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Quintiles 2nd Quarter 2015 Results
[July 29, 2015]

Quintiles 2nd Quarter 2015 Results


Quintiles Transnational Holdings Inc. ("Quintiles" or the "Company") (NYSE: Q) today reported its financial results for the quarter ended June 30, 2015.

For the three months ended June 30, 2015, the Company's growth in service revenues, excluding the impact of foreign currency fluctuations ("constant currency"), was 9.8% with 22.9% growth in the Integrated Healthcare Services segment and 5.5% growth in the Product Development segment. The Company's service revenues were $1.07 billion which at actual rates represents growth of 3.8%, or $38.9 million, including an unfavorable foreign currency impact of $62.2 million compared to the same period last year.

Adjusted income from operations was $164.6 million in the second quarter of 2015, representing growth of 16.0% at actual rates compared to the same period last year. The adjusted income from operations margin was 15.3%, representing 160 basis points of margin expansion compared to the same period last year. The margin expansion resulted from a constant currency improvement in Integrated Healthcare Services operating margin and the benefit of 160 basis points from favorable currency fluctuations across the company. Adjusted net income was $98.7 million and diluted adjusted earnings per share was $0.78 in the quarter ended June 30, 2015, including a $0.06 per share contribution from foreign research and development credits that were expected later in the year.

Reported GAAP income from operations was $158.4 million, reported GAAP net income was $85.0 million and reported GAAP diluted earnings per share was $0.67 for the three months ended June 30, 2015, respectively. Reconciliations of the non-GAAP measures, including adjusted income from operations, adjusted net income and diluted adjusted earnings per share to the corresponding GAAP measures are attached to this press release.

Net new business grew 7.6% compared to the same period last year to $1.32 billion, representing a book-to-bill ratio of 1.23 in the quarter ended June 30, 2014. Second quarter net new business contributed to an ending backlog of $11.37 billion at June 30, 2015.

"Our industry-leading position and advantages delivered a strong book-to-bill of 1.23 this quarter and $2.7 billion of new business in the first half of the year," said Chief Executive Officer Tom Pike. "Strong IHS service revenue growth at 22.9% at constant currency, coupled with a strong quarter from Product Development, delivered solid diluted adjusted earnings per share of $0.78."

"We are pleased to again be named to the FORTUNE 500 and to be recognized as the leader of our industry."

The Product Development segment net new business increased 11.5% for the quarter ended June 30, 2015 to $968 million which translates to a book-to-bill ratio of 1.23. Product Development's service revenues at constant currency grew 5.5%, or $42.6 million, during the second quarter of 2015 compared to the same period last year. At actual foreign exchange rates, Product Development service revenues were $786.4 million, negatively impacted by $37.4 million of unfavorable foreign currency exchange, resulting in service revenue growth of 0.7% compared to the same period last year. The constant currency revenue growth resulted from volume-related increases in clinical solutions and services provided on a functional resourcing basis, clinical trial support services, and core clinical services in Asia and Japan, offset by the negative impact of cancellations from 2014. The Company also recognized $16.9 million of revenue and a nearly equivalent amount of cost as a result of the release of deferred revenue upon early closeout of a customer arrangement. Product Development's income from operations margin was 22.4% for the second quarter, representing an improvement of 210 basis points compared to the same period last year, including 220 basis points of positive foreign exchange benefits, and a $7.6 million increase in foreign research and development credits that were expected later in the year, offset by a change in service revenue mix compared to the same period in 2014 and an increase in billable headcount due to the ramp-up of new projects resulting from recent net new business wins.

