.7       

as a percentage of service revenues

     59.5%         59.7%         

Selling, general and administrative

     154.5             147.5             7.0             4.7       

as a percentage of service revenues

     20.0%         20.6%         
  

 

 

    

 

 

    

 

 

    

Segment income from operations

    $ 158.2            $ 140.6            $ 17.6             12.5%   
  

 

 

    

 

 

    

 

 

    

as a percentage of service revenues

     20.5%         19.7%         

 

     Nine Months Ended September 30,                          Change                       
     2014      2013      $      %  
     (dollars in millions)  

Service revenues

    $ 2,323.4            $ 2,144.7            $ 178.7             8.3

Costs of revenue, service costs

     1,374.5             1,297.0             77.5             6.0   

as a percentage of service revenues

     59.2%         60.5%         

Selling, general and administrative

     471.7             438.3             33.4             7.6   

as a percentage of service revenues

     20.3%         20.4%         
  

 

 

    

 

 

    

 

 

    

Segment income from operations

    $ 477.2            $ 409.4            $ 67.8             16.6
  

 

 

    

 

 

    

 

 

    

as a percentage of service revenues

     20.5%         19.1%         

 

21


Table of Contents

Service Revenues

Product Development’s service revenues were $771.4 million in the third quarter of 2014, an increase of $57.2 million, or 8.0%, over the same period in 2013. This increase was comprised of constant currency service revenue growth of $56.3 million, or 7.9%, and a positive impact of approximately $900,000 from the effects of foreign currency fluctuations. The constant currency service revenue growth was primarily a result of a volume-related increase of $31.0 million as well as $25.3 million from the Novella acquisition.

Product Development’s service revenues were $2,323.4 million in the first nine months of 2014, an increase of $178.7 million, or 8.3%, over the same period in 2013. This increase was comprised of constant currency service revenue growth of 165.2 million, or 7.7%, and a positive impact of approximately $13.5 million from the effects of foreign currency fluctuations. The constant currency service revenue growth was primarily a result of a volume-related increase of $75.6 million as well as $89.6 million from the Novella acquisition.

The volume-related service revenue growth was primarily from clinical solutions and services for both the three and nine month periods and was related to an increase in global laboratories services, clinical trial support services and clinical solutions provided on a functional resource basis. This growth was due largely to execution on the higher backlog in place as we entered the three and nine month periods. The rate of year-over-year revenue growth was negatively impacted by the wind-down of a large clinical solutions project delivered throughout 2013.

Costs of Revenue, Service Costs

Product Development’s service costs increased approximately $32.6 million in the third quarter of 2014 over the same period in 2013. This increase was comprised of a $34.4 million constant currency increase, or 8.1%, partially offset by a reduction of $1.8 million from the positive effect of foreign currency fluctuations. The constant currency service costs growth was due to incremental costs resulting from the Novella acquisition and increases in expenses directly related to our service contracts to support our higher volume of revenue. These increases in service costs were partially offset by efficiencies gained from restructuring activities taken in prior years. As a percent of service revenues, Product Development’s service costs were 59.5% and 59.7% in the third quarters 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 (including cost efficiencies gained from restructuring actions taken in prior years).

Product Development’s service costs increased approximately $77.5 million in the first nine months of 2014 over the same period in 2013. This increase was comprised of a $83.5 million constant currency increase, or 6.5%, partially offset by a reduction of $6.0 million from the positive effect of foreign currency fluctuations. The constant currency service costs growth was due to (1) incremental costs resulting from the Novella acquisition, (2) increases in expenses directly related to our service contracts 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 service costs were partially offset by efficiencies gained from restructuring activities taken in prior years. As a percent of service revenues, Product Development’s service costs were 59.2% and 60.5% in the first nine months 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 (including cost efficiencies gained from restructuring actions taken in prior years).

Selling, General and Administrative

As a percent of service revenues, Product Development’s selling, general and administrative expenses were 20.0% and 20.6% in the third quarter of 2014 and 2013, respectively. Product Development’s selling, general and administrative expenses increased approximately $7.0 million, or 4.7%, in the third quarter of 2014 as compared to the same period in 2013. This increase was primarily caused by the impact from the Novella acquisition and increases in compensation and related expenses resulting from annual merit increases and an increase in headcount.

As a percent of service revenues, Product Development’s selling, general and administrative expenses were 20.3% and 20.4% in the first nine months of 2014 and 2013, respectively. Product Development’s selling, general and administrative expenses increased approximately $33.4 million, or 7.6%, in the first nine months of 2014 as compared to the same period in 2013. This increase was primarily caused by the impact from the Novella acquisition, increases in compensation and related expenses resulting from annual merit increases and an increase in headcount, and a growth related increase in IT costs partially offset by a positive impact of approximately $1.1 million from the effects of foreign currency fluctuations.

 

22


Table of Contents

Integrated Healthcare Services

 

     Three Months Ended September 30,                          Change                       
     2014      2013      $      %  
     (dollars in millions)  

Service revenues

    $     289.6            $   218.5           $ 71.1             32.6%    

Costs of revenue, service costs

     232.3             174.6             57.7             33.1       

as a percentage of service revenues

     80.2%         79.9%         

Selling, general and administrative

     37.4             32.2             5.2             16.2       

as a percentage of service revenues

     12.9%         14.8%         
  

 

 

    

 

 

    

 

 

    

Segment income from operations

    $ 19.9           $ 11.7            $ 8.2             70.5%    
  

 

 

    

 

 

    

 

 

    

as a percentage of service revenues

     6.9%         5.3%         

 

     Nine Months Ended September 30,                          Change                       
     2014      2013      $      %  
     (dollars in millions)  

Service revenues

    $     778.4           $ 659.7            $     118.7             18.0%   

Costs of revenue, service costs

     634.8             532.5             102.3             19.2      

as a percentage of service revenues

     81.6%         80.7%         

Selling, general and administrative

     103.1             96.8             6.3             6.5      

as a percentage of service revenues

     13.2%         14.7%         
  

 

 

    

 

 

    

 

 

    

Segment income from operations

    $ 40.5           $ 30.4           $ 10.1             33.3%   
  

 

 

    

 

 

    

 

 

    

as a percentage of service revenues

     5.2%         4.6%         

Service Revenues

Integrated Healthcare Services’ service revenues were $289.6 million in the third quarter of 2014, an increase of $71.1 million, or 32.6%, over the same period in 2013. This increase is comprised of constant currency service revenue growth of $73.9 million, or 33.9%, including $19.2 million from the Encore acquisition, partially offset by a negative impact of approximately $2.8 million due to the effect of foreign currency fluctuations.

Integrated Healthcare Services’ service revenues were $778.4 million in the first nine months of 2014, an increase of $118.7 million, or 18.0%, over the same period in 2013. This increase is comprised of constant currency service revenue growth of $124.5 million, or 18.9%, including $19.2 million from the Encore acquisition, partially offset by a negative impact of approximately $5.8 million due to the effect of foreign currency fluctuations.

For both the three and nine month periods in 2014, the increase in constant currency service revenues was driven by the impact from the Encore acquisition and an increase in commercial services in North America and Japan, as well as growth in real-world and late phase research services. These increases were partially offset by a decline in Europe due to lower revenue from an agreement to distribute pharmaceutical products in Italy as well as lower commercial services revenues. The agreement to distribute pharmaceutical products in Italy will end in the fourth quarter of 2014.

Costs of Revenue, Service Costs

Integrated Healthcare Services’ service costs increased approximately $57.7 million in the third quarter of 2014. This increase was comprised of a $59.3 million constant currency increase, or 34.0%, partially offset by a reduction of $1.6 million from the positive effect of foreign currency fluctuations.