The Integrated Healthcare Services segment net new business decreased 1.9% in the quarter ended June 30, 2015 to $354 million which translates to a book-to-bill ratio of 1.23. Integrated Healthcare Services' service revenues at constant currency grew 22.9%, or $58.5 million, during the second quarter of 2015 compared to the same period last year, including $24.4 million from the Encore acquisition. At actual foreign exchange rates, Integrated Healthcare Services' service revenues increased 13.2% to $288.0 million inclusive of the negative impact of $24.8 million from unfavorable foreign currency exchange. The constant currency revenue growth resulted from increases in commercial services in North America, along with growth in real-world and late phase research services. This growth was partially offset by a decline in commercial services in Europe due primarily to the conclusion of an agreement to distribute pharmaceutical products in Italy. Integrated Healthcare Services' income from operations margin was 6.5% at actual rates including a 10 basis point impact from unfavorable currency fluctuations. The income from operations margin at constant currency improved 200 basis points compared to the same period last year.

General corporate and unallocated expenses were $30.3 million during the quarter ended June 30, 2015 compared to $28.2 million for the same period last year, primarily due to an increase in share-based compensation expense and costs related to the recently-closed clinical trials laboratories joint venture.

Interest expense was $25.5 million during the quarter ended June 30, 2015 compared to $24.8 million for the same period last year. Interest expense was higher than the same period in 2014 due to an increase in the average debt outstanding. During the second quarter of 2015, the Company recognized a $7.8 million loss on extinguishment of debt related to the refinancing of its senior secured credit facilities.

Other expense, net was $11.7 million during the quarter ended June 30, 2015 compared to $3.1 million for the same period last year. Other expense, net for the second quarter of 2015 included $6.8 million of foreign currency net losses and $4.6 million of expense related to the change in fair value of contingent consideration related to an acquisition.

The GAAP effective income tax rate was 27.6% for the second quarter of 2015 compared to 28.4% for the same period in 2014.

Equity in earnings of unconsolidated affiliates was $1.7 million during the second quarter of 2015 compared to equity in earnings of unconsolidated affiliates of $3.4 million for the same period last year.

For the six months ended June 30, 2015, the Company's constant currency service revenue growth was 9.0%, or $184.7 million, as compared to the same period in 2014. At actual foreign exchange rates, the Company's service revenues of $2.1 billion for the six months ended June 30, 2015, grew 3.1% compared to the same period in 2014 which included a negative foreign currency impact of $121.2 million. Adjusted income from operations for the six months ended June 30, 2015 was $313.2 million representing growth of 10.2% compared to the same period in 2014. Adjusted income from operations margin was 14.9% representing 100 basis points of margin expansion compared to the same period last year, including 140 basis points from favorable currency fluctuations offset by a change in segment contribution mix compared to the same period in 2014. Adjusted net income was $189.9 million for the six months ended June 30, 2015 representing growth of 7.6% compared to the same period last year. Diluted adjusted earnings per share was $1.50 for the six months ended June 30, 2015 representing growth of 12.8% compared to the same period last year. Reported GAAP income from operations was $301.6 million, reported GAAP net income was $171.3 million, and reported GAAP diluted earnings per share was $1.35 for the six months ended June 30, 2015.

Lab Joint Venture Formation

On July 1, 2015 the Company and Quest Diagnostics Incorporated ("Quest") combined their respective global clinical trials laboratories businesses to form Q2 Solutions. The Company owns 60% and Quest owns 40% of the two parent legal entities that comprise Q2 Solutions. The Company will account for the transaction as a business combination and will consolidate the new legal entities in its financial statements with a non-controlling interest for the portion owned by Quest.

The Company expects the transaction to add approximately $80 million of revenues in the second half of 2015 and to be neutral to diluted adjusted earnings per share, including the add-back of one-time costs. Restructuring and integration actions are expected to cost approximately $17 million to $20 million through 2017 and result in net annualized savings of between $40 million and $50 million in 2018. The transaction is expected to be accretive to diluted adjusted earnings per share beginning in 2016.

Financial Guidance

The Company is increasing its full year 2015 constant currency service revenue growth guidance to a range of 8.5% - 9.5% compared to full year 2014. The Company is also increasing its diluted adjusted earnings per share guidance range to $3.09 - $3.19 per share, representing growth of 14.4% - 18.1%, with diluted GAAP earnings per share between $2.84 - $2.96 per share. The annual effective income tax rate is projected to be approximately 29.5%. This financial guidance is based on the end of June foreign currency exchange rates and includes the impact of the Q2 Solutions transaction but does not reflect the potential impact of any future equity repurchases.

Webcast & Conference Call Details

Quintiles will host a conference call at 8:00 a.m. EDT today to discuss its second quarter 2015 financial results. To participate, please dial +1 (855) 710-5091 or +1 (706) 902-0591 outside the United States approximately 15 minutes before the scheduled start of the call. The conference call will also be accessible, live via webcast on the Investors section of the Quintiles website at www.quintiles.com/investors. An archived replay of the conference call will be available online at www.quintiles.com/investors after 1:00 p.m. EDT today.

About Quintiles

Quintiles (NYSE: Q) helps biopharma and other healthcare companies improve their probability of success by connecting insights from our deep scientific, therapeutic and analytics expertise with superior delivery for better outcomes. From advisory through operations, Quintiles is the world's largest provider of product development and integrated healthcare services, including commercial and observational solutions. Conducting operations in approximately 100 countries, Quintiles is a member of the FORTUNE 500 and has been named to FORTUNE's list of the "World's Most Admired Companies." To learn more, visit www.quintiles.com.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements reflect, among other things, the Company's current expectations and anticipated results of operations, all of which are subject to known and unknown risks, uncertainties and other factors that may cause 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," "guidance," "targets," "will" and the negative thereof and similar words and expressions are intended to identify forward-looking statements. Actual results may differ materially from the Company's expectations due to a number of factors, including, but not limited to, that most of the Company's contracts may be terminated on short notice, and that the Company may be unable to maintain large customer contracts or to enter into new contracts; the Company may under-price its contracts, overrun its cost estimates, or fail to receive approval for or experience delays in documenting change orders; the historical indications of the relationship of backlog to revenues may not be indicative of their future relationship; the Company may be unable to maintain information systems or effectively update them; customer or therapeutic concentration could harm the Company's business; the Company's 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 Company may be unable to successfully identify, acquire and integrate businesses, services and technologies; the Company's effective income tax rate may fluctuate, which may adversely affect our operations, earnings, and earnings per share; and the Company has substantial indebtedness and may incur additional indebtedness in the future, which could adversely affect the Company's financial condition. For a further discussion of the risks relating to the Company's business, see the "Risk Factors" in Quintiles' annual report on Form 10-K for the fiscal year ended December 31, 2014, filed with the SEC, as such factors may be amended or updated from time to time in Quintiles' subsequent periodic filings with the SEC, which are accessible on the SEC's website at www.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this release and in Quintiles' filings with the SEC. The Company assumes no obligation to update any such forward-looking statement after the date of this release, whether as a result of new information, future developments or otherwise.

Use of Non-GAAP Financial Measures

This press release includes adjusted EBITDA, adjusted income from operations, adjusted income from operations margin, adjusted net income and diluted adjusted earnings per share, each of which is a financial measure not prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). Management believes that these non-GAAP measures provide useful supplemental information to management and investors regarding the underlying performance of the Company's business operations and are more indicative of core operating results as they exclude certain items whose fluctuations from period-to-period do not necessarily correspond to changes in the core operations of the business. These non-GAAP measures are performance measures only and are not measures of the Company's cash flows or liquidity, nor are they alternatives for measures of financial performance prepared in accordance with GAAP and may be different from similarly titled non-GAAP measures used by other companies. Investors and potential investors are encouraged to review the reconciliations of the non-GAAP financial measures to their most directly comparable GAAP measures attached to this press release.