Integrated Healthcare Services’ service costs increased approximately $102.3 million in the first nine months of 2014. This increase was comprised of a $105.2 million constant currency increase, or 19.8%, partially offset by a reduction of $2.9 million from the positive effect of foreign currency fluctuations.

For both the three and nine month periods in 2014, the constant currency increase was primarily due to the impact from the Encore acquisition and increases in compensation and related expenses resulting from an increase in billable headcount needed to support the higher volume of revenue and annual merit compensation increases. These increases in compensation and related expenses were partially offset by a decline in other expenses directly related to the agreement to distribute pharmaceutical products in Italy. Service costs as a percentage of service revenues were 80.2% and 79.9% in the third quarters of 2014 and 2013, respectively, and 81.6% and 80.7% in the first nine months of 2014 and 2013, respectively. The increase in service costs as a percentage of service revenues was primarily in Europe and reflects the competitive pricing environment for our commercial services in that region.

 

23


Table of Contents

Selling, General and Administrative

Integrated Healthcare Services’ selling, general and administrative expenses in the three and nine months ended September 30, 2014 were higher as compared to the same periods in 2013 primarily caused by the impact from the Encore acquisition and higher compensation and related expenses.

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 $645.0 million at September 30, 2014 ($203.1 million of which was in the United States), a decrease from $778.1 million at December 31, 2013.

On October 30, 2013, our Board approved an equity repurchase program, or the 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. Through September 30, 2014, we have used $65.5 million of cash to purchase $59.1 million of stock options and $6.4 million of common stock under the Repurchase Program. We have used and intend to continue to use cash on hand to fund the Repurchase Program. The Repurchase Program does not obligate us to repurchase any particular amount of common stock or vested in-the-money employee stock options and it can 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 Repurchase Program expired in November 2013. The Repurchase Program for common stock does not have an end date. Additional information regarding our 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.

On May 28, 2014, we completed the repurchase of 3,287,209 shares of our common stock for $50.23 per share from TPG Quintiles Holdco, L.P., one of our existing shareholders, in a private transaction for an aggregate purchase price of approximately $165.1 million. We funded this private repurchase transaction with cash on hand. This private repurchase transaction was separate from and in addition to the Repurchase Program.

On July 1, 2014, we completed the acquisition of Encore for approximately $91.5 million in cash (net of approximately $2.2 million of acquired cash). Encore has operations in the United States and its business is primarily focused on providing electronic health records implementation and advisory services to healthcare providers.

 

24


Table of Contents

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. 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 September 30, 2014, we had $2.0 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 nine months of 2014. Our long-term debt arrangements contain usual and customary restrictive covenants, and as of September 30, 2014, we believe we were in compliance with these covenants.

See “Management’s 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 the fiscal year ended December 31, 2013, for additional details regarding our credit arrangements.

Nine months ended September 30, 2014 and 2013

Cash Flow from Operating Activities

 

     Nine Months Ended September 30,  
     2014      2013  
     (in millions)  

Net cash provided by operating activities

    $   175.8            $   177.9   

Cash provided by operating activities decreased by $2.1 million during the first nine months of 2014 as compared to the same period in 2013. The decrease in operating cash flow reflects less cash received from upfront payments under customer contracts in the first nine months of 2014 as compared to the same period in 2013, higher payments for income taxes ($70.5 million), and higher cash used for incentive compensation. These decreases in operating cash flow were partially offset by an increase in net income as well as lower payments for interest ($20.6 million). In addition, net income for the first nine months of 2013 included cash expenses totaling $32.5 million for a fee paid in connection with the termination of our management agreement with affiliates of certain of our shareholders ($25.0 million), a fee paid in connection with the modification of an agreement for the business usage of an airplane owned by GFM ($1.5 million), and a termination fee for the repayment of the $300.0 million term loan ($6.0 million), which did not recur in the 2014 period.