Internet Posting of Information: The Company routinely posts information that may be important to investors in the 'Investors' section of the Company's website at www.Quintiles.com. The Company encourages investors and potential investors to consult the Company's website regularly for important information about the Company.

Click here to subscribe to Mobile Alerts for Quintiles.





QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
     
Three Months Ended Six Months Ended
June 30, June 30,
2015 2014 2015 2014
 
Service revenues $ 1,074,366 $ 1,035,476 $ 2,104,340 $ 2,040,764
Reimbursed expenses   369,161     305,554     686,780     608,112  
Total revenues 1,443,527 1,341,030 2,791,120 2,648,876
Costs of revenue, service costs 683,845 674,514 1,345,672 1,318,236
Costs of revenue, reimbursed expenses 369,161 305,554 686,780 608,112
Selling, general and administrative 225,898 219,014 445,504 438,256
Restructuring costs   6,234     948     11,558     1,956  
Income from operations 158,389 141,000 301,606 282,316
Interest income (1,459 ) (994 ) (2,329 ) (2,249 )
Interest expense 25,487 24,799 50,827 49,502
Loss on extinguishment of debt 7,780 - 7,780 -
Other expense (income), net   11,659     3,056     8,798     (1,788 )
Income before income taxes and equity in
earnings of unconsolidated affiliates 114,922 114,139 236,530 236,851
Income tax expense   31,700     32,400     67,788     69,789  
Income before equity in earnings
of unconsolidated affiliates 83,222 81,739 168,742 167,062
Equity in earnings of unconsolidated affiliates   1,725     3,371     2,636     8,262  
Net income 84,947 85,110 171,378 175,324
Net loss (income) attributable to noncontrolling interests 4 10 (29 ) (21 )
Net income attributable to Quintiles        
Transnational Holdings Inc. $ 84,951   $ 85,120   $ 171,349   $ 175,303  
Earnings per share attributable to common shareholders:
Basic $ 0.69 $ 0.66 $ 1.38 $ 1.35
Diluted $ 0.67 $ 0.64 $ 1.35 $ 1.32
Weighted average common shares outstanding:
Basic 123,834 128,979 124,169 129,439
Diluted 126,536 132,042 126,995 132,541
 
QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 
June 30, December 31,
2015 2014
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 803,615 $ 867,358
Restricted cash 3,146 2,882
Trade accounts receivable and unbilled services, net 1,089,439 975,255
Prepaid expenses 57,454 44,628
Deferred income taxes 115,962 118,515
Income taxes receivable 64,550 45,357
Other current assets and receivables   85,676     92,088  
Total current assets   2,219,842     2,146,083  
Property and equipment, net 176,773 190,297
Investments in debt, equity and other securities 34,258 34,503
Investments in and advances to unconsolidated affiliates 37,445 31,508
Goodwill 463,610 464,434
Other identifiable intangibles, net 263,217 280,243
Deferred income taxes 34,694 35,972
Deposits and other assets   111,945     112,913  
Total assets $ 3,341,784   $ 3,295,953  
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 758,407 $ 842,387
Unearned income 502,477 543,305
Income taxes payable 32,662 55,694
Current portion of long-term debt and obligations
held under capital leases 48,510 826
Other current liabilities   11,752     29,688  
Total current liabilities 1,353,808 1,471,900
Long-term debt and obligations held under
capital leases, less current portion 2,440,972 2,282,612
Deferred income taxes 57,925 61,797
Other liabilities   190,757     183,656  
Total liabilities   4,043,462     3,999,965  
Commitments and contingencies
Shareholders' deficit:
Common stock and additional paid-in capital,
300,000 shares authorized, $0.01 par value,
122,644 and 124,129 shares issued and outstanding
at June 30, 2015 and December 31, 2014, respectively 28,520 143,828
Accumulated deficit (661,434 ) (788,798 )
Accumulated other comprehensive loss   (68,842 )   (59,091 )
Deficit attributable to Quintiles Transnational
Holdings Inc.'s shareholders (701,756 ) (704,061 )
Noncontrolling interests   78     49  
Total shareholders' deficit   (701,678 )   (704,012 )
Total liabilities and shareholders' deficit $ 3,341,784   $ 3,295,953  
 
QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Six Months Ended
June 30,
2015 2014
Operating activities:
Net income $ 171,378 $ 175,324
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Depreciation and amortization 60,340 58,933
Amortization of debt issuance costs and discount 5,800 3,191
Amortization of accumulated other comprehensive
loss on terminated interest rate swaps 1,651 -
Share-based compensation 20,321 15,601
Earnings from unconsolidated affiliates (2,603 ) (8,239 )
Loss (gain) on investments, net 5 (5,114 )
Benefit from deferred income taxes (375 ) (1,173 )
Excess income tax benefits from share-based award activities (29,565 ) (8,613 )
Changes in operating assets and liabilities:
Change in accounts receivable, unbilled services
and unearned income (177,494 ) (61,568 )
Change in other operating assets and liabilities   (63,028 )   (129,645 )
Net cash (used in) provided by operating activities (13,570 ) 38,697
Investing activities:
Acquisition of property, equipment and software (31,924 ) (35,832 )
Proceeds from sale of equity securities - 5,861
Investments in and advances to unconsolidated
affiliates, net of payments received (3,431 ) (2,336 )
Termination of interest rate swaps (10,981 ) -
Other   870     (701 )
Net cash used in investing activities (45,466 ) (33,008 )
Financing activities:
Proceeds from issuance of debt 2,248,500 -
Payment of debt issuance costs (21,857 ) -
Repayment of debt and principal payments
on capital lease obligations (2,035,051 ) (466 )
Stock issued under employee stock purchase and option plans 45,308 11,313
Repurchase of common stock (250,000 ) (165,131 )
Payroll taxes remitted on repurchase of stock options - (8,415 )
Excess income tax benefits from share-based award activities   29,565     8,613  
Net cash provided by (used in) financing activities 16,465 (154,086 )
Effect of foreign currency exchange rate changes on cash   (21,172 )   6,722  
Decrease in cash and cash equivalents (63,743 ) (141,675 )
Cash and cash equivalents at beginning of period   867,358     778,143  
Cash and cash equivalents at end of period $ 803,615   $ 636,468  
 
QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED SEGMENT OPERATIONS
(in thousands)
(unaudited)
 
Three Months Ended Six Months Ended
June 30, June 30,
2015 2014 2015 2014
 
Service revenues
Product Development $ 786,397 $ 781,187 $ 1,535,926 $ 1,552,015
Integrated Healthcare Services   287,969     254,289     568,414     488,749  
Total service revenues 1,074,366 1,035,476 2,104,340 2,040,764
 
Costs of revenue, service costs
Product Development 453,450 465,278 890,872 915,761
Integrated Healthcare Services   230,395     209,236     454,800     402,475  
Total costs of revenue, service costs 683,845 674,514 1,345,672 1,318,236
 
Selling, general and administrative
Product Development 156,777 157,552 311,885 317,237
Integrated Healthcare Services 38,845 33,346 76,767 65,622
General corporate and unallocated   30,276     28,116     56,852     55,397  
Total selling, general and administrative 225,898 219,014 445,504 438,256
 
Income from operations
Product Development 176,170 158,357 333,169 319,017
Integrated Healthcare Services 18,729 11,707 36,847 20,652
General corporate and unallocated (30,276 ) (28,116 ) (56,852 ) (55,397 )
Restructuring costs   (6,234 )   (948 )   (11,558 )   (1,956 )
Total income from operations $ 158,389   $ 141,000   $ 301,606   $ 282,316  
 
QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP TO NON-GAAP MEASURES
(in thousands, except per share data)
(unaudited)
 
Three Months Ended Six Months Ended
June 30, June 30,
2015 2014 2015 2014

Adjusted EBITDA (1)

Net income attributable to Quintiles Transnational Holdings Inc. $ 84,951 $ 85,120 $ 171,349 $ 175,303
Interest expense, net 24,028 23,805 48,498 47,253
Income tax expense 31,700 32,400 67,788 69,789
Depreciation and amortization 30,011 29,845 60,340 58,933
Restructuring costs 6,234 948 11,558 1,956
Loss on extinguishment of debt 7,780 - 7,780 -
Adjustment to estimated contingent consideration   4,599     -     5,886     (82 )
Adjusted EBITDA $ 189,303   $ 172,118   $ 373,199   $ 353,152  
 

Adjusted Income from Operations

Income from operations, as reported $ 158,389 $ 141,000 $ 301,606 $ 282,316
Restructuring costs   6,234     948     11,558     1,956  
Adjusted income from operations $ 164,623   $ 141,948   $ 313,164   $ 284,272  
 

Adjusted Net Income

Net income attributable to Quintiles Transnational Holdings Inc. $ 84,951 $ 85,120 $ 171,349 $ 175,303
Restructuring costs 6,234 948 11,558 1,956
Loss on extinguishment of debt 7,780 - 7,780 -
Adjustment to estimated contingent consideration 4,599 - 5,886 (82 )
Tax effect of adjustments (2)   (4,858 )   (346 )   (6,631 )   (593 )
Adjusted net income $ 98,706   $ 85,722   $ 189,942   $ 176,584  
 
Diluted weighted average common shares outstanding 126,536 132,042 126,995 132,541
Diluted adjusted earnings per share $ 0.78 $ 0.65 $ 1.50 $ 1.33
 
(1) During the second quarter of 2015, we changed our Adjusted EBITDA calculation to include an adjustment to estimated contingent consideration, and to remove from the calculation (i) net income (loss) attributable to non-controlling interests, (ii) other expense (income), net, and (iii) equity in (earnings) losses from unconsolidated affiliates. The net overall impact of these changes on Adjusted EBITDA for the three months and six months ended June 30, 2015 was to decrease Adjusted EBITDA by $5.3 million and $0.3 million, respectively. Management believes that the changes to the calculation are indicative of the core results of the business. To conform to the current period calculation, prior periods have been changed. Please visit www.quintiles.com/investors for a presentation of the prior periods' Adjusted EBITDA calculation.
 
(2) The tax effect of adjustments was based on the income tax rate of the respective transactions, which was 38.5%, with the exception of i) restructuring costs which were tax effected at 29.9% and 36.5% during the three months ended June 30, 2015 and 2014, respectively, and 31.5% and 30.3% during the six months ended June 30, 2015 and 2014, respectively and ii) contingent consideration which is not tax effected as it represents a permanent difference between book and tax income.
 
QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP TO NON-GAAP MEASURES (Continued)
(in millions, except per share data)
(unaudited)
 
Reconciliation of GAAP to Non-GAAP Full Year 2015 Guidance
Diluted Adjusted
Adjusted Net Income Earnings Per Share
Low High Low High
Net income attributable to Quintiles and diluted earnings per share $ 358 $ 373 $ 2.84 $ 2.96
Restructuring costs 32 28 0.25 0.22
Loss on extinguishment of debt 8 8 0.06 0.06
Adjustment to estimated contingent consideration 6 6 0.05 0.05
Tax effect of adjustments (1)   (14 )   (12 )   (0.11 )   (0.10 )
Adjusted net income and diluted adjusted earnings per share $ 390   $ 403   $ 3.09   $ 3.19  
 
(1) The tax effect of adjustments was based on the income tax rate of the respective transactions, which was 34% for Restructuring Costs and 38.5% for Loss on Extinguishment of Debt. Adjustment to Estimated Contingent Consideration is not tax effected as it represents a permanent difference between book and tax income.


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