Cash Flow from Investing Activities

 

     Nine Months Ended September 30,  
     2014      2013  
     (in millions)  

Net cash used in investing activities

    $   (145.9)            $   (224.0)       

Cash used in investing activities decreased by $78.1 million during the first nine months of 2014 as compared to the same period in 2013. This decline in the use of cash in the first nine months of 2014 was primarily related to lower cash used for the acquisition of businesses. The 2014 period includes approximately $92.2 million primarily for the acquisition of Encore, as compared to the 2013 period which includes the acquisition of Novella for approximately $145.0 million. Also contributing to the decline was lower cash used for property, equipment and software and an increase in proceeds from the sale of equity securities.

 

25


Table of Contents

Cash Flow from Financing Activities

 

     Nine Months Ended September 30,  
     2014      2013  
     (in millions)  

Net cash (used in) provided by financing activities

    $   (144.4)            $   104.3       

Net cash used in financing activities increased by $248.7 million to $144.4 million during the first nine months of 2014, as compared to cash provided by financing activities of $104.3 million in the same period in 2013. The cash used in financing activities in the first nine months of 2014 was primarily related to the repurchase of common stock ($165.1 million) partially offset by stock issued under employee stock purchase and option plans ($23.2 million). The cash provided by financing activities in the first nine months of 2013 was primarily related to the net proceeds from our initial public offering, or IPO, in May 2013 ($489.6 million). The net IPO proceeds were partially offset as a result of repayment of all amounts outstanding under the $300.0 million term loan and $83.8 million of repayments on our senior secured credit facilities, which included a voluntary pay down of $50.0 million and a mandatory prepayment of $33.8 million 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.

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 September 30, 2014 is approximately $7,193 million of backlog that we do not expect to generate revenue in the next 12 months.

Backlog was as follows:

 

     September 30,
2014
     December 31,
2013
 
     (in millions)  

Backlog

    $   10,746            $   9,855       

Net new business was as follows:

 

     Three Months Ended September 30,          Nine Months Ended September 30,      
     2014      2013      2014      2013  
     (in millions)  

Net new business

    $   1,512            $   1,341            $   4,014            $   3,600       

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 the 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 the fiscal year ended December 31, 2013.

 

26


Table of Contents

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 the fiscal year ended December 31, 2013.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer, or CEO, and Chief Financial Officer, or 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 management’s 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.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We are party to legal proceedings incidental to our business. While the outcome of these matters could differ from management’s expectations, we do not believe that the resolution of these matters is reasonably likely to have a material adverse effect to our financial statements.

Item 1A. Risk Factors

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 the fiscal year ended December 31, 2013. There have been no significant changes from the risk factors previously disclosed in our Annual Report.

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.

 

27


Table of Contents

Purchases of Equity Securities by the Issuer

The following table summarizes the Repurchase Program activity for the three months ended September 30, 2014 and the approximate dollar value of shares that may yet be purchased pursuant to the 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
 
     (in thousands, except share and per share data)  

July 1, 2014 – July 31, 2014

     —           $ —             —           $ 59,486       

August 1, 2014 – August 31, 2014

     —           $ —             —           $ 59,486       

September 1, 2014 – September 30, 2014

     —           $ —             —           $ 59,486       
  

 

 

       

 

 

    
     —                —          
  

 

 

       

 

 

    

On October 31, 2013, we announced that on October 30, 2013 our Board approved the Repurchase Program, authorizing the repurchase of up to $125.0 million of either our common stock or employee stock options, or a combination thereof. We have used and intend to continue to use cash on hand to fund the Repurchase Program. The Repurchase Program does not obligate us to repurchase any particular amount of common stock or 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 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 Repurchase Program expired in November 2013. The Repurchase Program for common stock does not have an end date.

Item 6. Exhibits

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.

 

28


Table of Contents

SIGNATURES

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 October 30, 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)

 

29


Table of Contents

EXHIBIT INDEX

 

              

Incorporated by Reference

   Exhibit   
   Number   

  

Exhibit Description

  

Filed

    Herewith    

  

    Form    

  

    File No.    

  

    Exhibit    

  

    Filing Date    

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            

 

30